Global warming - Impact on Insurance industry

1. Content
Global Warming – Its impact on Insurance Industry
• Global Warming – An overview
• Global Warming – What it means for Insurers?
• Insurance Industries’ response
• Glossary
Global Warming – Its impact on Insurance Industry
Rajagopalan Trichy S
Date: 25-Dec-2009
1 Date: 25/12/2009 Author: Rajagopalan Trichy S.

2. Global Warming – An overview

3. Global Warming
Global warming
• Is the increase in the average temperature of the Earth's near-surface air and oceans since
the mid-20th century and its projected continuation.
• The Intergovernmental Panel on Climate Change (IPCC) concludes –
− Temperature increases mostly due to increasing concentrations of greenhouse gases
resulting from fossil fuel (Coal, oil, natural gases) burning and deforestation (Human
activities)
Impact of Global Warming:
• Increase in global temperature will cause
− Sea levels to rise and will change the amount and pattern of precipitation,
− Probably including expansion of subtropical deserts.
• The continuing retreat of glaciers, permafrost and sea ice is expected, with warming being
strongest in the Arctic.
• Other likely effects include increases in the intensity of extreme weather events, species
extinctions, and changes in agricultural yields.
• Pacific Islanders are already feeling the effects of global warming, including food and water
shortages, rising cases of malaria and more frequent flooding and storms. (UK news papers)
3 Date: 25/12/2009 Author: Rajagopalan Trichy S.

4. Relevant Root causes - Global Warming
Motor Vehicles
• Transportation / Motor vehicles are responsible for almost quarter of annual emissions of carbon
dioxide (CO2), the primary global-warming gas.
• Three factors contribute to CO2 emissions from cars and trucks:
− Amount of fuel used ; Amount of CO2 released when a particular fuel (ex: coal) is used.
− Number of miles vehicles travelled
• Combating global warming requires reducing all of these factors. This necessitates increased
fuel efficiency, switching to renewable fuels, and less driving.
The US transportation sector emits more CO2 than all but three other countries' emissions from all
sources combined.
Buildings/Architecture
• Buildings and their construction account for more than half of all the greenhouse gas emissions
• Cars and light trucks could turn over within about 12 years and be replaced by more efficiently
run vehicles, buildings have a lifespan (and energy consumption and emissions pattern) of 50 to
100 years.
• In US, Buildings and their construction account for nearly half of all the greenhouse gas
emissions and energy consumed in US each year.
4 Date: 25/12/2009 Author: Rajagopalan Trichy S.

5. Global Warming – What it means for Insurers?

6. Global Warming – What it means for Insurers?
Insurers have more incentive than any other industry to catalyze global action on climate
change. As changing weather patterns will affect many insurance lines, including P&C, flood,
crop, business interruption, vehicle, health, and life.
Losses:
Catastrophic losses to the economy were the third highest ever, exceeding $200 billion globally
in 2008, in US alone it was $40 billion due to Hurricanes (As per Munich Re)
Impact on Revenue:
Insurance Industries revenue comes from Investment and Premiums (Underwriting).
Climate trends are creating risks on both sides of the insurance house—underwriting and
investment.
Opportunities:
The above mentioned Losses and impact on revenue also indicates vast opportunities, from
product innovation to investment alpha, for insurers to be part of the global warming solution.
6 Date: 25/12/2009 Author: Rajagopalan Trichy S.

7. Global Warming – Regulator’s questions to Insurance Industry
Last year, a Committee of the National Association of Insurance Commissioners (NAIC)
proposed the following 9-point questionnaire to the insurance industry:
1. Do you have a plan to mitigate your own emissions?
2. Do you have a policy for handling climate change risk and investment management?
3. Have you considered the impact of global warming on your own investment portfolio?
4. What steps have you taken to encourage policyholders to reduce losses from climate
change?
5. Describe your use of computer modeling to assess global warming impact.
6. Do you know of any trends or effects of global warming that may have a material impact
on your operations or financial condition?
7. Are there geographic locations (read Gulf coast) where you are reducing business or
line of insurance you are reducing or eliminating due to global warming?
8. What analysis have you conducted on the impact of global warming on your business?
9. Describe steps you have taken to engage key constituencies on the topic of climate
change.
Response from Industry is mixed for the above questions as there are fears about divulging
confidential data which may result in ‘law suits’, ‘loosing to competitors’ etc….
7 Date: 25/12/2009 Author: Rajagopalan Trichy S.

