Insurance and Climate Change
Increasing evidence of climate change has already begun to affect business and financial markets. Insurance in particular has become a business driver for companies to address climate change. This is especially true of the re-insurance industry, which insures insurance companies, thereby protecting them against exceptionally large losses such as those caused by large natural disasters. For example, the second largest reinsurance company in the world, Swiss Reinsurance Co., announced in 2002 that it would withdraw liability coverage from executives at companies that fail to adopt adequate climate change policies. Swiss Re and other re-insurance companies are particularly concerned about climate change because of the potential for extraordinary losses in two specific areas: weather-related damages and liability.
Weather-related losses
Rising temperatures can lead to increased extreme weather events (e.g., storms, droughts) in several ways. Hurricanes, which require warm ocean water to form, can travel across a greater area as water temperatures climb. Warmer weather can increase the number of lightning strikes, which may lead to forest fires, and also heighten the severity of droughts by speeding up evaporation rates. In addition, Swiss Re points out in a report on climate and insurance that “[e]ven apparently harmless climatic anomalies, such as a ‘particularly warm’ summer, can have far-reaching consequences.” In late 2002 the United Nations Environment Program Finance Initiatives, a group of the world’s leading financial institutions, issued a study predicting that global warming could bankrupt the insurance industry and wreak havoc among the world’s stock markets and financial centers. The report says that if the number of annual weather-related natural disasters continues to increase, economic losses to the insurance industry will reach $150 billion per year during the next decade. As a result of such studies, mainstream insurance companies have begun scrutinizing the climate change policies of their business partners.
Liability concerns
A second insurance-related concern centers on potential liability. In its report “Carbon Finance and the Global Equity Markets,” the Carbon Disclosure Project notes that one possible impact of climate change on businesses is the possibility of legal liabilities that could force emitters of large amounts of greenhouse gases to face enormous lawsuits. The report notes that “precedents set by asbestos and tobacco litigation could lead to a spate of lawsuits against significant emitters.” It points to the example of climate-related lawsuits in the actions by attorneys general in Maine, Massachusetts, and Connecticut, announcing in early 2003 that they plan to sue the Environmental Protection Agency to force it to regulate carbon dioxide, as well as the push for increased corporate accountability in the wake of scandals such as Enron. Another study, done by a consultant at the request of investors, uses the example of tobacco lawsuits in predicting that climate-related legal costs for one company could rise to between $200 million and $1 billion per year.