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Professional Liability Underwriting Society (PLUS)

Winds of change

Insurance industry begins to focus on global weather issues

By Phil Zinkewicz

As recently as five years ago, the insurance industry placed the earth’s climate changes very low on its list of priorities. However, since the National Association of Insurance Commissioners (NAIC) established its own task force on global warming, attitudes in the industry have changed.

In May of this year, Franklin W. Nutter, president of the Reinsurance Association of America (RAA), testified before Congress that “understanding global climate change and integrating that information into the insurance system is an essential part of addressing climate extremes and conveying information to governments and the public about the economic consequence of human activity in the face of changing a global climate.”

Speaking before the U.S. House of Representatives Subcommittee on Energy and Environment, Nutter referred to a sobering GAO study that reported private and federal insurers paid $320 billion in claims on weather-related losses from 1980 to 2005, with private insurers paying $243 billion, or 76% of the total.

In a recent article in the London-based Global Reinsurance magazine, Christopher Walker, managing director of Greenhouse Gas and Environmental Solutions, and Mark Way, a member of Group Sustainability Management, Swiss Re, discussed in great detail the subject of climate change and its potential effects on the insurance industry.

The authors wrote: “Climate change is probably one of the most important issues facing the insurance industry today. Swiss Re has identified climate change as an important element of our long-term risk management strategy. Few other factors affect more the bottom line of our clients, insurance companies, than natural catastrophes. We believe that climate change has the potential to affect the number and severity of these natural catastrophes and result in a very significant impact on insurance business.”

Marsh & McLennan, the world’s largest insurance broker, has joined the fray. Last year, Marsh briefed its corporate clients, which include roughly 75% of the Fortune 500 companies, on the potential impact of global warming. Marsh’s clients heard from, among others, Carol Browner, who headed the Environmental Protection Agency when President Bill Clinton signed the Kyoto Protocol to curb greenhouse gas emissions, and Robert Watson, the chief climate scientist at the World Bank and former head of the Intergovernmental Panel on Climate Change (IPCC).

Also, more than willing to be part of the climate change solution is Travelers. Last year, The St. Paul Travelers Companies announced its participation in the U.S. EPA’s “Climate Leaders” program as part of its commitment to focus on improving the environment of the communities in which it does business. Climate Leaders is a government partnership that works with companies to develop long-term comprehensive climate change strategies and reduce greenhouse gas emissions.

With all this relatively new interest in the subject, then, it is small wonder that PLUS is addressing the issue of climate change at next month’s annual conference. A special panel session titled “Climate Change: Whose Ox is Gored?” will be moderated by Fred Perez, vice president of McLarens Young Inter-national, an independent adjusting firm. The panel will consist of an insurance carrier, an attorney and a regulator, according to Perez, who is a past chair of PLUS’s Southern California chapter. However, it is unlikely that the phrase “global warming” will be employed during the panel discussion, despite the obvious reference to Al Gore in the panel’s title.

“There is a good deal of talk these days about global warming,” says Perez. “I think that phrase has become politically charged and is, in fact, a misnomer. Whether man has caused the current climate changes or whether they are forces of nature is irrelevant to this panel. The fact is, the climate is changing … period.”

Having said that, Perez maintains that the insurance industry is being held accountable for dealing with the current weather phenomena. “There is an increased awareness on the part of corporate shareholders of the potential effects of climate change on a company’s bottom line. Shareholders want more transparency on the part of companies as to the businesses they are involved in that can affect climate change. Insurance brokers are expected to have the answers. On the underwriting side, companies should be asking themselves what risks they have and how will climate change be affected.”

Perez says also that regulatory agencies are encountering problems with climate change. “Government recognizes that the problem is a serious one, but is having difficulties in finding out how to deal with it,” Perez says.

“There is little doubt that insurance coverages are going to be affected by climate change,” he says. “I think directors and officers insurance will most likely be affected and carriers will be looking to modify the coverage. These are the things we will be discussing during our panel session,” Perez says. *

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