Environment


I.I.I. chief actuary Jim Lynch offers his perspective on how insurers are responding to climate change:

The insurance industry got a report card this week on a test I’m not sure they knew they were taking. And the grading curve was, in my opinion, harsh.

Ceres, a nonprofit group that promotes sustainable business practices, rated 330 insurers – life, health and property/casualty – on how well they are responding to climate change.

Before I wade further into the topic, it is important to acknowledge that insurance companies and their managers have a range of opinions on global warming that is as wide as the opinions of Americans overall on the topic. There is no insurance industry position, though there are individuals and companies with strong opinions – just as with all Americans.

On a four-point scale, nine companies got the highest mark (“leading”): Ace, Munich Re, Swiss Re, Allianz, Prudential, XL Group, The Hartford Financial Services Group, Sompo Japan and Zurich. Matthew Sturdevant of the Hartford Courant does a nice job rounding up how these firms earned their grade.

Ceres gave “minimal” or “beginning” rankings to 276 insurers, 84 percent on my calculator. The New York Times played up that aspect. But the analysis may be skewed because of the source of the rankings and how Ceres adapted that source.

Ceres took a National Association of Insurance Commissioners (NAIC) survey that six states require on climate change. The survey consists of eight yes-or-no questions, each of which follows up with why the insurer answered as it did. The follow-up questions are open-ended – companies can respond with as little or as much information as they like.

The questions help regulators when they assess a company’s enterprise risk management, specifically how hard a company looks for potential problems that might not hit them until years from now. Climate change certainly has that potential.

Ceres took those answers and graded them on its own criteria, resulting in six scores from 1 to 4, which it then re-summarized into a single grade.

Boiling a complex set of open-ended answers is tricky enough, but Ceres has, in my opinion, misused the NAIC survey, which is supposed to help regulators understand how well insurers are considering climate change in their risk management, not whether insurers are acting as stewards of the environment.

So it doesn’t seem like Ceres is giving a fair test. Insurers are answering questions on how climate change might affect their business then being rated on how their actions will reduce carbon emissions. It’s like being told to write an essay, then being graded on penmanship.

How could this skew results? Some insurers are minimally exposed to climate change, so it would not be prudent risk management for them to devote valuable resources to the issue. Medical malpractice writers are an obvious example. Climate change might be important to the world at large, but how relevant is it to the operation of a medical malpractice writer?

Property insurers are in a different boat, pardon the irresistible pun. Rising sea levels and growing weather extremes are important developments, and it would seem a prudent coastal writer would consider whether those trends will continue, abate or accelerate. A company that writes worldwide has still more to think about, as climate trends would affect other countries more than our own.

Seen that way, it makes perfect sense that some large, multinational insurers are concerned about climate change while small writers not exposed to property insurance are less so.

On the life/health side, there is a signal-to-noise problem. Climate change appears to have an impact on mortality, but it’s really small. A 2011 Brookings study suggested that climate change will increase U.S. age adjusted mortality rates by about 3 percent over the next 85 years or so. That rate has declined by 1 percent per year over the past 35 years. So the impact of climate change on mortality is likely to be overwhelmed by other forces at work.

That’s not to say that life expectancies outside the U.S. won’t be affected more. But a life insurer that only writes U.S. risks might not want to incorporate climate change-induced mortality changes from, say, Australia, into its business model.

Regardless, life insurers have a built-in mortality hedge in pairing annuity sales with life insurance. People who die sooner drive life insurance profits lower. But they push annuity profits higher, and vice versa. Combine that with the small impact of climate change on U.S. mortality and it makes perfect sense that a great many U.S. life insurers have decided that climate change doesn’t form a central part of their risk management strategy.

Health insurers are in a similar situation. Gradual changes in health have small effects on their business, and those changes can be easily adjusted to year by year. Pandemics are a bigger risk, so risk management efforts focus there.

That helps explain why health and life insurers didn’t score as high as property/casualty insurers. They have less at stake.

