Global Warming the Insurance Industry by HC120729224942

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									                                        Environmental Services Group


       GLOBAL WARMING AND INSURANCE
        A Gathering Storm or Just “Hot Air”




Presented by:
Rodney J. Taylor, J.D., P.E., CPCU, CLU, ARM
Managing Director
Aon Environmental Risk Services

November 8, 2007




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                                  Environmental Services Group


Global Warming Defined
 “Global Warming refers to the increase in the average
  temperature of the Earth’s near-surface air and oceans
  in recent decades and its projected continuance”

  • Temperatures rose 0.74º C (1.33º F) during the last 100
    years

  • IPCC concluded:
      “Most of the observed increase…since the mid-20th
       century is very likely due to…anthropogenic
       greenhouse gas concentrations.”




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Greenhouse Effect
• Naturally occurring greenhouse gases increase Earth’s
  temperatures 33º C (59º F)
  • Without GHG, Earth would be uninhabitable
• Major GHGs:
  •   Water Vapor (Avg. 54%)
  •   Carbon Dioxide (18%)
  •   Methane (7%)
  •   Ozone (6%)
• Increases in concentrations since 1750:
  • CO2 - 31%
  • Methane – 149%




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Global Warming (1850 to 2007)




                                                                          The year 2006 was sixth
                                                                          warmest year on record,
                                                                          exceeded by 1998, 2005,
                                                                          2003, 2002 and 2004



         Source: Climatic Research Unit and the UK Met. Office Hadley Centre
           Brohan, P., J.J. Kennedy, I. Haris, S.F.B. Tett and P.D. Jones, 2006

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Concentrations of CO2 in the Atmosphere




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CO2 Concentrations and Temperature Change




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Concentrations of CO2 Are Expected to Increase
• Present - 383 ppm
• Much higher than any time during last 650,000 years
• Fossil fuels = ¾ of the increase in past 20 years
• Future rate of change will depend on economic,
  sociological, technological and natural developments
• IPCC models predict concentrations of 541 ppm to 970
  ppm by the year 2100
• Resulting temperature changes of 1.1º C to 6.4º C (2.0º F
  to 11.5º F) by the year 2100




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Projected Temperature Increase by Year 2100




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                                    Environmental Services Group


Global Warming & Risk Management
• Concerns regarding Global Warming include:
  • Melting of glaciers/polar ice
  • Rising ocean levels
  • More severe tropical storms/hurricanes
  • Changes in precipitation
  • Draught
  • More severe forest fires
  • Heat related deaths and diseases
  • Tipping Point – Point where damage is irreversible and/or
    rate of change accelerates



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                       Environmental Services Group


Global Warming & Risk Management




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                          Environmental Services Group


Run-Off from Glacier Melt in Greenland




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                          Environmental Services Group


Change in Thickness of Glaciers (1955 to 2005)




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Rising Sea Levels Due to Global Warming
• Sea levels are up 130 meters (400 ft.) since the last ice
  age (18,000 years ago)
• Most occurred 6000 years ago
• Last 3000 years, sea levels were nearly constant
• Since 1900 – rising at 0.15 mm/yr.
• Since 1993 – rising at ten times that rate (1.5 mm/yr.)
• Global Warming contributes rise in two ways:
   • Expansion of sea water as the oceans warm
   • Melting of ice over land




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                          Environmental Services Group


Changes in Sea Levels (1880 to 2005)




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Estimated Sea Level Changes by Year 2100
• IPCC Models 110 mm to 770 mm (4.34 in. to 30.34 in.)
• May be altered by:
  • Melting glaciers/polar ice
  • Thawing of permafrost
• Impacts of sea level rises:
  •   Coastal erosion
  •   Higher storm-surge
  •   Flooding and coastal inundation
  •   Impacts to groundwater
  •   Loss of wetlands and habitat
• 634 million people live at levels of 30 feet or less above
  sea level
• Also home of 70% of the world’s largest cities

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                                 Environmental Services Group


Results of Sea Level Rise are Already Apparent

Scenes like this are common
from the Pacific to Antarctica




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                           Environmental Services Group


Results of Sea Level Rise are Already Apparent
Cape Hatteras Lighthouse
 • Built in 1797
 • Rebuilt 1870
 • Moved 2780 ft.
   inland in 1999




