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Underwriting Green: Climate Change and Your Policyholders

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Underwriting Green Climate change and your policyholders

Whether it’s the recession, the stimulus package, healthcare reform or the steroid scandal, there are plenty of topics grabbing our attention these days. One that may have a strong impact on the insurance industry is climate change. However, a discussion of the effects of climate change on our industry and the people we serve is almost non-existent.

While carriers battle it out in the current soft market, a quiet storm may be brewing when it comes to insurers’ approach to underwriting climate change. This issue may influence the insurance market’s capacity in the next 24 months and into the next decade.

Agents should take steps to learn more about the potential impact on the insurance marketplace from climate change and the evolving laws attempting to address the phenomenon. In so doing, agents can minimize potential client disruptions that may exist as governments and courts at all levels wrestle with the effects of climate change and carriers react by underwriting green.

First, Let’s Start With Global Warming and What It Is…

Global warming is often used to describe the effect of the Earth’s climate due to excess and accumulating greenhouse gases. Although the Earth produces greenhouse gases even without intervention from man, there is an accumulating effect when natural greenhouse gases combine with those produced by man. This accumulating effect traps infrared radiation within the Earth’s atmosphere causing an increase in average temperature. Many scientists believe the changes to climate patterns result in stronger and more frequent storms, more wildfires, changes in precipitation patterns, polar ice melt, coastal flooding and rising ocean levels. Such events are logically linked to an increase in the potential for economic and financial devastation as well as a physical toll on human life.

Climate Change – Impacts to the Insurance Industry

It is possible that climate change will become one of the biggest challenges insurance companies face in the near future. Within the past 25 to 35 years, the industry has absorbed tremendous costs resulting from increases in weather related claims. A significant percentage of all claims paid are due to natural catastrophes. Greater loss potential will occur as the issues evolve and as key court decisions impact coverage in certain product lines.

While some insurance carriers have formed a climate change task force to assess their risks, the insurance industry as a whole has no unified position on coverage. Carriers face important questions on this issue, for instance:

  • Will the majority of climate change claims simply result from property losses or will carriers increasingly see liability claims from policyholders tagged with climate change related lawsuits?
  • If climate change claims are deemed unexpected and unintended by the courts, will a GL policy get triggered for coverage or will the pollution exclusion apply?
  • Will business interruption claims result from facilities shut down due to elevated emissions or not allowed to start up until they install the appropriate equipment to reduce their emissions?
  • How will climate change impact product liability insurers? Since automobiles and gasoline powered mobile equipment generate emissions, are the insurers who write the manufacturers products liability exposed to loss?
  • How will climate change impact D&O insurers? Will courts rule that the management teams of carbon generating business are knowingly suppressing the adverse effects of greenhouse gases over the years?
  • Will auto liability policies be affected? Will the liabilities associated with carbon emissions from automobiles ultimately stretch to hit personal lines auto carriers from a liability perspective?
  •  What about the environmental insurance industry? Can one make a compelling case that carbon emissions are a pollution condition? Some industry experts think pollution policies could be the hardest hit.

Regulatory Actions and Current Disclosure Demands

Aside from the many coverage questions that remain unanswered, it is important to note that significant legal action is already underway; brought on by state and local governments and environmental groups. Third party litigation has commenced against large manufacturers and utility companies that plant emissions have contributed to global warming. Declaratory judgments and injunctive relief actions have been brought against the larger emitters of greenhouse gasses.

Governing entities are now requesting and requiring disclosure statements among certain organizations. For example, the Carbon Disclosure Project and the Global Reporting Initiative are both voluntary surveys aimed at all industries. They are structured in a way to provide incentives to organizations that report their procedures, identity climate risk and characterize their total emissions. The National Association of Insurance Commissioners has also entered into the fray. The NAIC formed an executive committee called the Climate Change and Global Warming Task Force. Its mission is to coordinate an analysis of the impact of climate change on insurance providers, consumers and regulators. The Task Force also focuses on insurer solvency, the availability and affordability of coverage, and overall impact on national insurance regulation.

The NAIC today requires insurers to submit a Climate Risk Disclosure Survey by May 1 of each year. Disclosures were mandatory in 2009 for life, property and casualty insurer groups with premium amounts over $500 million and in 2010 for insurer groups with premium amounts over $300 million. All other carriers report on a voluntary basis. The survey focuses on whether a carrier has a climate change policy with report to risk and investment management. Further, some carriers are taking specific steps to encourage policyholders to reduce their exposure to climate change related losses.

Key Indicators in Underwriting for Climate Change

Since there is no official coverage position presented by an insurance industry regulator or industry interest groups, agents need to assess the efforts of their carriers in preparing for potential loss due to climate change. Agents need to know which carriers are underwriting green. Some questions agents should ask themselves include:

  • Is your environmental carrier “not” excluding climate change? It is important to note that some environmental carriers over the past six to nine months have expressly stated they are not going to use climate change exclusions. What does this mean? Could this be the new “asbestos bubble” for would be plaintiffs affected by carbon emissions? Does that mean the new carriers coming into the market should continue to take the same position or be deemed uncompetitive? Should large carriers with billions of dollars in gross written premiums over the past 20 years start to protect themselves now before they get into hot-water?
  • Is your environmental carrier considering offering incentive based pricing for those entities that reduce their carbon footprint? While this may be good marketing strategy, an insurer’s ability to offer an “environmentally friendly” premium credit may or may not yield better claims experience.
  • Is your environmental carrier considering raising rates to fund for climate change losses? Carriers have to decide how much of a rate increase is enough when there is little ability to accurately forecast the exposure at this point in time? However, the exposure is certainly present now, thus some carriers may consider raising rates to begin the funding process.
  • Is your environmental carrier taking on too much exposure to climate change by writing accounts that fall beyond traditional environmental contractors and consultants? Many carriers are expanding environmental business by broadening their definition of an environmental risk. For instance, Unexploded Ordinance Contractors are seen by some as environmental contractors. HVAC contractors get rated as Indoor Air Quality Specialists. Boiler cleaners become Industrial Hygiene experts. Carriers that expand their definition of an environmental risk, then add pollution coverage, are potentially expanding their exposure to carbon pollution unwittingly.

The potential impacts on the insurance industry from climate change are numerous. From potential increased liability across many product lines to regulatory disclosure requirements and the varied carrier reactions to this phenomenon, it is clear that substantial changes are coming. It is more important than ever for agents to work with specialized E&S brokers with broad environmental expertise to ensure their clients exposures to carbon emissions are properly assess and presented to carriers.

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