California’s insurance department doesn’t sound too concerned. Ceres relied on CA DOI information to compile its report, so there’s a good chance the Ceres researchers saw a 2013 press release that said this:

The results of this year’s survey are a positive sign for the insurance industry and the environment,” said Commissioner Jones. “It is encouraging to see that insurers are aware of the risks that a changing climate brings, and moreover they are taking steps to ensure their responses to these risks are sufficient to protect their business.”

More than 1,000 companies [Duplicates and multi-company insurance groups account for the difference between Ceres’ total and California’s.] were required to respond to the survey. The survey revealed that roughly 75 percent of insurers have a plan for identifying climate change-related risks that could affect their business, and are taking actions to mitigate these risks. Responses to the eight survey questions reveal that nearly every insurer is aware of the risks posed by a changing climate, and an overwhelming majority of insurers have incorporated mitigating practices into their business model.”

That sounds like an industry that is handling the issue prudently, even if it is not the way an environmental group would prefer.

Climate change is among the five most likely and most potentially impactful global risks, according to the just-released World Economic Forum (WEF) 2014 Global Risks Report.

The report assesses 31 risks that are global in nature and have the potential to cause significant negative impact across entire countries and industries if they take place.

An analysis of the five risks considered most likely and most impactful since 2007 shows that environmental risks, such as climate change, extreme weather events and water scarcity, have become more prominent since 2011 (see chart above).

This suggests a pressing need for better public information about the potential consequences of environmental threats, the WEF says.

Concern about socio-economic risks such as income disparity, unemployment and fiscal crises has become more prominent over the years.

The report reveals that fiscal crises and structural unemployment and underemployment are among the most impactful risks while the latter also feature among those most likely to occur. This has knock-on effects on income disparities, which is regarded as the overall most likely risk, the WEF notes.

Cyber attacks and the breakdown of critical information infrastructure also feature among the most prominent risks in this year’s report.

The WEF notes:

This arguably reflects the increasing digitization of economies and societies, where rising dependence on information and data, as well as the systems to analyze and use them, has made attacks more likely and their effects more impactful.”

WEF note: Global risks may not be strictly comparable across years, as definitions and the set of global risks have been revised with new issues having emerged on the 10-year horizon. For example, cyber attacks, income disparity and unemployment entered the set of global risks in 2012. Some global risks were reclassified: water supply crises and income disparity were reclassified as environmental and societal risks, respectively, in 2014.

The report is published in collaboration with Marsh & McLennan Companies, Swiss Re, Zurich Insurance Group, National University of Singapore, Oxford Martin School, University of Oxford, Wharton Risk Management and Decision Processes Center, University of Pennsylvania.

Media reports over the weekend suggest some residents were allowed back to their homes days after a Texas fertilizer plant explosion left 14 dead and more than 160 injured.

A fire last Wednesday at the fertilizer plant in West, Texas, some 80 miles southeast of Dallas, triggered the deadly explosion, though investigators have yet to pinpoint the exact cause.

The United States Geological Survey (USGS) recorded the explosion as a 2.1-magnitude tremor.

GCCapitalIdeas has a summary of the event here.

Satellite images on the PHOTOblog at NBC news via DigitalGlobe show West, Texas before and after the explosion. More than 150 buildings were damaged or destroyed in the explosion.

Business Insurance reports that in the wake of the disaster, questions about risk management planning adequacy and insurance coverage abound.

It quotes Joe Woods, vice president of state government relations for the Property Casualty Insurers Association of America, saying that the incident could trigger a broad range of insurance coverage that includes commercial property, business interruption, third-party liability, health and personal lines.

PC360 also reports on the insurance implications of the event here.

Check out I.I.I. facts and statistics on man-made disasters.

The unanimous decision by a federal appeals court to uphold a finding by the Environmental Protection Agency (EPA) that greenhouse gases endanger public health and can be regulated under the Clean Air Act is drawing a wide range of responses in the media.

