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The Gunther Report

Why is the Insurance Industry So Eerily Quiet on Climate Risk?

If there's one industry that ought to be concerned about the threat of global warming, it's the insurance industry. OK, the ski industry, too, but I digress.

Dave Jones, California's insurance commissioner, recently put it this way: "Climate change is an obvious physical threat to us all, but increasingly it also poses a serious financial threat to the insurance industry…" When extreme weather causes damage, insurers pay.

So you'd expect insurance companies to be among the most forceful voices in corporate America calling for the regulation greenhouse gas emissions.

Uh, no. They've been eerily quiet.

And, at the least, you'd expect them to be proudly steering some of their massive investments to clean energy or energy efficiency projects aimed at reducing emissions of greenhouse gases.

Wrong again.

"It's surprising, in a sense, because they have so much to lose from climate change," says Sharlene Leurig, senior manager of the insurance program at Ceres, a nonprofit coalition of investor and environmental groups. But, she notes, insurance is a conservative business. The industry is all about risk, but it doesn't want to take the risk of speaking out on climate change.

This is the second of two blogposts about the insurance industry and climate. Yesterday, I blogged about federal and state-backed programs that are insure risky properties from flood and storm damage, creating potential liabilities for all of us. Today, I'll ask why U.S. insurers -- in stark contrast to the big European reinsurance companies -- have been missing in action during the Washington climate wars.

Consider: The U.S. Climate Action Partnership, an alliance of big companies and environmental groups calling for a cap on carbon emissions, includes 21 companies -- seven utility companies, industrial giants GE and Siemens, chemical firms Dow and DuPont, Alcoa, Shell, Rio Tinto, Johnson & Johnson, PepsiCo and not a single insurer since the departure of AIG (for reasons unrelated to climate).

Business for Innovative Climate and Energy Policy, or BICEP (which is a project of Ceres), another coalition pushing hard for policies to drive a low-carbon economy, includes Nike, Starbucks, Timberland, eBay, Gap, Avon and the Aspen/Snowmass, among others. No insurers.

Now…this isn't to suggest that insurers have been entirely absent from the climate debate but mostly they've focused on their parochial interests. Some companies, for example, have asked the federal government to provide wind as well as water coverage in the event of hurricane damage. Others proposed want the federal government to offer reinsurance -- that's insurance for insurance companies -- to protect against a major catastrophe, or "mega-cat" in industry argot. Fireman's Fund, a unit of the German financial services firm Allianz, has been writing "green insurance" policies for building owners. (See my blogpost, Fireman's Fund: an insuror that isn't dull.)

But the industry has been a non-factor on the big issues, unlike the European reinsurance firms which have repeatedly warned of climate risks. Way back in 2007, Andrew Castaldi, head of the catastrophe risk unit for Swiss Re America Corp, told a Senate committee: "We believe unequivocally that climate change presents an increasing risk to the world economy and social welfare." In a 2009 report, Lloyd's of London warned of climate change contributing to "resource-driven conflicts; economic damage and risk to coastal cities and infrastructure; loss of territory and resultant border disputes; environmentally induced migration; government fragility; political radicalisation; tensions over energy supplies and pressures on international governance". Munich Re, the world's biggest reinsurer, said last year: "It would seem that the growing number of weather-related catastrophes can only be explained by climate change."

When I emailed the Property Casualty Insurers Association of America to ask why the industry hasn't been more vocal, David Kodama, senior director of research and policy analysis for PCI, replied:

Climate change is one among many of important strategic risks for insurers. Broadly speaking, insurance companies assess and monitor developments associated with climate change and, as appropriate for the individual insurer, incorporate the relevant information into their business model and practices.

However, climate change is a particularly complex issue and its causes, effects and the relevant variables that impact it are multifaceted and not well understood.

…It is prudent for the many insurers to continue to study the issue.

Could the association be any more cautious? "Climate change is a heavily politicized issue in the US," Ceres' Sharlene Leurig says, when I ask her why the companies have stayed on the sidelines. "Why put your neck out there and start messaging about a topic that many consumers are confused about and, in some instances, downright hostile to?" Of course, that's exactly what bolder companies like Nike and Starbucks are doing with BICEP.

There may, however, be another reason why insurers have been loathe to speak out: They write liability coverage for corporations, including oil and coal companies, which are being sued over climate-related liability.

Claims have been filed against fossil fuel companies that remind some people of class-action suits against tobacco and the asbestos makers. In Comer v. Murphy Oil, plaintiffs sued corporate defendants claiming personal injury and property damages caused by the allegedly climate change-induced impacts of Hurricane Katrina. In Village of Kivalina v. ExxonMobil, a native Alaska group sued oil and gas companies and US utilities claiming that coastal erosion caused by global warming would force them to relocate their fishing village.

In a fascinating interview with an Australian newspaper, Gerald Maples, the lead attorney in the Comer case, said he'll go after those fossil fuel companies that misled the public about the dangers of climate change, just as tobacco companies sowed doubt about the danger of smoking: "It's pretty much accepted history that asbestos and tobacco are the role models for climate change litigation now."

Clearly, the insurers are watching. In 2010, Munich Re published a 26-page report [PDF, download] about the climate liability issue. Kevin Haroff, a partner with Shook Hardy & Bacon who represents insurance companies, among others, said courts may be willing to hear climate-related claims that could cost corporate defendants many millions, if not billions, of dollars. But Prof. Richard Stewart of NYU law school said the risks to polluters are very small. "Plaintiffs seeking compensation for storm damage or flooding, for instance, linked to climate change face insurmountable hurdles in proving that the defendants caused their harm." So far, the suits haven't made much headway.

Still, a small company called the Steadfast Insurance Co. sued the utility AES and won a judgment affirming that Steadfast was not required under the corporate general liability (CGL) policy it issued to AES to defend the company against climate-change related claims, the Insurance Journal reported in November. AES is a defendant in the Kivalina case.

Other insurers, of course, face potential exposure toward climate-change claims. Since they'll have to go to court to argue that climate change isn't causing all those damages, maybe we shouldn't be surprised that they have been so quiet about the biggest threat they face.

It reminds me of the lyrics from a song written in the 1930s by a coal miner's wife: Which side are you on, boys, which side are you on?

Images courtesy of the author.

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