As the debate on climate change has progressed, the (re)insurance industry has not stood by as mere observers. Although agreement on the issue is far from universal, the matter is being addressed, including an adjustment to catastrophe modeling, the creation of new (re)insurance products, and the construction of defenses against climate change-related claims.
The process of actuarial prediction is grounded in the notion that studying the frequency and severity of past losses can provide some indication of what the future may hold. If conditions are changing, either through natural or manmade causes, however, the reliability of historical events is eroded. But actuaries have compensated with assumptions drawn from evidence supporting climate change in order to model more accurately for the future.
As a result of including warmer ocean temperatures and recent flooding data in the modeling of property risks, (re)insurers have been able to better assess and price the risk of catastrophe-prone regions. The results have provided justification for carriers leaving regions where premium-cost restrictions compared to the newly modeled risk make writing policies bad business. (Re)insurers have also become more attuned to the various threats of potential climate change and the corresponding ambiguity and uncertainty that increases risk across nearly all lines of business.
An awareness of the climate change issue has also spurred the development of new (re)insurance products and loss control services. Some of these are “green coverages” that encourage environmentally responsible activities through reduced carbon emissions or increased energy efficiency. New policies are being written and the language of existing policies reshaped to address coverage for green buildings, renewable energy, carbon risk management, and directors’ and officers’ liability.
In response to the expansion of the “green” industry, new (re)insurance products are being developed for companies that are in the business of addressing-and reducing-emissions in the defense of climate change. Carriers have developed policies and risk financing solutions to deal with wind and solar production shortfalls, premium discounts for building-efficiency renovations, carbon capture and storage insurance, and coverage for humanitarian emergencies during droughts. In addition, (re)insurers are participating in carbon markets and issuing policies for related credit and political risks.
Particularly in the United Sates, (re)insurers are strategizing for the potential onslaught of climate change-related claims. Capitalizing on in-house experience with high-risk liabilities, mass tort and environmental departments are taking on climate change.
The policy reviews and claims adjustments use established rationales to assess the validity of climate change-related claims and their applicability to a written policy. Carriers are examining the question of “occurrence” as defined in the policy, the “expected or intended” nature of the damage, pollution exclusions, and the occurrence time period. In court, legal teams have successfully mounted defenses based on arguments such as the political nature of the issue, a plaintiff’s standing to litigate, burden of causation, preemption issues, and expert opinion conflicts.
A March 2009 decision by the U.S. National Association of Insurance Commissioners (NAIC) mandates (re)insurer disclosure of financial risks due to climate change and actions taken to mitigate them, the world’s first such climate risk disclosure requirement. This policy is likely to encourage further understanding of the risks of climate change as well as inspire consequent product and service development. The continued release of new models, investments in climatological research, and innovative risk-transfer vehicles will continue to empower carriers to take control of their portfolios in the face of climate change likelihood.
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