The New York Times reports that in addition to upholding the E.P.A.’s so-called endangerment finding, the three-judge panel of the United States Court of Appeals for the District of Columbia let stand related rules setting limits on greenhouse gas emissions from cars and limiting emissions from stationary sources.

The Wall Street Journal describes the decision as a blow to the coal industry and other companies, noting that he court gave the EPA almost everything it wanted in the 82-page ruling.

According to Wonkblog at the Washington Post this is what the decision means:

For one, the EPA will finish up drafting standards requiring cars and light trucks to get a fleet-wide average fuel economy of 54.5 miles per gallon by 2025. And the agency can move forward with its rules limiting carbon pollution from new power plants. Next up: The agency has to decide whether to place carbon limits on existing power plants, as well as whether to regulate other major sources of pollution such as oil refineries or cement plants.”

The NY Times Dot Earth blog has a downloadable version of the full court decision posted here.

Check out I.I.I. information on climate change and insurance.

Companies need to undertake ongoing and more robust analysis of potential water-related risks and provide more quantitative data on overall water use and financially material risks as part of their disclosures in Securities and Exchange Commission (SEC) filings, according to a new report from Ceres.

Ceres maintains that while overall corporate disclosures of water-related risks have increased since the SEC issued its climate change guidance in 2010, most reporting remains weak and inconsistent.

In its analysis of changes in water risk disclosures by more than 80 companies between 2009 and 2011, Ceres says that reporting is lacking especially in regard to data on financial impacts, quantitative water metrics and potential supply chain risks.

Ceres notes that drought and flood cycles have led to billions of dollars in losses for corporations worldwide. Drought in China in the spring of 2012 left 3.5 million people with limited or no access to drinking water and cost the affected provinces an estimated $2.3 billion. Flooding in Thailand in November 2011 cost the semiconductor industry an estimated $15-20 billion.

Here in the U.S. in early June rain inundated the Florida panhandle and coastal Alabama, resulting in more than two feet of precipitation and at least $20 million in flood damage. The region had previously been classified as in severe or extreme drought. This has led Florida officials to call for increased disclosure of risks.

A key takeaway from the report is that significantly more companies are disclosing exposure to water risk, with a focus on physical risk. Some 87 percent of companies now report physical exposure to water risk versus 76 percent in 2009, with the biggest increases coming from the oil and gas sector, according to Ceres.

The report also finds that more companies are making the connection to climate change. In 2009, only eight of the 82 companies assessed (10 percent) disclosed that climate change posed growing physical risks in the form of water scarcity, flooding or quality issues to their operations and supply chains. In 2011, that number jumped to 22 (27 percent).

Hat tip to Business Insurance for flagging this story.

The I.I.I. has information on climate change and insurance issues.

March 11, 2012 will mark the one-year anniversary of the Japan earthquake and tsunami. Together the quake and tsunami caused $210 billion in economic damage, an estimated $35 to $40 billion in insured losses, and 15,840 fatalities, according to Munich Re.

While the disaster hit Japan, its aftermath was felt well beyond that country’s borders. Concerns were raised worldwide over supply chain disruption, nuclear risks and tsunami damage.

Another ongoing issue of concern beyond Japan’s shores is marine debris.

According to NOAA, it’s possible that debris washed into the sea by the tsunami could arrive on shores in Alaska, Hawaii, the West Coast, and Canada over the next few years.

Over at the Marine Debris blog, a post by Nancy Wallace, Director of the NOAA Marine Debris Program, notes:

It is likely that beachgoers on the West Coast and Alaska will start noticing a gradual increase in marine debris items near-shore or on the beaches in 2013. Those on the main Hawaiian Islands might start noticing an increase closer to 2014.”

Despite the alarming news headlines, NOAA’s Wallace assures us there is no scientific estimate of how much debris the tsunami washed into the sea or how much is still floating. It is also highly unlikely any debris is radioactive, while the chance of human remains arriving with it is almost zero.

