Climate Change

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Facing up to climate change must now be top of the agenda for the insurance market.  We discuss how best to respond to the challenge.

Climate Change predictions

An Australian Perspective: Climate change exposes infrastructure assets to heightened risks and makes resilience planning critical

Insurers will need to consider climate change impact on ageing and new infrastructure, as many assets are vulnerable to damage or loss with increasing occurrences of extreme weather, including drought, bushfires, rising sea levels, catastrophic storms and extreme temperatures. In Australia, we are already seeing the first of these claims involving relatively new assets, such as pipelines. Climate-related infrastructure issues will include asset loss or damage, performance impacts and potential regulatory exposures for infrastructure asset owners, operators, manufacturers and designers. Insurers will need to identify the risks for each infrastructure asset, assess their materiality and work with the insureds on building climate resilience into their business plans. This is particularly important for essential service assets, such as transportation infrastructure, and energy, water and sewage assets.


Climate change matters more to directors and officers

Public pressure and shareholder activism highlights the need for early recognition at board level that all firms are vulnerable to risks associated with climate change, whether or not they are operating in an environmental sector.  Management boards are now expected to understand, analyse and manage the financial risks from climate change and integrate this issue into decision-making.  Individuals may be held to account if they are unable to demonstrate that risks have been appropriately assessed, mitigated and disclosed.  The Prudential Regulation Authority has extended the Senior Managers and Certification Regime (implemented on 9 December 2019) to incorporate climate change reporting obligations and, in the worst cases,  a finding of a regulatory breach might be severe, including criminal prosecution, fines and penalties, and disqualification as a director.  Corporate pressures around climate change have been expected by boards and their insurers for a few years – it’s now a day-to-day reality and scrutiny of investors, auditors and regulators is likely only to increase.


The Prudential Regulation Authority’s regulatory focus on climate change will gain greater prominence in 2020

Recognising the importance of managing the financial risks from climate change, the Prudential Regulation Authority (PRA) has consulted banks and insurers on climate-related challenges and its detailed expectations on effective governance and risk management will follow. It has established the Climate Financial Risk Forum to develop analytical tools and techniques to inform strategy and regulatory approach.  Recent natural catastrophes have highlighted the need for firms to review whether their modelling accurately represents the changing nature, frequency and severity of climate perils and exposure trends.  The PRA will shortly undertake sample reviews to stress test the adequacy of firms’ exposure management, their risk mitigation strategies and to ensure firms are meeting their climate responsibilities.


Climate change – the force behind a new wave of litigation

Flooding, drought, forest fires, land degradation.  Claimant lawyers are using the evidence on climate change to support a wave of litigation.  In addition to regulatory and reporting requirements, companies will increasingly face the threat of damages to individuals.  All eyes are on the German court’s consideration of the case of a Peruvian farmer’s claim against RWE for the alleged impact of its emissions on farming.  Regardless of the outcome, we expect to see a surge in this category of litigation.  State-owned companies in the fossil fuel industry are at heightened risk, particularly in Latin America and South East Asia, where there is broad recognition of the right to a healthy environment.

Environmental risk poses parametric challenge to traditional insurance products as wordings come under scrutiny

Environmental disasters are becoming more frequent and severe, resulting in an increased value of associated losses.  In responding to pressure for faster payments, the insurance market must continue to innovate in areas including parametric policy triggers and artificial intelligence.  Fundamentally though, we also expect to see a wholesale review of traditional and specialist insurance products for the transfer of environmental risks. Tightening regulations demand that businesses actively manage and report on their exposure to climate change.  Increased litigation relating to environmental damage is likely to test how far general liability policies will respond, beyond the traditional triggers of third party property damage and bodily injury.  Similarly, the wording of standard pollution exclusions used in first and third party policies will come under ever-increasing scrutiny.  The insurance market is well-placed to respond.  Around the world, penetration of specific environmental impairment liability cover remains low, and we expect to see this change.


The solution to reducing damage to sub-sea cables/interconnectors caused by anchors and fishing gear: co-operation or deterrents?

The rapid expansion of offshore wind farms and the development of a transnational electricity grid in the seas around the UK has significantly increased the number of power cables crossing the seabed.  One consequence has been an upsurge in incidents of hugely expensive damage to interconnectors caused by anchors and deep-sea fishing gear.  Co-operation between interested parties, such as agreeing designated corridors for cables and no anchor/trawler zones, helps mitigate incidents.  Nevertheless, rogue fishing vessels will still risk damaging cables to pursue a catch on the basis that their liability for any claim will be limited.  The introduction of fines by the EU/UK government might prove to be a more effective deterrent.


Highly Automated Road Passenger Services will fundamentally change the insurance model

The adoption of a modern public transport system in which Highly Automated Road Passenger Services (HARPS) play a significant role will realise a number of social benefits in specific environments where the infrastructure allows. Private car commuters will be drawn by the ability to work and engage in productive tasks while travelling, while the young, elderly and infirm will benefit from improved independence. HARPS will accelerate the change from mass private vehicle ownership to mobility as a service, encouraging multiple occupancy ride sharing. Over time, this will reduce the number of vehicles on the road, improving congestion and air quality. Such societal changes will give rise to major challenges for the insurance industry, which will need to develop new products to meet the changing needs and demands of passenger service operators.


Surveyors: Property valuation is likely to be complicated by environmental concerns 

As automated valuation model technology fast becomes the primary valuation tool for lenders, and surveyor input is restricted to the more difficult cases, the impact of environmental change should not be under-estimated.  Flood risk analysis is likely to come into sharp focus as predictions suggest properties at risk will more than double by 2050 to 1.9m.  Similarly, as awareness of localised air pollution data rapidly grows, momentum is gathering pace for a ratings system to be introduced.  Adverse conclusions in either instance are likely to result in certain localities falling out of favour, which would inevitably have a potentially dramatic impact on values.  The availability and accuracy of such data, not to mention the skill of its interpretation in valuation terms, is going to be a critical ingredient of future valuation methodology.


Underwriting for the unknown in renewable energy

The Haliade-X wind turbine has a blade length longer than a football field.  It is currently being tested but how can the engineers design for all the conditions this 260m offshore turbine is likely to encounter?  A bladeless turbine is currently being developed and may come to market within 12-18 months.  If more efficient than ‘traditional’ turbines, the oscillating rods will take underwriters back to square one as to the likely losses.  Looking forward, insurers will need to be cautious while also enabling new renewable energy technologies to have access to affordable insurance and thereby lowering our dependency on fossil fuels. 

An Australasian Perspective: Climate risks will have a growing impact in coastal areas

Climate change is impacting coastal property risks as a result of erosion, sea level rises and storm surges. Modelling, including timeframe projections, is being done around coastal properties that may be affected by these changing risks and this issue is being considered by governments at all levels. In Australasia, the insurance industries are calling on governments to help address the risks by strengthening building codes, planning practices and infrastructure that prevents further loss. The Insurance Council of Australia is also seeking to have tax disincentives on insurance products removed. In New Zealand, climate risk does not currently appear to be incorporated into the price of residential coastal properties. But it is expected that higher insurance premiums and insurance retreat in coastal areas will soon have a material impact on private decision making.

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