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                                     Environmental Services Group


Worldwide Drought Conditions
• Shortage of water affecting      • Exacerbating factors:
 >2 billion people                   • Rapid industrialization in
• Causes:                              India and China
  • Natural forces
  • Over-use
  • Inefficient agriculture
  • Agricultural & industrial
    pollution
  • Lack of water treatment
    facilities (90% of the world
    dumps untreated sewage
    and industrial waste in
    rivers and streams


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                                Environmental Services Group


Worldwide Drought Conditions
Ship Stranded in Bed of Former Aral Sea in Uzbekistan




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                                Environmental Services Group


Worldwide Shortage of Usable Water
Industrial Growth is Changing China
and Adding to the Water Shortage




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                                   Environmental Services Group


Changes in Patterns of Precipitation
• With Global Warming not all areas will experience water
  shortages
  • Some regions will have more rain
  • Hurricanes and tropical storms will cause more flooding and
    damage
  • Earlier snow melt and lighter winter snow pack will change
    amounts of water in many areas
  • Coupled with a decrease in the moisture content of soils




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Changes in Patterns of Precipitation




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Changes in Patterns of Precipitation




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Changes in Weather Coupled with
Changes in Demographics (U.S.)
•   53% of population live in coastal areas (17% of land area)
•   23 of the 25 most densely populated counties are coastal
•   Since 1960, coastal populations have increased by 150%
•   Coastal values exceed 50% of total values in many states
    • Florida – 80%
    • New York – 65%
    • Connecticut – 62%
• Growth in coastal values is accelerating




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                                    Environmental Services Group


Example - Florida
• 3rd most populous state
• Population growth is twice that
  of most other states
• Florida’s population:
   • 2007 – 18 million
   • 2030 – 28 million
• Insured values:
   • 1988 - $566 billion
   • 2007 - $2.4 trillion
   • 2014 - $5.0 trillion (projected)




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                                                       Environmental Services Group


Commercial Property Values in Coastal Areas
          Florida                                                       $1,937.3
       New York                                                        $1,901.6
           Texas                           $740.0
   Massachusetts                        $662.4
      New Jersey                    $505.8
     Connecticut                 $404.9
        Louisiana           $209.3
      S. Carolina         $148.8
         Virginia         $129.7
           Maine         $117.2
   North Carolina        $105.3
        Alabama         $75.9
         Georgia        $73.0
        Delaware       $46.4
  New Hampshire        $45.6
       Mississippi     $44.7
    Rhode Island       $43.8
        Maryland      $12.1

                     $0         $500          $1,000     $1,500       $2,000          $2,500


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                                   Environmental Services Group


Why Should Risk Managers Care?
• If people cause Global Warming - People can stop it
• If informed - Some people will reduce their impact:
  •   Carbon footprint
  •   Energy use
  •   Water use
  •   Recycling
• If voluntary measures not effective – Legislation will be
  passed to regulate activities
• If someone is at fault – They will pay




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                         Environmental Services Group


Changes in the Number of Catastrophic Events




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Changes in the Costs of Catastrophic Losses




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                                     Environmental Services Group


Global Warming & Risk Management
• Estimated costs of Global Warming:
  • 1 meter rise in sea level - $600 billion to $900 billion
  • Doubling CO2 in the atmosphere –
    • $27 billion increase in windstorm storm damage annually
       – 65% increase over 2006 levels
    • $175 billion increase in flood damage annually
       – 70% increase over 2006 levels)
  • Stern Report - $9 trillion damage due to Global Warming
    on a world-wide basis
    • Cost to reverse damage – 1.5% of GNP annually




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                                    Environmental Services Group


Global Warming & Risk Management
• Insurers’ reactions to Global Warming:
  • Most current changes involve Property Insurance
  • Changes include:
    • Rate changes in areas subject to greater risks
    • Limiting the number of policies issued in high-risk areas
    • Withdrawal from markets




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                                    Environmental Services Group


Global Warming & Risk Management
• Risks have been transferred to insureds or government
  insurance programs
  • Rate surcharges assessed by insurers for windstorm
     • Forces others to subsidize insureds in high-risk areas
  • State programs have been implemented to preserve
    insurance
  • Federal programs provide the only coverage available for
    some risks (e.g., flood insurance)
     • There is a current effort to add windstorm damage to the
       National Flood Insurance Program




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                                Environmental Services Group


National Flood Insurance Program Statistics
For 2005:
  • Loss payments totaled $13.1 billion
  • Annual premium collected was $2.2 billion
  • Average flood claim was $87,512
     • Up from $39,094 in 2004.




