CLIMATE CHANGE AND INSURANCE
As the UN Climate Change Conference 2015 celebrates its work in Paris, the time seems opportune to look at climate change, the liability risks which it poses and how insurers might respond to those liability risks.
It is easy enough to talk about excess carbon being trapped in the Earth’s atmosphere as a result of human activity such as the burning of fossil fuels and clearing of land. It is not so easy to say that the trapped carbon is changing the climate.
But the evidence is becoming more compelling that it does just that. Some of the highlights which the Governor of the Bank of England, Mark Carney, emphasised in a recent speechat Lloyd’s of London included:-
In the Northern Hemisphere, the last 30 years have been the warmest since Anglo Saxton times; indeed, eight of the ten warmest years on record have occurred since 2002;
Atmospheric concentrations of greenhouse gasses are at levels not seen in 800,000 years; and
The rate of sea level rise is quicker now than at any time over the last 2 millennia.
Underpinning this speech was the report into climate change and insurance issued by the UK Prudential Regulation Authority in response to an invitation from the Department for Environment, Food & Rural Affairs. The principal conclusion which the Report drew was as follows:-
‘The PRA sees three primary channels through which climate change may impact its objectives in relation to insurers. Although a potential increase in physical risks is the most apparent of these, each of the other two – transition and liability risks – has the potential to have a substantial impact.’
Now some people may simply write this evidence off as being nothing more than “the Weather”. Lloyd’s of London is not taking that approach nor would such an approach be consistent with Lloyd’s distinguished history of responding to new risks as they have evolved.
So how does Climate Change translate into a liability and how do you quantify that liability?
Well the obvious starting point is first party losses. Sophisticated modelling built after many years of natural disasters all over the World has educated insurers about the skill of anticipating and measuring loss. Floods and storms are not events about which insurers have little or no experience. This modelling has enabled insurers to be more certain about risk pricing and risk transfer.
Climate change will always present first party loss insurers with its particular problems in relation to public policy issues, capital requirement adequacy and consequential claims. Even so a lot of lessons have been learnt and the insurers are well done the track to meeting most if not all that climate change can offer.
Third party losses are different story.
Firstly the experience is a new one so the data is not there. But there are signs that the wheel may be turning.
The most notable of those developments is the finding which the Hague District Court made earlier this year, that the Government of the Netherlands had breached its obligations in failing to take sufficient measures to prevent dangerous climate change. As a result the Hague directed the Government to reduce its greenhouse emissions by reducing Dutch GHG emissions by 25% by 2020.
While focussed on a government body, the suggestion that this type of finding can reach the corporate community and its management does not involve any extraordinary leap of faith.
Already there are signs that that thinking has reached the United States. This is reflected in such cases as Roe v Arch Coal Inc and Lynn v Peabody Energy Corporation, involving allegations that directors of corporate pension schemes breached their fiduciary duties in not taking into account the financial risks associated with climate change.
More recently ExxonMobil has announced that it is under investigation by the New York Attorney General for withholding information from both its shareholders and the public about the risks of climate change. The potential legal exposure confronting ExxonMobil is massive.
In due course we might start to see in Australia similar types of claims. After all, that topic is already well on the table in relation to cyber liability and is not a topic about which company directors would be unfamiliar.
There are also developments in relation to understanding and defining the notions of Loss and Damage arising from climate change. That topic is on the agenda of the United Nations Framework Convention on Climate Change.
The insurance response to third party liabilities is, at this stage, more subdued because the risk experience and its pricing are so ill defined. While it may not yet be something that insurers are obviously responding to, there are already aspects in many financial lines policies that will become drivers in defining the extent to which these policies will respond to climate change claims.
The first aspect is the policy’s scope of cover and the extent to which the risks involved (once more properly understood), pricing and other market forces have had their say in how the policy’s scope of cover should be defined.
The second aspect is the extent to which property damage claims are excluded. While claims can be crafted in a way to diminish the focus on property damage, the presence of these exclusions cannot be denied.
The third aspect is the expression “pollution” and the extent to which the pollution exclusion applies. Pronounced by the Supreme Court of the United States in Massachusetts v EPA, as including greenhouse gasses, the use of pollution exclusions may prove to be another lever which insurers use to manage their exposure to third party climate change claims. This decision is a powerful development in the course of judicial thinking and has been recognised in various jurisdictions including Australia.
In 2010, Liberty International Underwriters issued a comprehensive overview of the future of the relationship in Australia between climate change and D&O insurance. Nearly six years on the future which Liberty perceived, seems to be much closer.
[This article first appeared on 15 December 2015 in the online publication Actuaries Digital.]
 29 September 2015
 The Impact of Climate Change on the UK Insurance Sector (September 2015)
 Paragraph 1.32
 549 U.S.497
 See for example Walker v Minister for Planning  NSWLEC 741
 Climate Change The Emerging Liability Risks for Directors and Officers. August 2010