5/1/2020 Staying (insurance) cool in rising heat: Risk Management for Businesses and Cities in the face of Climate Change Sustainable Silicon Valley Annual Meeting Santa Clara, CA. December 8, 2008

Amy Bach

,

Executive Director

About UP

 United Policyholders is a not-for-profit founded in 1991 that advocates for fairness in insurance transactions and is a help resource for commercial and individual policyholders:    Loss recovery and legal support for individuals and businesses “Insurance Assurance” preparedness education workshops Interfacing with elected officials and regulators  UP advances the interests of individual and business policyholders:     In regions that have been hit by natural disasters By filing “Friend of the Court” briefs By publishing materials in print and on line at www.uphelp.org

At the NAIC and in legislative proceedings  The organization’s work is funded by donations and grants.

 UP has a large national network of volunteers and limited paid staff.

Challenges and opportunities:

 The insurance industry has a uniquely high stake in the effects of climate change:  Higher incidences of weather-related property damage claims will reduce the insurance sector’s (formerly) extraordinary profitability  New risks that have limited data history will present pricing challenges  If the industry can’t adapt to pricing these new risks, its role and influence will diminish  The insurance sector has the potential to make very substantial positive contributions to solving climate change related problems

Insurers’ reactions to data

and their perceptions

re: increasing risks are in play and will have a substantial impact on all of us:  Risks relating to new energy technologies that have no history present a challenge and an opportunity for insurers  If insurers can’t adapt, fewer risks may be insured through the traditional carriers  More “Captives”, Risk Retention Groups and government involvement will continue to grow (e.g. TRIA, Flood, EQ)

Insurers have clearly “noticed”:

 Increasing hurricane activity and weather related property damage claims  1,000 wildfires in California in 2008  The State of Florida is now in the reinsurance and risk-modeling business

Insurance executives are essentially gamblers. Underwriters like predictable risks.

 The predictive tools the industry uses have become more sophisticated over the years with computerized modeling, but climate change presents a level of unpredictability that has been described as “ominous”. Models and loss data that are based on historic events have limited relevance to the future.

Insurers’ reactions thus far:

 Increasing rates and deductibles  Adding exclusions  Strategic market share reduction in regions that have been hit repeatedly by catastrophic losses  Non-renewals  Rejected apps  Increased reliance on short term modeling firm data

A sampling of insurer positions in GHG litigation coverage disputes:

   No covered “occurrence” because emissions have long been considered a byproduct of electricity; No coverage because damages complained of were “in progress” prior to the effective date of the applicable policy and are thus excluded from coverage; Carbon dioxide and GHGs should qualify as pollutants and thus be subject to a so-called “total pollution exclusion” in the policy.

Policyholder counsel disagree:

 Covered “occurrence” because emissions part of normal business operations;  Carbon Dioxide was not classified as a pollutant at the time policies were issued,  The release of GHGs were not regulated emissions when policies were issued and therefore cannot be subject to the so called “total pollution exclusion”.

Forming a captive insurance company:

 Somewhat analogous to medical savings accounts but much more complex  Substantial tax advantages  $40-50 million in annual sales  Strong risk management program in place  Relatively favorable loss history  Trade assoc. or group with similar entities   VT, NY, DEL, SC, DC Vermont Captive Insurance Association

The dynamic:

 We want insurers not to stick their heads in the sand, but we don’t want them to over-react  NAIC Climate Change Risk Disclosure Model

The insurance industry has the power to influence societal behavior favorably by:      Providing mitigation incentives Managing and pricing property risks related to extreme weather events Continuing to create and implement new products offering solutions for climate change-related risks Refusing to insure development in ecologically sensitive areas Focusing on underwriting third party liability claims against heavy greenhouse gas emitting industries for the climate change-related exposures they create

Green initiatives by insurers:

 Pay as you drive  Coverage for green building materials  Heightened attention to mitigation and preparedness  Renewable energy related insurance products

To do:

 Shop for policies that do not contain broad exclusions for events that could be associated with climate-change.  Be prepared to retain specialized policyholder counsel to challenge claim denials that are based on an insurers’ overly broad reading of a policy exclusion.

 Investigate options:   Self-insuring for lower risk levels and purchasing high layers of coverage/gap policies where necessary and appropriate.

Risk Retention Groups  Captive insurance companies  Aggressive mitigation/risk management.

 Educate and help employees be prepared to recover from increased weather related property damage by buying enough and the right kind of insurance on their homes. See http://www.unitedpolicyholders.org/prepare_protect.html

Resources:

   Coverage for Climate Change: Footing the Bill for Carbon Footprints by Michael Conley, Esq. and Meghan Finnerty, Esq. Anderson, Kill & Olick, PC

Environmental Claims Journal, 20(4):1 –7, 2008 Captive Insurance Companies: A Growing Alternative Method of Risk Financing Journal of Payment Systems Law (June 2007) (with Isaac E. Druker and R. Mark Keenan) [email protected]

Amicus briefs, articles etc. at United Policyholders’ website: http://www.unitedpolicyholders.org/amicus.html

United Policyholders

Amy Bach Executive Director [email protected]