23 Apr 2012: Report

Insurance Companies Face
Increased Risks from Warming

If the damages related to climate change mount in the coming decades, insurance companies may face the prospect of paying larger disaster claims and being dragged into global warming lawsuits. But many firms, especially in the U.S., have barely begun to confront the risks.

by ben schiller

Given that insurers are likely to be among the first companies affected by climate change, you might expect the industry to be better prepared than most.

But that is not how it appears to many analysts, regulators, and industry representatives, who say insurers are showing a lack of urgency on the twin threats of massive future damage claims from weather-related events, and the prospect of growing climate change-related litigation.

A report published last September by Ceres, a Boston-based coalition of investors and environmental groups, puts it starkly. Surveying the disclosures of 88 U.S. insurance companies to the National Association of Insurance Commissioners (NAIC), it found that only 11 had formal climate change policies and that just 60 percent were assessing climate risks.

Insurers are central to how we deal, or don’t deal, with climate change. They price the risk facing property owners, and others, from weather events —
Insurers are central to how we deal, or don’t deal, with climate change.
effectively sending a signal to the rest of the economy about how seriously to take the threat. And with $23 trillion in global investments, insurers are also systemically important. If these companies fail to properly account for the risks they face from climate change, they could become financially vulnerable, with serious repercussions for the global economy.

As the Ceres report puts it: “With the world still reeling from the devastating impacts of an economic crisis triggered by hidden risks in the banking sector, we can ill afford a new problem triggered by hidden risks in another.”

The report revealed a growing divide between U.S insurers and their European counterparts, who have been some of the strongest business advocates for taking action to slow global warming. European insurance executives also have been critical of the U.S industry for not being more proactive.

“It is frustrating to see that it’s so extremely difficult to include this huge risk of climate change into current business,” says Andreas Spiegel, senior climate change adviser at Swiss Re, a large reinsurance company. “There is a bit of a short-term view on the benefits, risks, and costs.”

Regulators are also concerned. Three state insurance commissioners — in California, New York, and Washington State — last month said they would require about 300 insurers to file an NAIC survey, raising the number of insurers for which public disclosure is compulsory. (One other state, Pennsylvania, requires a smaller number of insurers to publicly disclose how they are managing climate change; three others, plus Puerto Rico, do not require disclosure to be public, while the rest require no disclosure at all).

“The essence of insurance is the analysis of risk,” said Robert Easton, New York’s lead insurance regulator. “We are asking insurers to share their views of the risk of climate change so that we can be sure that the industry and regulators are appropriately prepared.”

That risk takes two main forms. The first is damage claims, which could rise significantly as a warmer atmosphere — which holds more moisture — is expected to generate more extreme weather, including more powerful
Could climate-related damage payouts eventually match those in asbestos and tobacco litigation?
hurricanes and increased flooding. The damage wrought by rising sea levels, which some experts forecast could increase by three to six feet this century, could also create massive liabilities for insurance companies.

In addition, Ceres says that insurance companies face a growing risk of litigation from individuals or groups seeking to hold power companies and other major greenhouse gas emitters liable for causing global warming in the first place.

“Climate change has also become the subject of significant litigation in recent years, a trend which is likely to grow as the physical impacts of climate change become more pronounced and affected parties seek redress in the courts,” Ceres says.

In 2010, 132 climate-related cases were filed in U.S courts, according to Deutsche Bank Climate Change Advisors. The majority of these involved activists or state governments trying to prod the federal government into climate action, or industries arguing that federal agencies had over-reached in regulating climate change.

In recent years, however, some groups have brought cases against historical emitters, such as energy companies. And insurers could one day find themselves on the hook both for legal costs in these cases, as well as the liability from legal rulings, some experts contend. Plaintiffs face a daunting array of legal challenges in trying to prove that individual greenhouse gas emitters are liable for damages from global warming, including the fact that the major sources of greenhouse gas emissions — oil companies, coal companies, utilities — are global and number in the many thousands. Still, some analysts have wondered whether climate-related damages could eventually match the size of payouts in asbestos and tobacco litigation.