You can find out more about the Japan tsunami marine debris on the NOAA Marine Debris Program site. Resources include the informative tsunami debris FAQs and fact sheet.

There’s also a marine debris tracker app that allows you to check in when you find trash on U.S. coastlines and waterways. Significant marine debris sightings can also be reported to NOAA via email at DisasterDebris@noaa.gov

A HuffPost piece offers further analysis on the tsunami marine debris story.

Oh deer, it’s that time of year again. State Farm has just released its annual report on U.S. deer-vehicle collisions.

State Farm’s findings show that for the third consecutive year, the number of deer-vehicle collisions has dropped, and the downturn is accelerating.

Using its claims data, State Farm estimates that 1.09 million collisions between deer and vehicles occurred in the U.S. between July 1, 2010 and June 30, 2011. That’s 9 percent less than three years ago and 7 percent fewer than a year ago.

However, the average property damage cost of these incidents was $3,171, up 2.2 percent from the year before.

For the fifth year in a row, West Virginia tops the list of states where an individual driver is most likely to run into a deer. State Farm calculates the chances of a West Virginia motorist striking a deer over the next 12 months at 1 in 53, an improvement over last year’s odds of 1 in 42.

Iowa remains second on the list (1 in 77), followed by South Dakota (1 in 81) which moves up one place to third, Pennsylvania (1 in 86) which jumps two places to fourth, Michigan (1 in 90) which drops from third to fifth.

November, the heart of deer migration and mating season, is the month during which deer-vehicle encounters are most likely, with more than 18 percent of such mishaps occurring in this month.

So why are deer-vehicle collisions declining?

In a press release, State Farm notes:

While we can’t put our finger directly on what’s causing a decline in deer-vehicle collisions, we’d like to think media attention to our annual report on this subject has had at least a little bit to do with it.”

What do you think?

Check out I.I.I. tips on how to avoid deer/car collisions.

Check out State Farm’s map to see if you live in a high risk state:

 

The news wires are buzzing with reaction to a landmark environmental case in which an Ecuador court ordered U.S. oil giant Chevron Corp. to pay $8.6 billion to clean up oil pollution in Ecuador’s rain forest.

The award is believed to be the largest ever imposed for environmental contamination and could double if Chevron does not publicly apologize for the oil pollution within the next 15 days, as ordered by the judge.

Today an article in the New York Times follows up with the news that representatives for Ecuadorean villagers say they plan to pursue Chevron in more than a dozen countries where it operates in a bid to force the company to pay.

The case has been the subject of proceedings in courts in Ecuador and the U.S. for nearly 20 years.

Residents of Ecuador’s Amazon forest, who are plaintiffs in the case, are attempting to hold Chevron liable for environmental damage they claim resulted from the operations of Texaco Inc. in the region from 1965 to 1992. Chevron inherited the suit when it acquired Texaco in 2001.

An editorial in the Wall Street Journal observes:

The Ecuador suit is a form of global forum shopping, with U.S. trial lawyers and NGOs trying to hold American companies hostage in the world’s least accountable and transparent legal systems. If the plaintiffs prevail, the result could be a global free-for-all against U.S. multinationals in foreign jurisdictions.”

The LA Times quotes John van Schaik, oil analyst at Medley Global Advisors in New York, saying:

The appeals could go on for many years. But the fact that the Lago Agrio court ruled in favor of the plaintiffs sends a signal to oil companies that, more than ever, they need to be good corporate citizens.”

Meanwhile, the president of the U.S. Chamber of Commerce said the ruling against Chevron “runs contrary to the fundamental rule of law.”

The case is being watched closely by other multinational corporations.

Check out the Huffington Post for more on this story.

You may have seen the video footage of the wave of toxic red sludge that flooded out of a failed reservoir at an alumina refining plant in Hungary on Monday, inundating villages and leaving at least four dead and 120 injured.