8. Global Warming - Insurance Industries’ response

9. Global Warming – Insurance Industries’ response
The Fundamental Role of Insurers is to Assess & Quantify Risk and it is same for Climate change as
well. The process should be same as for other products.
Identification of Risk due to Global Warming:
• Property Damage
• Liability Risks
• Management Liability
• Political Risk
• Economic Risk
• Regulatory Risk
• Investment Risk
Risk Identification should lead risk quantification
• Loss Trending
• Catastrophe Modeling
• Scientific Research
• Climate Models
• Tort Threat Assessment
• Regulatory Environment
Based on Risk quantification risk mitigation (solutions) should be arrived:
• Risk Transfer (New or Adapted Insurance products)
• Risk Retention
• Uninsurability issues
• etc...
9 Date: 25/12/2009 Author: Rajagopalan Trichy S.

10. Global Warming - Insurance Industries’ Response
(Research / Study to Understanding the problem)
Today insurers can capitalize on their enormous creativity and market clout to preserve and
grow their businesses in the face of this unprecedented challenge.
Lloyd’s of London’s performed a detailed research and their report ‘Climate change Adopt or Bust’
give warning to Insurers – To :
• Understand and actively manage climate change risk
• Regularly update and recalibrate our pricing models to keep pace with REALITY
• Insurers must also take advantage of scientific advances to factor forecasts for the season
ahead into their planning, instead of relying only on long-term trends.
• Climate change means – risk exposures are changing and new one emerging – Which
means need for reviewing the coverage and communicating new conditions.
• Ability to assess the impact of climate change on asset value – Underwriting for profit will be
key for success in insurance
• Engage with business and government for better managing the risk
Industry Leaders feel: Insurance industry once asserted its leadership and expertise in tackling
Building fire and Earthquake risks in the past. Similarly risk due to Global Warming/Climate
change should be taken up as priority.
10 Date: 25/12/2009 Author: Rajagopalan Trichy S.

11. Global Warming - Insurance Industries’ Response
(Research / Study to Understanding the problem)
As per one of the Insurance Industry report on Climate change,
Globally Insurers are focusing in the following areas related to climate change:
− Understanding Climate change problem
− Promoting loss prevention
− Aligning Terms and Condition with risk reducing behavior
− Creating innovative insurance products (Max effort spent here: 22% of total)
− Offering carbon risk management and offsets
− Financing customer improvements
− Investment in climate change solutions
− Building awareness and participating in public policy
− Leading by example
− Carbon risk disclosure
11 Date: 25/12/2009 Author: Rajagopalan Trichy S.

12. Global Warming - Insurance Industries’ response
(Strategic Initiatives)
Strategic Developments
• Increased engagement of trade allies such as Actuaries, Catastrophe modeling firms,
Intermediaries
• Increased engagement with Insurance Regulators
Some of the climate focused insurance product/service offerings
1. Rebuild more resilient or "green“ after loss
2. Bundled carbon offsets
3. Incentives for low-emissions or loss-resilient profile
4. Performance: Energy savings & carbon reduction risk
5. Performance: Energy production & carbon reduction risk
6. Finance for carbon reducing or loss-resilient improvements
7. Advisory, inspections, or risk management services
8. Climate-risk modeling services
Note: Not all Lines of business of Insurance would be able to offer all product/services listed
about. For ex: Health and Life insurance cannot cater for 1st service listed above but it is very
much applicable for Auto and Homeowners insurance.
12 Date: 25/12/2009 Author: Rajagopalan Trichy S.