“In recent years, the insurance industry has been closely monitoring attempts to base liability claims for damages on greenhouse gas emissions,” says Ina Ebert, leading liability and insurance law expert at Munich Re, a large German reinsurer.

“Climate liability is considered one of the emerging risks that could gain in importance for the insurance industry in coming years.”

Insurers could be sued both by emitters that are trying to pass on liability, or by investors claiming they did not adequately disclose risks to the market. In 2010, the U.S. Securities and Exchange Commission (SEC) asked companies to report how climate change may affect profitability, potentially opening the
The courts have yet to rule on whether greenhouse gas emitters can be tied to climate events.
way for investor lawsuits.

The risks of litigation are already evident. This spring, Virginia’s Supreme Court reheard AES Corporation v. Steadfast Insurance Co., a first-of-its-kind case for the insurance industry. AES, an energy-generation company, argued that Steadfast should cover its legal fees, and potential losses, in a separate climate lawsuit. AES is one of more than 20 energy companies being sued by the coastal village of Kivalina, in Alaska, which alleges that the companies’ emissions caused its land to become uninhabitable because melting sea ice and rising seas are enabling storms to erode the town’s shoreline.

Virginia’s highest court ruled that Steadfast did not have to defend AES, because the claims for which it sought coverage were not “an occurrence” under the policy. But experts say other jurisdictions could be more sympathetic, potentially opening the way for emitters to be certain that their liabilities are covered by insurers. Sharlene Leurig, author of the Ceres report, says the decision to rehear the case “upset many insurers” who thought they had put the case behind them last year.

The Steadfast-AES case is just one of a slate of climate change-related legal battles with ramifications for insurers, emitters, and the wider debate about climate change, particularly in the U.S. For example, the Kivalina case — with ExxonMobil Corporation as one of the main defendants — was brought by the same lawyers behind the 1990s tobacco litigation. That case is currently before a federal appeals panel in San Francisco, having been dismissed by a district court in 2009 for being a political rather than a legal matter.

Several cases so far have foundered on the “political question doctrine,” where courts have decided that regulating greenhouse gas emissions is something for the U.S. executive branch or Congress. That assertion was part of the lower court ruling in the Kivalina trial, as well as in the case of “Connecticut vs AEP,” in which eight states, New York City, and three non-profits claimed that six power companies had caused “public nuisance” by releasing greenhouse gases. The U.S. Supreme Court ruled last summer that the U.S. Environmental Protection Agency had the authority to regulate greenhouse gas emissions.

“Several cases found that the issue of climate change liability raises political questions that are more appropriately confronted by Congress and the
Look at any U.S. insurer’s Web site, and you will be hard-pressed to find a mention of anthropogenic climate change.
executive than by the courts,” says Michael Gerrard, director of the Center for Climate Change Law at Columbia University.

Thus far, the courts have yet to rule on the crucial question of “causation”: whether greenhouse gas emitters can be tied to climate events. That could be a high bar. “How are you going to show proximate cause from these events that took place years ago that cumulatively, with other entities generating greenhouse gases, led to these results that, in turn, caused damage?” asks Scott Seaman, partner at Meckler Bulger Tilson Marick & Pearson, in Chicago.

Legal experts say the question in the next few years is whether U.S. courts may be more willing to hear the cases if Congress pares back the executive’s regulatory authority or takes no legislative action to reduce greenhouse gas emissions. San Francisco attorney Kevin Haroff says they may be. “If you really believe the political action defense, then you have to take it both ways,” he said. “If it’s legitimately a political question, then it should be resolved by regulation and legislation. If not, the political arguments have to carry less weight.”

Adding further grist to the idea that plantiffs may eventually win a climate change case is that it also took a long time for arguments in the tobacco and asbestos litigation to stick, and that climate change litigants may, in fact, never have to prove a causation link. The tobacco torts turned on evidence that cigarette companies suppressed evidence of the dangers of smoking, while knowing it was harmful.