Today NPR reports that the sludge has reached the Danube River – Europe’s second longest river – though Hungarian officials are quoted as saying no immediate damage is evident.

The European Union earlier had warned that the spill could pose a serious environmental problem for 12 countries if it contaminates the Danube.

The flood, estimated at 700,000 cubic meters, or 185 million gallons, swept cars off roads, damaged bridges and houses and forced the evacuation of hundreds of residents, according to the New York Times. People who came into contact with the substance were burned through their clothes.

Authorities have ordered a criminal inquiry into the accident. It is still not known why part of the reservoir wall collapsed. The Ajkai Timfoldgyar plant is owned by Hungarian aluminum production and trade company MAL Rt.

The disaster underscores the point recently made by I.I.I. president Dr. Robert Hartwig that large-scale industrial accidents are not as rare as you might think and can result in losses in the hundreds of millions of dollars. Earlier this year, a power plant in Middletown, Connecticut exploded leaving five dead and 27 injured.

Insurers play a key role in insuring these facilities.

Man-made global disasters triggered insured losses of about $4 billion in 2009, according to Swiss Re. Some 155 man-made disasters occurred in 2009, including major industrial fires and explosions; aviation, maritime and rail disasters; mining accidents; building/bridge collapses; and losses related to terrorism and social unrest.

The April 2010 explosion at the BP Deepwater Horizon oil rig in the Gulf of Mexico will add to the insured loss tally from man-made disasters this year.

As for environmental liability arising from the disaster in Hungary, Europe’s Environmental Liability Directive (ELD), in effect since April 30, 2007, is based on the “polluter pays” principle.

A bulletin released by Aon and reported at Insurance Journal, warns companies with industrial operations in Europe that the ELD leaves no place to hide:

Under the ELD, all companies have a liability and many, because of the nature of their operations, do not even have to be at fault if the environment is damaged due to the actions of a company.”

Aon goes on to warn that events such as this could ultimately lead to the total collapse of a company at fault if they do not have suitable insurance coverage in place.

Comprehensive environmental insurance programs can be put in place and the market can provide coverage for up to €150 million ($210 million) for an individual risk, Aon adds.

If you’re planning on taking a drive to enjoy the beautiful fall foliage, bear in mind that this is peak season for deer-vehicle collisions.

A just-released report from State Farm reveals that while the number of miles driven by U.S. motorists over the past five years has increased just 2 percent, the number of deer-vehicle collisions in this country during that time has grown by ten times that amount.

State Farm estimates some 2.3 million collisions between deer and vehicles occurred in the U.S. during the two-year period between July 1, 2008 and June 30, 2010 – an increase of 21 percent in five years.

The average property damage cost of these incidents was $3,103, up 1.7 percent from a year ago. Furthermore, about 200 fatalities each year are caused by deer-vehicle collisions, according to the Insurance Institute for Highway Safety (IIHS).

These collisions are more frequent during the deer migration and mating season which runs from October through December. The combination of growing deer populations and the displacement of deer habitat caused by urban sprawl are producing increasingly hazardous conditions for motorists and deer.

So in which states are drivers – and deer – most at risk?

For the fourth year in a row, West Virginia tops the list of those states where a driver is most likely to collide with a deer. State Farm calculates the chances of a West Virginia driver striking a deer over the next 12 months at 1 in 42.

Iowa (1 in 67) is second on the list, followed by Michigan (1 in 70), South Dakota (1 in 76) and Montana (1 in 82). The state in which deer-vehicle collisions are least likely is still Hawaii (1 in 13,011).

Note: State Farm now calculates the likelihood of deer-vehicle collisions using the number of licensed drivers instead of number of registered vehicles against its claims data.

Check out this map to see if you live in a high risk state:

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Our Terms+Conditions vlog has more on the dangers of deer-vehicle collisions. Also check out I.I.I. tips on how to avoid deer/car collisions.

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