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
#1 AVIATION

The future of flight: hydrogen-powered aircraft

2020 bore witness to a landmark moment in aviation: the world’s first hydrogen fuel cell powered flight of a commercial-grade aircraft, which took place in the UK. Earlier exploration into hydrogen-power had focused on wide-bodied aircraft and floundered. Those behind this cutting-edge technology identified smaller aircraft with a 500 mile range as the market where the science could deliver an economically viable, climate-friendly reality. Neglected regional and general aviation airports may yet experience a renaissance and come to the forefront of a green air travel revolution. So often berated when it comes to environmental issues, the aviation industry is now at the fore of bringing real change and a positive response to climate change. Hydrogen-powered aircraft have the potential to meet the industry’s long-term aim of zero emissions while offering a reduction in operating costs compared to traditional turbine engines. A win-win. The future is bright. The future is hydrogen.

#2 CASUALTY

An Australian perspective: class actions will force underwriters to consider risk of natural disasters

In addition to injury, property damage and business interruption claims, natural catastrophes can also give rise to class actions. In late 2019, the Supreme Court of New South Wales found in favour of the plaintiff/class in the Queensland Floods Class Action (brought against the dam operators for causing the floods) regarding the Wivenhoe and Somerset dam floods in South East Queensland in 2011. An appeal is currently pending. Underwriters must continue to consider the risk of natural disasters for the customers and businesses they insure, particularly in high risk areas. As premium affordability continues to be an issue, the number of uninsurable risks will continue to rise. Insurance cannot be the only reconstruction solution. Experts are now calling for a levy on the fossil fuel industry for a climate disaster fund to help pay for the impact of natural disasters.

#3 DIRECTORS & OFFICERS AND FINANCIAL INSTITUTIONS

Environmental issues remain a top concern for the boardroom

Expect a continued focus on environmental factors in business decisions and an increase in enforcement action by environmental regulators. Public and shareholder expectations continue to place boards under pressure to examine supply chains and switch to more environmentally-friendly production (reducing plastic and waste). Meeting stakeholders’ values in this regard will be imperative to maintain a competitive advantage and ensure accountability. In the marine sector, environmental regulations should remain a key consideration for organisations hit hard by COVID-19 seeking to manage the financial impact. Careful planning will be required when opting to reduce costs by scrapping and decommissioning vessels. Cost effective international options for decommissioning (i.e. in developing countries) are likely to attract scrutiny and directors and officers may be subjected to regulatory investigations and exposed to fines, imprisonment and disqualification.

#4 INSURANCE ADVISORY

FCA plans to implement climate-related disclosure requirements for FCA-regulated pension schemes

The Financial Conduct Authority (FCA) intends to consult in 2021 on implementing client-focused disclosures for asset managers and contract-based pension schemes.  The disclosures will be aligned to the Task Force on Climate-related Financial Disclosures (TCFD).  The FCA aims to finalise rules by the end of 2021, with new obligations coming into force in 2022. The FCA’s plans follow the Department for Work and Pensions proposals on climate-related financial disclosures for Occupational Pension Schemes regulated by the Pensions Regulator.  FCA disclosure requirements are considered important to facilitating the government’s expectations in the Green Finance Strategy that all listed companies and large asset owners should move to reporting in line with the TCFD.

#5 INTERNATIONAL CASUALTY

Climate change litigation will gather speed

Insurers will receive a significant increase in notifications of claims relating to the impact of climate change – particularly in the heavy industry and oil and gas sectors.  Climate change related litigation is starting to gather momentum, as courts around the world are more inclined to give standing to individuals to bring claims related to its impact.  In the near term, insureds with existing policies will look increasingly to their insurers for support in meeting the defence costs of the litigation.  The next battle will be on causation. It will remain difficult to evidence that there is any significant causal link between one company and the effects of climate change.  Claimants may be encouraged by the landmark decision in Urgenda v The Netherlands that saw the court hold the Dutch government accountable for meeting targets to reduce emissions. It remains to be seen whether this reasoning will transfer to the private sector. 

Act now on climate change

Insurers and their corporate policyholders will need to work together to undertake climate change risk assessments (e.g. through the framework of the Task Force on Climate Related Disclosures) to identify, mitigate and/or adapt to the risks arising from climate change.  Insureds will need to alter their supply chains and eliminate carbon intensive aspects of their operations.  This will protect the insured (and its directors and insurers) from future liabilities.  Any company using carbon intensive products, such as non-recyclable plastics or unsustainable palm oil, must take action: a failure to decarbonise these risks now will result in claims in the future.

#6 MARINE, ENERGY AND TRANSPORT

COVID-19 induced oil demand shock could accelerate offshore energy industry’s shift to renewables

With oil prices already struggling, the coronavirus pandemic has driven demand for oil to new lows. The pandemic, coupled with the ever-increasing scrutiny surrounding climate change risk, means energy majors may look to expedite the transition from oil and gas to renewable energy sources.  Energy giant Equinor has set a goal to reach net-zero emissions by 2050, in part achieved by a transition to renewables, carbon capture and storage and development of alternative technologies such as hydrogen. In line with this, the International Energy Agency has said the 2050 target for net zero will not be met without a notable acceleration in clean energy innovation.  The oil and gas industry is best placed to fund and drive this innovation.  For offshore energy insurers, the plight of oil demand has driven down premium volumes.  However, the expectation is that the increasing move to renewables will plug the gap in lost business.

