May 27th, 2009

Climate Change, Part III: Liabilities Heating Up

Posted at 1:00 AM ET

klein_chris_bioChristopher Klein, Head of Global Business Intelligence

Whether it is a matter of calculating the potential catastrophic loss due to increased storm activity or the hurt caused in court, the potential liability of climate change is a threat for the (re)insurance industry to consider. It’s not just the rising temperatures but the climate change debate itself that has lead to liabilities and losses. Class action lawsuits have charged oil, gas, and chemical companies, as well as other groups, with negligence in causing climate change and resultant property damage. Meanwhile, recent severe catastrophe events have stressed the (re)insurance industry’s coffers and cast doubt over the accuracy of previous risk assessments.

On Sea and on Land, Risk Fluctuations

The cost of natural disasters, including floods, droughts, and storms, is on the rise in both developing and wealthy nations. Should these expenses indeed be connected to a climate change phenomenon and that pattern continue, (re)insurers may face increased losses in existing catastrophe-prone regions, the emergence of newly vulnerable locations, as well as changing liabilities — including decreases in catastrophe exposure — elsewhere.

The possible increased intensity and occurrence of cyclones, tornadoes, hailstorms, floods, storm surges, mudslides, and wildfires in those regions already prone to such disasters could affect losses and the way policies are written for an array of business lines. The portfolio risk assessment of health, life, property, flood, business interruption, and crop insurance business may need revision. On the other hand, climate changes could be reducing the catastrophe risk in certain incident areas, such as the Philippines and south China coast where storm landfall appears to be decreasing. As a result, the risk assessment and pricing of catastrophe risk in these regions may warrant reassessment, and possible reductions.

Risks in Court

The climate change debate has also induced a flurry of activity in the court systems. Nearly a decade ago the notion of filing a climate change liability suit was first considered. Since then, the idea has gone from a theoretical case for the International Court of Justice, to a widespread class-action liability for U.S. corporations and their (re)insurers. Although some have been tossed out, recently cases are being settled for significant sums, including one for USD500 million from U.S. government agencies sued by a group of activists and cities for funding and insuring fossil fuel projects.

Nuisance lawsuits are also on the rise as communities put forth claims of hardship due to climate change. In addition, some believe that draft U.S. legislation could issue forth a sea of plaintiffs claiming damages from climate change and seeking retribution from companies and government, with the (re)insurance industry left to handle claims settlement and legal defenses.

But environmental activists may not be the only plaintiffs. Should a company’s stock stumble due to noncompliance with domestic and international carbon policies, pension funds, hedge funds, and index funds could take the case to court. Professional liability policies could be triggered by disclosure failures related to a range of issues, including pollution and the impact of regulations or environmental degradation. An examination of the largest companies likely to be vulnerable to disclosure and emissions compliance found many unexpected industries (i.e., not necessarily those in the energy industry) vulnerable in their ability to withstand such potential lawsuits. Organizations with insufficient carbon disclosure and reduction strategies could become unexpected liabilities for (re)insurers.

Economic Losses

In an economic report sponsored by the British government, the cost of climate change was estimated to top the equivalent of 5 percent of global gross domestic product each year. Should the risk and damages swing to the more extreme end of the forecasts that could increase to 20 percent. With costs even estimated in this range, the financial responsibility of accounting for the potential impact on the (re)insurance industry grows.

Read Climate Change, Part I: A Contested Point You Need to Understand >>

Read Climate Change, Part II: What a Warmer World Could Mean >>

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