In a 2009 report, Swiss Re argued “that climate change-related liability will develop more quickly than asbestos-related claims and [we] believe the frequency and sustainability of climate change-related litigation could become a significant issue within the next couple of years.”

The asbestos claims took about 40 years from the first lawsuits in the 1950s to the eventual payouts, of up to $265 billion, in the 1990s, according to Swiss Re. The first climate change lawsuits were filed in 2004. But whatever the time frame or outcome, the threat of litigation is already having an impact by making companies more cautious about talking about climate change, according to several observers.

“Acknowledging climate risk would be a risk for [any] company in an American context,” says Andreas Spiegel, at Swiss Re. “There is the risk that the company or the managers would be held liable for their actions in relation to that.”

Leurig, at Ceres, says the threat of litigation “makes it very much less likely [that they would speak up], and I’ve heard that explicitly from a number of legal counsels. They are being advised to avoid any sort of attribution language between man-made emissions and damages.”


Florida Counties Band Together
To Ready for Warming’s Effects

Florida Counties Band Together To Ready for Warming’s Effects
While U.S. action on climate change remains stalled, Michael Lemonick writes that four south Florida counties have joined forces to plan for how to deal with the impacts — some of which are already being felt.
Look at any U.S. insurer’s web site, and you will be hard-pressed to find any mention of anthropogenic climate change. And, leading companies have tended to shy away from policy questions. For example, in 2010, Marsh McLennan, a reinsurance company, left the U.S. Climate Action Partnership, a group of businesses and environmental groups that lobbies for a reduction in carbon emissions. A spokesperson now says it did so “in order to make room for new members who had a more direct and immediate business interest in the outcome of the climate change discussion.”

Andreas Spiegel, at Swiss Re, says European insurers have tried to persuade U.S. companies to take a more public role — but so far to little avail. “We try to reach out a lot to our clients and partner organizations in the U.S.,” said Spiegel. “But we haven’t been very successful. There seems to be a fear and a great opposition to tackle the topic, and we're not quite sure how to overcome that and make sure the sector speaks as one voice on a political level.

POSTED ON 23 Apr 2012 IN Business & Innovation Climate Energy Oceans Policy & Politics Europe North America North America 


I have yet to see solid evidence that global warming is indeed happening and getting worse ... or that this is the effect of man made air pollutants. With that being said, I find it alarming that the world leaders in the insurance industry are concerned that global warming cause claims to go up and claims to increase in severity. How can such a powerful industry base its projections on a theory that has not been proven? To me this is alarming. In today's world where everyone is looking at ways of saving our planet (for which I am not opposed) I think the issue of global warming has been blown way out of proportion.

Posted by Bryan Maloney on 23 Apr 2012

Climate is defined not simply as average temperature and precipitation but also by the type, frequency and intensity of weather events. Human-induced climate change has the potential to alter the prevalence and severity of extremes such as heat waves, cold waves, storms, floods and droughts. So I would have to disagree with Brian, and say that global warming is happening right now and there is evidence of that daily, on any given weather forecast across the United States.

I also think that insurance industry should definitely be thinking about policy changes due to global warming and the changing of the climate across the United States, it should be about not only the Insurance company protecting their company but also the people who trust the insurance company to protect them in the case of an extreme event.

Posted by Amber Williams on 23 Apr 2012

Well, there may be risks from global warming, if it happens. However, extreme weather events will manifestly not be a problem. Global warming theory says that the poles will warm more than the more equatorial regions, thus achieving a more uniform global temperature. Extreme events are caused by a difference in temperature (basic physics), so if there is less temperature differential, there is less potential energy release, and thus less extreme weather.