A Canadian perspective: insurers to grapple with risk v reward related to expanded shipping in Canadian Arctic

While climate change continues to open up new, more direct routes for shipping, the opportunity has brought with it a myriad of risks many underwriters may not have previously considered. Increased crewing and dangers related to navigating dangerous and previously unexplored routes increase risk. Claims related to accidents, ship damage and even potential death are all possibilities, but without historical data to rely on underwriters must grapple with the risk profile of a relatively unknown area and we may well learn whether the risk is worth the reward for insurers willing to venture into ‘unchartered waters’ in 2021. 

A Canadian perspective: marine spill risks due to anticipated West Coast tanker traffic increase

If proposed pipelines are approved, crude oil and petroleum-based products being transported on Canada’s West Coast are projected to increase, and with them the number of oil spills from groundings, collisions, allisions and hull and equipment failures is expected to rise. The environmental consequences of oil spills can be catastrophic to coastal communities and ecosystems and could cost insurers millions of dollars in losses and clean up. While shipping is far safer today than it was many years ago, claims related to increased tanker traffic could seriously impact insurers and the area remains high-risk for underwriters.

#7 MOTOR

Changing mobility habits and the regulation of e-scooters will herald an increase in vulnerable road users

Driven by COVID-19 and supported by an increase in cycle lane infrastructure, there has been an increase in the use of personal forms of transport for shorter journeys. With the threat of further periods of lockdown suppressing car usage, we anticipate a significant increase in vulnerable road users and an acceleration in adoption of more environmentally-friendly electrically-powered transportation solutions.  This will be echoed in an increase in demand for flexible and on-demand insurance policies. With current e-scooter trials set to conclude in summer 2021, expect to see legislative change to facilitate their wider adoption and likely regulation akin to electrically assisted pedal cycles.

Solar and ‘vehicle to grid’ charging set to be tested in private and commercial vehicles

We will see further testing of new electrical charging technologies in both the private and commercial vehicle markets as people strive to reduce fossil fuel consumption and running costs. Expect to see large commercial vehicle manufacturers trialling the use of solar panel clad trailer units to reduce fuel consumption for plug-in hybrid tractor units. At the same time, manufacturers of electric cars and light commercial vehicles (EVs) are expected to pilot ‘vehicle to grid’ charging in conjunction with energy suppliers. Such novel solutions will help to accelerate the adoption of EVs by enabling consumers to sell energy to the grid at peak times when the vehicle is not being used, and to charge it off peak when energy prices are lower. 

#8 PROFESSIONAL LIABILITY

Pensions Investment: new social and moral obligations on investing for pensions funds could leave trustees vulnerable

Environmental, social and corporate governance (ESG) concerns have not historically been at the heart of pension investing decisions. This is changing. Since October 2020 new obligations have come into force requiring all pension trustees to publish annual implementation statements explaining how they have complied with their ESG and stewardship policies. Contract based providers also have new requirements that came into force in 2020.  Taking these important issues properly into account and investing appropriately is important for future generations. Now not doing so leaves the trustees more vulnerable to claims from members and sponsoring employers.

#9 PROPERTY

Roll-up to reduce flooding

We are likely to see incentives, such as premium discounts, offered to homeowners to flood-proof their homes following Flood Re’s recommendations, which the Government will adopt.  Measures are likely to include installation of floodgates, self-closing vents, flood resistant paint and relocation of electrical sockets.  Eventually this is likely to be rolled out to all homeowners, not only those falling within high-risk flood areas.  With urban surface water flooding striking even in low risk areas, all insurers are likely to look at how they can incentivise their policyholders and reduce future exposure.

Feeling hot, hot, hot

After another glorious summer of high temperatures and dry conditions, the spotlight falls on perils such as subsidence.  Subsidence caused by the close proximity of trees to properties is the only peril which is made worse by global warming but where the traditional response is to fell trees, thereby contributing to the exacerbation of global warming.  The answer cannot continue to be to remove trees.  What we will start to see is artificial intelligence being used more and more to improve the ability to risk profile areas and actively manage appropriate tree planting and effective tree maintenance.  A harmonious balance between trees in the urban environment and housing stock must be reached. 

As Easy as ADB

Ash die back (ADB) is a fungal tree disease which has been present in the UK since 2012. With more than 60 million ash trees outside of woodlands in the UK, it is estimated that the majority of them will become infected with ADB. There is no known cure and only 1% to 5% of the trees are immune to the disease.  The disease itself causes particular branches of the tree to die-back by blocking the supply of water and nutrients to those branches.  This can lead to branches failing and collapsing, posing a significant risk to human life, property, infrastructure and services. Land owners have had to move from a standing start in 2012 to take action to minimise the impact of ADB.  The Tree Council launched guidance for tree owners in June 2020 which impresses upon tree owners the importance of understanding the disease.  The steps launched include identifying Ash trees and proactively inspecting and managing them to minimise their risk of failure. This is going to have a huge implication on land owners over the next five to 10 years as they work to avoid criminal and civil liability by effectively managing their ash tree stock.  However, it is far more than simply working to avoid a legal liability.  These Ash trees are part of the UK’s native deciduous rainforest and they are likely to be removed in the main from our landscape causing a huge environmental impact. 

A US perspective: California property insurers are likely to continue their exodus from fire- prone areas in the wake of the 2020 wildfires

In 2019, to slow the exodus of insurers, California implemented a moratorium on the cancellation and/or non-renewal of policies covering property in fire-prone areas. However, this expired in September 2020 and the expectation is that property insurers will resume their departure, potentially cratering the housing market if homes in such areas become uninsurable. Any permanent solution to the problem will require a deal between California lawmakers, the property insurance industry and the federal government, which owns about 57% of California’s 33 million acres of forest land. In the current hyper-charged political atmosphere, no such solution is yet on the horizon.

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