13. Global Warming - Insurance Industries’ response
(Strategic Initiatives)
Analyzing Loss drivers and vulnerabilities:
Creating risk models that account for the uncertainty of a changing climate: CAT models
used by insurers to manage and price risk are backward looking so action on Climate change is
difficult. So first step is Integrating Climate Change into Traditional Catastrophe Modeling.
With sponsorship from AIG and Lloyd’s of London, Harvard University and the Insurance
Information Institute (with ACE, Allstate, Guy Carpenter, Marsh, Munich Re, Travelers, and
Willis), insurers are collaborating through the Catastrophe Modeling Forum to better integrate
climate change factors into insurance loss models (CMF 2007).
13 Date: 25/12/2009 Author: Rajagopalan Trichy S.

14. Global Warming - Insurance Industries’ response
(Strategic Initiatives)
Promoting Loss prevention:
Managing risks and controlling losses is central to the insurance business,
Financial Management of Risk: Insurers will continue to manage the risks financially by:
1. Exclusions
2. Price increases
3. Derivatives etc...
Physical risk management:
• Implement Building codes to mitigate losses from Natural hazards. (Use ISO’s Building
Code 194 Effectiveness Grading Schedule (BCEGS™) assessment programs.)
• Land use planning (Avoid building homes/businesses near coastal or forest areas)
Integrating Energy management & Risk Management: Use of energy-efficient and
renewable-energy technologies that also make infrastructure less vulnerable to insured
losses, and in improved management of forests, agriculture, and wetlands.
Rebuilding right after losses: In 2008, Fireman’s Fund introduced the first commercial
fleet hybrid vehicle upgrade endorsement in the event of loss, which includes
significant additional incentives by covering full-replacement value (no depreciation) and no
deductible for the first three years (FFIC 2008a).
14 Date: 25/12/2009 Author: Rajagopalan Trichy S.

15. Global Warming – Insurance Industries’ response
Innovative Insurance Products
• Currently 600+innovative, eco-friendly products and services are now offered by 244 insurers,
reinsurers, brokers and insurance organizations.
• 37 percent of these activities come from U.S. companies.
• Twenty-two companies now offer 39 products and services specifically designed for new
green buildings, and green upgrades for existing buildings, either following a loss or in the
course of normal renovations.
Pay as You Drive (PAYD) insurance programs. (Insurance regulation forcing insurers to offer
this is being planned in California)
• A device or sensor in the car tracks miles driven, as well as speed.
• Depending on the program, different techniques are used to collect the information; some take
odometer readings, others may use GPS systems. The information is then used to reward
policyholders who drive fewer miles than the average driver by providing them with discounts.
Hybrid discounts.
• Some auto insurance companies offer premium discounts up to 10 percent for those who
drive hybrid vehicles. A similar discount may also apply to hybrid-electric boats and yachts.
15 Date: 25/12/2009 Author: Rajagopalan Trichy S.

16. Global Warming – Insurance Industries’ response
Innovative Insurance Products – Contd…
Climate related Micro insurance –
• Mainly driven by European Insurers provides coverage for low-income populations. These
products respond to food and water shortages in Rural areas of South America, Asia and
Africa.
− AIG offers this insurance to around 2,250,000+ customers in Uganda
− Allianz offers this in Columbia, Indonesia, Egypt etc..
− Swiss Re offers this to Small farmers in India as Weather Insurance and in Africa as
draught insurance..
Insurance coverage for green buildings, renewable energy, carbon capture and storage and
carbon trading are being offered by more insurers than ever before.
Home
• Premium discounts for LEED certified homes (LEED is short for the Leadership in Energy and
Environmental Design Green Building Rating System, developed by the U.S. Green Building
Council)
16 Date: 25/12/2009 Author: Rajagopalan Trichy S.