Posted by Andrew Kerber on 24 Apr 2012

Bryan Maloney:

Scientific theories are really hardly ever "proven". But the science behind climate change has been studied for over 100 years, and 97 percent of the people who actually work in the field are convinced that global warming is happening and that it's largely due to the burning of fossil fuels. It's incumbent on a business concerned with insurance and risk to base its decisions on the best science available, just as it was incumbent on NASA to base the moon mission on the best rocket science available — even though that wasn't "proven" either, at the time, since no one had built moon rockets until then.

Posted by Neal J. King on 24 Apr 2012

Good story. The absence of insurance companies from the climate debate is a big deal. They have truly been missing in action, which a departure from their traditional role.

Historically, insurers helped bring us fire and building codes and seat belts. They were powerful advocates for safety — because it was in their economic self-interest to avoid paying claims.

They face big risks from climate change, but they haven't spoken up because their clients (as you note in the Kivalina case) are fossil fuel companies that want to deny links between GHG emissions, climate change and extreme weather.

So they are badly compromised.

Their other response has been to offload risks to taxpayers by, for example, declining to write flood insurance in Florida. I wrote about this here: http://bit.ly/A0cMQp
Posted by Marc Gunther on 26 Apr 2012

This article properly highlights the key role of the insurance industry in assessing and managing risk on the broad societal scale. No argument there. Hope to see you do a follow-up next year!

That said, I do have 2 questions of fact:

First, the executive summary of the CERES report says "Of 88 companies surveyed, only 11 reported having formal climate change policies, and more than 60 percent of the respondents reported having no dedicated management approach for assessing climate risk." But Ben Schiller writes "that just 60 percent were assessing climate risks." Do these 60 percent figures refer to different things?

Second, how much of the U.S. market is covered by the small number of firms with climate risk policies?

Posted by Sallan Foundation on 26 Apr 2012

To Andrew,

There's a lot more at play in weather "severity" than the temperature gradient from equator to pole. Another huge driver, probably more important, is evaporation, more "simple physics." There's a lot of recent science, including a report published just the other day, clearly showing increased evaporation in certain areas of the ocean, and increased precipitation in others (correlated to observed changes in surface salinity), is ALREADY occurring. In short, wet places are getting wetter, and dry places are getting drier, making for more severe drought and flood events. This is observed, already happening, and projected to get worse.

Posted by Dave on 27 Apr 2012

There are two aspects this article on which I dissent.

The first is that the insurance industry is underestimating the future costs of climate change damage impacts. On the contrary, I would claim that the climate scientists have consistently over-predicted both the warming and consequent damage impacts. There are 3 aspects that relate to a risk assessment — magnitude, change/time and likelihood. The scientific community has consistently over-estimated all three, so giving an impression of climate impacts many times greater than will occur.

The second is in the area of litigation. There is very firm empirical evidence that smoking and asbestos exposure causes harm. The evidence of CO2 causing extreme weather events is anecdotal and hearsay. The studies showing increased financial impacts fail to take into account real economic growth and inflation.

Posted by Kevin Marshall on 01 May 2012

Kevin Marshal: Climate science estimates are panning out. Have a look at this remarkable fact check of James Hansens 1981 study on projections of impact due to climate change:

In fact, looking at the increases in extreme weather events, the problem is growing exponentially. Check out the third chart here: http://8020vision.com/2010/12/21/how-charles-

Jay Kimball
8020 Vision

Posted by jaykimball on 24 Jun 2012

What great news! In capitalist America the only real things that keep corporations in check is either the government (which doesn't seem to do a great job vs lobbyist) and the threat of losing money.

If insurance companies begin to lose money due to climate change I think we will quickly see the ship righted. Great news for mother earth!

Posted by Jon on 21 Jul 2012

Comments have been closed on this feature.
ben schillerABOUT THE AUTHOR
Ben Schiller is a New York-based staff writer for Fast Company magazine. His coverage of energy and environmental issues has appeared in the Financial Times and other publications. In previous articles for Yale Environment 360, he has written about the European Union’s Emissions Trading Scheme and about the emergence of “fracking” in Europe.



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