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                               Environmental Services Group


Global Warming & Risk Management
Future Global Warming Risk Issues :
  • Utilities that emit CO2 into the atmosphere may be
    charged with the costs of storm damages
  • Oil companies may be asked to pay for seawalls to
    prevent damage from rising oceans
  • Automobile manufacturers may be asked to pay bodily
    injury claims due to higher temperatures
  • Foreign entities may sue U.S. manufacturers for
    damage to resources anywhere in the world




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                                  Environmental Services Group


Global Warming & Risk Management – Legal Issues
•   Global Warming claims to date have taken two forms:
    1. Challenge to Regulatory Inaction – Claims against
       government agencies to require corporate entities to
       reduce their emissions
    2. Target Corporate Defendants – Claimants, including
       governmental entities, seek declaratory and
       injunctive relief against emitters based on common-
       law nuisance theories




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                               Environmental Services Group


Global Warming & Risk Management – Legal Issues
• Massachusetts v. EPA - Type 1 Claim
  • October 20, 1999 - Environmental groups petitioned
    the U.S. EPA to regulate greenhouse gas emissions
    from new motor vehicles
  • Petition was denied by the EPA
  • 12 states, 3 cities, 2 territories and dozens of
    environmental groups asked the U.S. Court of Appeals
    to rule on the EPA’s decision not to regulate
  • From denial, case was appealed to the U.S. Supreme
    Court




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                                   Environmental Services Group


Global Warming & Risk Management – Legal Issues
• September, 2007 - The U.S. Supreme Court: (1) ordered
  the EPA to comply with its mandate to regulate emissions
  of air pollutants from new cars; and (2) determined that
  greenhouse gases are “pollutants” subject to the Act
• Could result in the application of Pollution Exclusions in
  liability policies to claims alleging emissions of
  greenhouse gases
• While the ruling is narrow, its implications are broad
  • Expect the EPA to now look at regulation of emissions of
    CO2 from fixed sources as well as automobiles

     Question: Is CO2 the kind of Pollution the liability
     insurers intended to exclude?

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                                  Environmental Services Group


Global Warming & Risk Management – Legal Issues
• California v. General Motors Corp., et al. - Type 2 Claim
  • CA A.G. sued automakers, alleging vehicles’ emissions
    contributed to Global Warming
  • Alleged harms included:
    • Reduced snow-pack
    • Loss of fresh water sources
    • Rising sea levels
    • Salt water incursion in aquifers
    • Erosion of beaches
    • Increased ozone pollution
    • Heightened risk of wildfires
    • Increased flooding
    • Health effects on sensitive populations
    • Adverse impact on animals and fish

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                                     Environmental Services Group


Global Warming & Risk Management – Legal Issues
• The U.S. District Court (N. California) dismissed the case,
  finding it presented a non-justiciable “political” question
  • Required court to determine what is “unreasonable” in the
    context of CO2 emissions
  • Forces election between competing interests:
     • Reducing emissions
     • Preserving economic/industrial development
  • Claims implicated:
     • Congress’s power over interstate commerce
     • Executive Branch’s power over foreign policy
  • Court could not identify precedent to assist it with legal and
    factual difficulties in allocating fault and damages



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                                  Environmental Services Group


Global Warming & Risk Management – Legal Issues
• Comer & Cox v. Nationwide Mutual Insurance Company
  • Original complaints – Against insurers for Katrina flood
    damage
  • Amended to include claims against coal, oil and refining
    companies
  • Allegation: “Hurricane Katrina evolved into a storm of
    unprecedented strength and destruction, fed and developed
    by global warming caused by the production of greenhouse
    gases by the defendant corporations
  • Damages alleged include:
    • Loss of property and use of property
    • Loss of business and income
    • Cleanup expenses
    • Disruption of lives
    • Loss of loved ones
    • Mental anguish and emotional distress

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                                     Environmental Services Group


