Aerospace_ Defence and Climate Change The Risk Dimension by wanghonghx



     Aerospace, Defence
     and Climate Change:
     The Risk Dimension
     One of the biggest challenges of tackling issues related to climate change is the global
     nature of the problem. Many different public and private agencies have a role to play in
     managing and mitigating the problem. However, the many different interests, motivations
     and methodologies can create confusion and delay in implementing the best solutions.
     John Scott and Adam Piper* describe how the insurance and A & D sectors
     can work together to fight climate change.

             he aerospace and defence                             insurance industry have been designed                        industry has experience of working with

       T     industry has been active in
             developing new technologies that
     either have a role in reducing emitted
                                                                  to protect private assets, whereas the
                                                                  climate is a public good. Despite this
                                                                  limitation, there are many examples
                                                                                                                               nuclear power for military use and has
                                                                                                                               developed a range of technologies to
                                                                                                                               improve the efficiency and viability of
     carbon dioxide (CO2e) or improving                           where insurance has been used to                             renewable energy sources (hydro, solar,
     resilience and adaptation to climate                         encourage the use of new carbon                              wind, wave, tidal). It has even developed
     change. Similarly, the insurance industry                    reducing technologies and the adoption                       technologies that can improve the low
     has been active in addressing the                            of adaptive behaviours. This is especially                   carbon fossil fuel efficiency of power
     challenges of climate change, working                        so in the areas of power generation and                      generation (especially coal and gas).
     with customers from various industries,                      transportation, but also in energy                              Examples of this type of R&D include
     including aerospace and defence, to                          efficiency and building resilience.                          stealth technology to reduce the radar
     create risk transfer products and provide                    Examples include insurance covers for                        impact of wind turbines, thereby
     risk management advice. Working                              solar and wind power generation, as well                     allowing them to be used near air traffic
     together could be a catalyst for both                        as liability cover for carbon capture and                    control radars (QinetiQ and Lockheed
     industries to play a significant role in                     sequestration (CCS) and insurance covers                     Martin). Similarly, research on the sonar
     reducing CO2e and the potential impacts                      for ‘green’ and weather resilient                            impact of wind turbines on marine
     of ongoing climate change.                                   construction.                                                wildlife has led to changes in turbine
        This article discusses some of those                         The majority of anthropogenic CO2e                        construction offshore.
     approaches for joint working, using a                        comes from burning fossil fuels for power                       In the CCS arena, improvements in CO2
     threefold classification: (1) Encouraging                    generation - roughly 50% (gas, coal and                      compression using supersonic
     the development of new technologies                          oil) - and from land transportation (car,                    combustion ramjet engine technology
     that reduce greenhouse gas emissions,                        truck, bus) or sea transport (ship),                         have significantly reduced the costs and
     (2) Developing adaptations to the                            around 20%. A relatively small amount                        power requirements of compression, one
     consequences of climate change and                           of anthropogenic CO2e comes from air                         of many key areas of risk in the
     (3) Influencing public policy that                           transport. Technologies that significantly                   successful commercial implementation of
     encourages behaviour change.                                 reduce greenhouse gas (GHG) emissions                        CCS. This is also an area where the
                                                                  from these activities are imperative if                      insurance industry has begun to address
     New Technologies                                             Intergovernmental Panel on Climate                           the operating liability risks of CO2
                                                                  Change (IPCC) GHG reduction targets are                      injection as well as the cost
       The aerospace and defence industry                         to be met.                                                   uncertainties associated with long term
     has been a powerhouse of technology                             In power generation, a move to a mix                      storage and sequestration. In particular,
     R&D in the search for ever more powerful                     of nuclear, renewable and CCS coal- or                       the insurance industry has been
     and power-efficient systems for military                     gas-fired power stations would help meet                     informing policymakers on the best
     use. Harnessing this activity to meet the                    GHG reduction commitments and improve                        approaches to managing long-term
     challenges of climate change could bring                     fuel security (i.e. make western                             storage and sequestration risks based on
     significant advances to reducing CO2e.                       economies less reliant on Middle Eastern                     the lessons and experiences of running
     The products available from the                              and Russian oil and gas). The defence                        different types of funding and risk

     *John Scott is Head of Risk Insight at Zurich Global Corporate UK, a part of Zurich Financial Services Group, an insurance-based financial services provider. Adam Piper
     is Director, Corporate Risks UK & Europe at Miller Insurance Services Limited, an independent specialist insurance and reinsurance broker. Both are based in London.
     The views presented in the article are the personal views of the authors and do not necessarily reflect the views of any other person or entity.

