‘Underwriting Green’ Tames Climate Risks

Feb 22, 2010 | BY Joseph A. Valenza

Whether it’s the economy, health care reform or steroid scandals, there are many controversies grabbing attention these days. However, one likely to have a stronger and longer-lasting impact on the insurance industry is climate change.

Indeed, a storm may be brewing for all insurance professionals when it comes to carbon emissions. How we handle this issue today might ultimately influence our industry’s capacity over the next decade.

Insurance professionals can avoid or minimize potential disruptions within their own companies by “underwriting green” as governments and courts wrestle with climate change effects.

Global warming results from excess and accumulating greenhouse gases. Although the Earth produces greenhouse gases without intervention from mankind, there’s an accumulating effect when natural and man-made greenhouse gases combine, as infrared radiation is trapped within the Earth’s atmosphere causing average temperature increases.

Many scientists believe climate pattern changes result in stronger, more frequent storms, more wildfires, polar ice melting, coastal flooding and rising ocean levels. Such events are logically linked to an increase in potential economic and financial devastation, as well as possible physical toll on human life.

The insurance industry has already absorbed high costs from weather-related claims–most are property claims from natural catastrophes. As climate issues evolve and as key court decisions impact coverage and certain product lines, man-made climate change awareness will gain momentum across all socio-economic levels.

Thus, whether real or perceived, climate change effects will become more widely accepted and liability claims will increase accordingly, in tandem with typical property losses.

While some insurance carriers have formed climate change task forces within their own organizations, the industry as a whole has no unified position. As an industry, and as capacity providers, insurers need to think about answers to certain questions, such as:

• Will the next weather disaster result in more liability claims against “climate polluters” versus typical property loss scenarios?
• If climate claims are deemed unexpected and unintended by the courts, will a general liability policy trigger or will the pollution exclusion apply?
• Will business interruption claims result from facilities that close due to elevated emissions, or will builders’ risk losses emerge from facilities not allowed to start up until they install the appropriate equipment to reduce emissions?
• How will climate change impact product liability insurers? Since automobiles and gas-powered equipment generate emissions, will product liability carriers have greater exposure?
• Will courts rule that directors and officers of carbon-generating businesses are knowingly suppressing adverse effects of greenhouse gases, resulting in D&O losses?
• Will auto liability policies be affected? Will carbon emission liabilities from cars ultimately stretch to affect personal lines auto carriers?
• Are carbon emissions a pollution condition? Some industry experts think pollution policies could be the hardest hit.

Significant carbon emission regulatory and legal action is already underway; brought on mainly by state and local governments and environmental groups against manufacturers and utility companies.

Third-party litigation has already commenced. Declaratory judgments and injunctive relief actions have already been brought. Game on!

Governing entities also are now 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.

The National Association of Insurance Commissioners has also become active by forming an executive committee (the Climate Change and Global Warming Task Force) to analyze the impact of climate change on insurance providers and consumers.

GOING GREEN

So, when I earlier mentioned the notion of “underwriting green,” what exactly does that mean for carriers?

“Underwriting green”–for the purposes of this article–means protecting your book of business (as well as the insurance buyer) from carrier instability related to potential climate change issues.

Since there is no industry standard coverage position presented by carriers, regulators or industry interest groups, insurance producers should now begin asking carriers questions to understand the potential effects and marketplace volatility that could come later. Questions such as:

• Will new carrier capacity continue to take aggressive coverage positions and cover climate change, or will they take conservative positions and exclude it at the risk of being deemed uncompetitive?
• Will large-capacity carriers with billions of dollars in earned premium change their position now and start to protect themselves with climate change exclusions?
• Will carriers begin offering incentive-based pricing for entities that reduce their carbon footprint? While this may be a good marketing strategy, will an insurer’s ability to offer “environmentally friendly” premium credit really yield better claims experience?
• Will carriers start raising rates to fund for climate change losses? If so, how much of a rate increase is enough when there is little ability to accurately forecast the exposure? When is the right time to increase rates to begin this funding process?
• How will environmental carriers treat climate change? Some environmental carriers so far have expressly stated they are not going to use climate change exclusions. Will others take a more responsible approach, seeing another potential “asbestos bubble,” and start to exclude it?
• Are environmental carriers today taking on too much exposure to climate change by writing coverage at discounted rates for accounts that reach beyond traditional environmental contractors and consultants?
• This last question is important because the reality today is that many carriers are newly introducing environmental underwriting groups, which may be applying unprofitable general liability rates to environmental risks that are not really environmental exposures. For instance:
• Should Unexploded Ordnance Contractors be deemed environmental contractors?
• Should HVAC contractors be grouped with Indoor Air Quality Specialists at the same rates?
• Should Boiler Cleaning Contractors be deemed Industrial Hygiene experts and offered the same rates?

Less experienced underwriters may get tricked by these characterizations. More experienced underwriters may allow these characterizations to apply in the name of writing more business to hit aggressive premium budgets.

Irrespective, carriers expanding their definition of environmental risk–and thus their “environmental” offerings–may also be unwittingly expanding their exposure to carbon pollution without appropriate price adjustments.

The potential effects on the insurance industry from climate change exposures are numerous. From potential increased liability across many product lines, to regulatory disclosure requirements, substantial changes will result.

Since this will foster more competition among brokers, be aware of the quality of the insurance solution offered by certain underwriters and intermediaries.

Some underwriters will continue providing low-cost and irresponsible insurance solutions in the name of making production budgets. If brokers choose low-cost options only in response to clients’ price sensitivity, many issues may evolve and much more volatility may be thrust into our already oversupplied marketplace.

The best solution is to work with carriers that have well-defined and transparent climate change philosophies. Brokers and their clients will be best served by underwriters with the knowledge, risk management support, underwriting stability, underwriting consistency and claims expertise to address climate change exposures individually.