17. Global Warming – Insurance Industries’ response
Renewal energy :
• Renewal energy is a new market for Insurance Products and services.
• AXA, Munich Re, Navigators, Sompo Japan, and Tokio Marine Holdings offer Insurance
products in this area.
Liability coverage associated with climate change:
Two insurers, Zurich and Liberty Mutual, have introduced directors and officers’ (D&O)
coverage specifically tailored to address liability risks associated with climate change.
Insurers are investing in businesses :
• That are developing and offering low- and no-carbon technologies
• Total of $11 billion in direct investments by 15 insurers, nearly double in 2008 in comparison
to investment in 2007
• Property insurance companies are driving the majority of the activity (homeowner,
commercial, and auto) along with significant increase in activity on the part of liability insurers:
Lines of business – With very minimal activity in this space are:
Life-health, Offshore property, Aviation, Ocean marine, or Standing-timber, Travel,
Warranty, Industrial, Business interruption, Inland marine, workers compensation, crop,
professional liability, and commercial auto insurance markets
17 Date: 25/12/2009 Author: Rajagopalan Trichy S.

18. Global Warming – Insurance Industries’ response
Quotes from Large insurance Companies:
“The industry should not be afraid to be bold on this issue. In fact, this might just
be the perfect opportunity for the insurance industry to demonstrate how it really does
advance the interests of all of us ahead of its own, narrower commercial interests”
(Canadian Underwriter 2007).
“Green’ customers tend to present better risk profiles, which can be translated
into lower rates. ~ AXA, response to 2006 Carbon Disclosure Project Survey
Claims arising out of the Green building environment are much less likely than in
conventional structures due to reduced levels of volatile organic compounds and healthier
fresh air” (Taylor 2008). - Broker of AON also subscribe to this view.
Fireman’s Fund recognizes it in the manufacturing sector as well:
“Manufacturers that enforce green standards benefit from higher employee productivity,
reduced absenteeism, improved product safety and lower energy bills. Sustainable
businesses present fewer risks and are, therefore, better risks to insure” (FFIC 2008b).
18 Date: 25/12/2009 Author: Rajagopalan Trichy S.

19. Global Warming – How we can support our customers in
Insurance Industry to face this challenge?

20. How can we support?
???
20 Date: 25/12/2009 Author: Rajagopalan Trichy S.

21. Glossary
Aerosols: Solid or liquid particles suspended within the atmosphere.
Albedo: Refers to the ratio of light from the sun that is reflected by the Earth’s surface to the
light received by it. Unreflected light is converted to infrared radiation (i.e., heat), which causes
atmospheric warming (see “radiative forcing”). Thus, surfaces with a high albedo (e.g., snow
and ice) generally contribute to cooling, whereas surfaces with a low albedo (e.g., forests)
generally contribute to warming.
Basket of Gases: Greenhouse gases listed in Kyoto Protocol, includes: carbon dioxide (CO2),
methane (CH4), nitrous oxide (N2O), hydro fluorocarbons (HFCs), perfluorocarbons (PFCs), and
sulphur hexafluoride (SF6).
Greenhouse Effect: The insulating effect of atmospheric greenhouse gases (e.g., water vapor,
carbon dioxide, methane, etc.) that keeps the Earth's temperature about 60“F warmer than it
would be otherwise. Any gas contribute to Greenhouse effect is called Greenhouse gas.
Kyoto Protocol:
An international agreement adopted in December 1997 in Kyoto, Japan. The Protocol sets
binding emission targets for developed countries that would reduce their emissions on average
5.2 percent below 1990 levels
21 Date: 25/12/2009 Author: Rajagopalan Trichy S.

22. Reference
1. http://www.Wikipedia.org
2. From Risk to Opportunity: 2008 – Insurer Responses to Climate Change by Evan Mills, Ph.D.
from Ceres
3. Climate facts from www.nrdc.org/policy
4. Insurance Information Institute website: www.iii.org
5. Lloyd’s climate change report: http://www.lloyds.com/NR/rdonlyres/38782611-
5ED3-4FDC-85A4-5DEAA88A2DA0/0/FINAL360climatechangereport.pdf
6. http://www.pewclimate.org/global-warming-basics/full_glossary/glossary.php
22 Date: 25/12/2009 Author: Rajagopalan Trichy S.

23. Questions?
?
23 Date: 25/12/2009 Author: Rajagopalan Trichy S.