20                    June 2009

transfer mechanisms – for example, in       they did in the past. In contrast to Cold       • Manufacturing within the confines of
the flood defence, oil pollution and        War requirements for heavily armoured        the ‘precautionary principle’, i.e. for the
nuclear arenas.                             vehicles, the emphasis is now on more        manufacturer to establish reasonable
  In solar panels, there has been           highly mobile forces, using fuel-efficient   proof that the use of nano-materials in
considerable research interest in           ‘platforms’. Fuel efficiency and reduced     products will not cause significant harm.
improving the performance of these for      GHG emissions go hand-in-hand with              • Implementing a ‘post marketing
military and civilian use. One example is   high-efficiency. Diesel engines, hybrid      surveillance’ regime that includes an
barrier film technology which improves      electric/petrol or plug-in hybrid or         ‘adverse event’ reporting system
protection of photovoltaic cells and can    electric-powered vehicles are becoming          • Consideration of an ‘employee
improve performance over their lifetime.    increasingly common. To help manage          baseline testing protocol’, i.e. to ensure
Lifecycle operating and risk issues are     the risks of these new fuels and engine      that employees are regularly tested
also areas that have been addressed by      technologies, the insurance industry has     and monitored to assess exposure
the insurance industry which has been       been developing products and services        impacts, if any
active in developing insurance covering     that either reward use of new                   • Institution of aggressive worker
the cost uncertainties associated with      technology, for example insurance            protection techniques to minimize
recovery, buyback and disposal of solar     premium discounts for hybrid vehicles,       inhalation, ingestion and dermatological
panels, so that manufacturers can           or encourage driving smarter – either by     exposure to hazardous substances
comply with the requirements of the EU      driving fewer miles or using less fuel          Alternative fuels such as biofuels and
Waste from Electronic and Electrical        such as pay-as-you-drive auto insurance      hydrogen are also areas of research by
Equipment (WEEE) Directive. Linked to       or telematics-enhanced systems that          the aerospace and defence industry.
this is the risk of distributed power       improve safety and efficiency.               Hydrogen requires a more fundamental
systems failing and not providing power,       The main technological barriers for       range of new technologies for it to be
or the potential loss of income from that   electric or hybrid vehicles are around       widely adopted as a fuel, including cost-
power to the owner-operators. There is      battery technology. Significant efforts      effective hydrogen fuel cells, a safe
increasing appetite to develop new and      have been made in defence research           distribution network of hydrogen filling
emerging insurance products that cover      establishments to develop, smaller,          stations and a low carbon source of
off-grid power business interruption        lighter, more powerful and longer-lasting    hydrogen production. Hydrogen
caused by equipment failure or              batteries. Nanotechnology has been used      production could be closely linked to CCS
property damage.                            to achieve battery performance               projects, where CO2 stored in nearly
  The other big new technology              improvements. Good risk management           depleted oil and gas reservoirs could
opportunity to reduce CO2e lies in the      practices, a core insurance industry         displace hydrocarbons which could be
development of alternative engines and      activity, should be implemented with         transformed (e.g. steam-methane
fuels for cars. The aerospace and defence   nanotechnology deployment to mitigate        reforming) into hydrogen for use in
industry has multiple opportunities and     potential future liabilities. Examples of    power generation or as an alternative
incentives to develop technologies in       some mitigative techniques available         fuel for vehicles. The insurance industry
this area. If nothing else, military        from the industry to apply to                has been looking at the entire hydrogen
planners now have different asset           deployment of nanotechnology include:        supply chain and the insurable risk
requirements for forces fighting regional      • Adoption of a ‘life cycle management    implications of running hydrogen-
conflicts and anti-terrorist actions than   approach’ to nano-materials                  powered vehicles.