Global Warming & Risk Management – Legal Issues
• The U.S. District Court (S. Mississippi) dismissed the case
  by refusing to certify the class (homeowners suffering
  damage due to Hurricane Katrina)
  • Court determined fact-specific inquiries must be resolved on
    the basis of evidence adduced at trial
  • The nature and extent of property damage from a common
    cause (Hurricane Katrina) will vary greatly in its particulars
     • Depends on location and condition of the property before
       the storm; and
     • Combination of forces that caused damage
  • Opinion stated:
        “I do not believe that a class action of this nature is a
         superior method of resolving the issues…”



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                                 Environmental Services Group


Global Warming & Risk Management – Legal Issues
General and Excess Liability Insurance
• Coverage issues in Global Warming cases:
   • Complaints are likely to be construed to implicate
     either:
     • Manufacturing activities conducted by insureds over
        a long period of time, or
     • Products manufactured by insureds over long
        periods of time




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                                    Environmental Services Group


Global Warming & Risk Management – Legal Issues
General and Excess Liability Insurance
• Coverage issues in Global Warming cases:
  • What policies are triggered by the claims?
     • Katrina (one policy)
     • California Auto Makers – 50 years or more
     • Lost policy questions
     • Choice of law issues
  • Do greenhouse gas emitting activities constitute an
    “occurrence” under the CGL Policy(ies)
  • Do harms alleged constitute “Bodily Injury” or “Property
    Damage?
  • Was the defendant aware of the harmful nature of its
    emissions?
  • Do exclusions (especially Pollution Exclusions) apply?



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                                   Environmental Services Group


Global Warming & Risk Management – Legal Issues
Directors & Officers Liability Insurance
• Coverage issues in Global Warming Cases:
   • Allegations that defendants:
        “…Knew or should have known that their emissions
         of carbon dioxide and other greenhouse gases
         contribute to global warming”
   • Involve potential liability of officers and directors who
     failed to act prudently in the face of “corporate
     knowledge” of likely injury or damage




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                                 Environmental Services Group


Global Warming & Risk Management – Legal Issues
Directors & Officers Liability Insurance
• Coverage issues in Global Warming Cases:
   • Scrutiny will be greater if executives actively
     misrepresent or conceal relevant facts
   • Information in the possession of Directors and Officers
     that differs from the corporation’s official statements
     may fuel shareholder litigation
   • D&O policies are written on claims-made forms that will
     result in only one policy being triggered by Global
     Warming claims




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                                    Environmental Services Group


Global Warming & Risk Management – Legal Issues
• Based on what is currently known, plaintiffs face an uphill
  battle in pursuing claims against corporate emitters for
  Global Warming damages
  • Many courts will simply refuse to recognize and wrestle with
    the complex issues
  • Some cases will be inextricably intertwined with matters of
    domestic and international environmental policy that involve
    “political’ questions
  • Causation issues – plaintiffs must prove the injury or
    damage is the result of the defendant’s emissions
     • Science has not yet established that more severe storms
       and floods are the result of Global Warming
     • Allocation of damages will also be challenging


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                                    Environmental Services Group


Global Warming & Risk Management – Legal Issues
• Even though it will be difficult for plaintiffs to win cases
  alleging Bodily Injury or Property Damage due to Global
  Warming, the insurance industry is not going to escape
  unscathed
  • Duty to defend is broader than duty to indemnify
  • Insurers must defend claims even if they are groundless
  • Defense of Global Warming claims will be expensive
    because of the technical evidence that must be produced
    and reviewed
  • It is likely that insurers will spend millions of dollars
    defending claims related to Global Warming
• Expect to see Climate Change and Global Warming
  Exclusions in insurance policies in the future


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Conclusions                      Environmental Services Group


o Global Warming is just beginning to be recognized by
  insurers as a significant risk factor in property,
  liability and D&O insurance policies
o Risks of loss from windstorms, floods, storm surges
  and other climate change phenomenon are likely to
  increase in the future
o Sophisticated modeling capabilities give insurers the
  ability to predict losses, but these tools are not widely
  used by the insurance industry
o Property insurers are using these models to avoid
  serious losses – risks are being shifted to insureds
  and government-operated insurers
o D&O claims pose a significant future risk to insurers
  and to corporate risk managers
o Global Warming claims are difficult for plaintiffs to
  win, but are expensive for insurers to defend

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