                                                                                                           June 2009                   21

     Adaptation                                   flooding or increased intensity and           gains could come from reducing CO2e
                                                  frequency of storms and continuing sea        through better insulation and more
        On the adaptation to climate change       level rise, all contribute to increased       efficient heat, light and power
     issue, a lot of effort has gone into         losses suffered by insurers. Well             consumption, with associated cost
     modelling the potential consequences of      publicised examples of major city             savings. Insurable risk covers are now
     changing climate, for example flooding       flooding such as in New Orleans during        available such as a ‘Green Wrap’, which
     from changing sea levels, or fluvial and     Hurricane Katrina in 2005 are likely to       incorporates general liability/workers
     pluvial flooding and damage from             be repeated, unless significant               compensation/professional indemnity for
     increasingly intense and frequent storms.    adaptation occurs - either by building        ‘green’ building projects.
     The insurance industry is motivated to       away from flood-prone areas or by
     understand the changing nature of these      building flood defences. The risk-based       Behaviour
     risks with respect to exposure to existing   pricing signal of insurance premiums, or
     insurance products. Insurers are             indeed, in some cases, the lack of               Behaviour of individuals and
     evaluating and offering coverage to make     insurers willing to provide cover, can        populations is a difficult area for private
     existing building stock more weather-        help encourage developers to build away       industry to have much influence over
     event resilient in some cases, but           from flood-prone areas, or to design          and is much more the responsibility of
     without mandatory building code              flood-resilient buildings.                    policymakers e.g. governments,
     changes, so the impacts of this voluntary       Of course it isn’t just flooding that is   legislators and regulators. However, the
     insurance industry effort may be             an increasing risk related to climate         aerospace and insurance industries,
     minimal. There are also potential            change, but the damaging affects of           working together, can create risk-based
     liability consequences of climate change     windstorms, drought-stricken areas and        pricing signals and influence policy-
     and some insurers are now offering           wildfires (for example in Southern            makers to develop policy frameworks
     liability cover for climate change related   California and Victoria, Australia). All of   that can manage risk and encourage the
     risk for directors and officers, political   the impacts of these events are felt by       introduction of new technologies, for
     risk, professional liability, and            insurers in increased losses and these        example CCS, that reduce reliance on the
     environmental liability. In developing       require changes to risk models and            carbon economy.
     economies where insurance is not so well     pricing for insurers to still be able to         On behaviour change, the insurance
     developed, micro-insurance schemes have      offer insurance cover that is                 industry has been actively working with
                                                  commercially viable. These risk models        public policy-makers to bring specialist
                                                  can be informed by data from earth            risk knowledge. New frameworks of

                                                  Adaptation has been an important area of focus for the
                                                  insurance industry and has military applications too.
                                                  observation technology provided by the        regulation and legislation are required to
                                                  aerospace and defence industry.               encourage decarbonising the existing
                                                  Traditional insurance products need to be     mix of power generation. Public policy
     been implemented to respond to food          modified to cope with the effects of          can also work together with insurance to
     and water shortages in rural areas of        climate change, but in addition, new          make existing building stock more
     South America, Africa, and Asia.             products are being developed. For             climate friendly and resilient by
        Adaptation has been an important area     example, there are new risks associated       establishing building code changes which
     of focus for the insurance industry and      with systems designed for water re-use        demand upgrades to a more efficient,
     has military applications too. As the        and increased storm water run-off which       green and resilient state after damage –
     effects of climate change are likely to be   can require innovative insurance              in the same manner that is required to
     felt over a number of decades, practical     solutions to address them.                    address necessary safety improvement
     actions will need to be taken to reduce         Another important angle on                 with respect to electrical safety and
     their impact. The insurance industry has     adaptation is improving the resilience        earthquake resilience.
     a commercial imperative to encourage         and insulation qualities of buildings. In
     mitigation of these impacts and better       many countries there are ‘green’ building     Working Together to Meet the
     risk selection to reduce losses. The         codes. Insurers are beginning to offer        Challenge of Climate Change
     aerospace and defence industry has the       products that fund rebuilding of
     know-how and technology to support           damaged properties to these codes and           In conclusion, via a framework of
     predictive modelling, for example            even higher resilience against windstorm      technology implementation, adaptation
     satellite remote sensing data being used     damage (stronger roof attachment,             and behaviour, there are many common
     for meteorological forecasting, or models    armoured glass) and flooding.                 actions that the insurance, aerospace and
     of potential flooding, or power outages      Technology from the aerospace and             defence industries can take to reduce the
     in areas affected by severe storms. These    defence industry can help in this regard,     impact of climate change. Further joint
     models can and have been used to             especially research into green building       work on initiatives should be established
     support emergency civilian and military      design and high-tech glazing. For the         in all three areas to encourage new
     forces who need to respond to natural        main customer of the aerospace and            technologies, create further adaptation
     catastrophes such as flooding or the         defence industry, the military, there is a    to change and influence policymakers to
     effects of serious windstorms.               vast estate of buildings that could           create new legislation and regulation
        Increased flood risk, related either to   benefit from green rebuild technology         that will help mitigate and reduce the
     changing patterns of fluvial/pluvial         and insurance cover. Some of the biggest      potential risks of climate change.

22               June 2009

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