Transcript The New Reality of Risk Insurance Market Report Update

July 26, 2006
Understanding and Managing
Environmental Risks
George Boire – Marsh
Canada
March 29, 2007
Agenda

Environmental Risk Management
– What are the risks
– How can they be managed
– How environmental insurance can help

Climate Change Risks
– What are the risks
– What insurers are doing
– Emerging solutions
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Types of Environmental Risks

Legacy or Historical Risks
– Past activities on a site (s) have resulted in pollution conditions
– Ongoing legal issues (e.g. fines, suits) related to past activities
– Joint, several and retroactive liability regime
– Typically an issue during transactions

Operational Risks
– Ongoing activities of company have inherent environmental risks
– New Regulations can result in the need for expenditures/upgrades

Contracting and E&O Risk
– Contractors & consultants who perform work for others and/or on
3rd party sites
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Types of Environmental Risks (cont.)

Transactional/Contractual
– Indemnities and liabilities associated with land ownership/transfer
– regulatory (cleanup levels, liability releases, “re-openers”, etc.)
– tort (injuries, damages)
– financial (financial statement disclosures/reporting)
– contractual (credit risks, corporate disclosures)

Financial cost uncertainties associated with remediation
– for identified pollution conditions
– for “unknown” pollution conditions

Reputational
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Managing Environmental Risk - Drivers

Regulatory

Company and Industry policies

Management liability concerns
– new corporate governance regime (e.g. SOX)

Stakeholders
– Clients
– Shareholders
– Lenders
– NGOs
– Neighbours

Transactions (e.g. mergers, divestitures, plant closings)
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Environmental Risk
Developing a Strategic Approach

Be aware of constant changes
– Regulations
– Liability framework
– Lack of case law in some areas
– Shareholder expectations

Involve wide range of expertise, including:
– Corporate counsel
– Risk managers
– Health and safety experts
– Accounting departments
– Outside experts
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Environmental Insurance Tools

Environmental Impairment Liability (commonly referred to as Pollution
Legal Liability)

Combined GL/EIL (e.g. AIG’s Eagle policy)

Contractors Pollution Liability

Cost Cap/Remediation Stop Loss

Insured Fixed-Price Cleanups

Lender Liability (aka “Secured Creditor”)

Errors & Omissions (e.g. > 70% environmental)
Note: Different insurers use different names for similar coverage
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What Are the Practical Business Consequences
of Climate Change?
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What Are the Practical Business Consequences
of Climate Risk?
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What are the Practical Business Consequences
of Climate Risk?
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Name Your Climate Risk—
Climate as a Fundamental Business Risk

Storms, wildfires, windstorms, sea-level rise
effect on facilities, power, transport, communications

Heat waves and new disease vectors

Lost business resources: forest resources,
water supplies, biodiversity

Reputational risks; shareholder concerns;
litigation possibilities

Compliance and competitive risks
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Drivers for Corporate Consideration of Climate Risk
Regulatory Drivers: International Agreements Take Effect




European obligations through EU ETS (January ’05)
Kyoto Protocol entry into force (February ’05) – applies to companies doing
business in EU, Japan, Canada, Russia
Montreal negotiations confirm post-2012 focus and rules for flexible
compliance mechanisms (December ’05)
Increasing long-term focus in international negotiations (December ’06)
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Drivers for Corporate Consideration of Climate Risk
Increasing Scientific Consensus:

UN International Panel on Climate Change –
assessment by 2500 leading climate scientists (2001)

National Academy of Science confirm IPCC findings

11 Joint National Science Academies:
“There is now strong evidence that significant global warming is occurring . . .
. It is likely that most of the warming in recent decades can be attributed to
human activities.” (Summer 2005)

New IPCC review – “unequivocal” human impacts

Increasing Focus on Climate Instability and feedbacks

Stern Review on “costs of inaction”
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Climate Change and Carbon Market Risk

Insurance Industry impacts
– E.g. Increasing weather-related losses
– E.g. legal action against companies, and their D&Os, for weather
related losses

Risk in the Carbon Market
– Driven by legally binding commitments to cut GHG emissions
– Risks associated with generation of emission reductions through
project-based transactions (e.g. In Canada and/or CDM and JI)
– Risks associated with actual trading of GHG emissions reduction
credits
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Climate Change
Preparing for Climate Risk

Analysis and disclosure
– Increased demand to disclose climate-related risks
– Carbon Disclosure Project

World Economic Forum reporting framework seeks disclosure of:
– Greenhouse-gas Emissions
– Physical risks to facilities and operations
– Compliance costs
– Strategic implications for growth
– Management structures
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Climate Change
Insurance Questions

Re Insurers and other stakeholders (i.e. shareholders/investors) may
ask insurers about potential impacts
– On financial positions
– On availability/cost of insurance

Could lead to insurers asking companies about:
– Carbon-management policies and practices
– Directors and officers liability
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MMC Climate Change Initiatives

Helping clients build resiliency to the negative economic impacts of
climate change.

Helping clients take advantage of the economic opportunities created
by climate change.
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MMC Climate Risk Activities
RISK SIDE
 Risk Mapping and Assessment
 Driving new insurance product development
(eg. D&0)
 Economic analysis for emissions trading
regulatory design and corporate strategy
OPPORTUNITY/ NEW MARKETS SIDE
 Renewable energy operational risk insurance coverage (eg., wind, hydro,
solar, biomass)
 Optimizing carbon value – credit delivery guarantees
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GHG Emission Reduction Project Risks


Counterparty risk – credit-worthiness of project proponents
Carbon regulatory risk – host country and international policies
governing the approval and issuance of credits

Political/country risk

Technology performance risk

Carbon performance risk

Non-compliance risk

Validation and verification risk
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Traditional and Emerging Insurance Solutions


Traditional policies are available to provide financial protection against
delays, business interruption, machinery breakdown, loss, damage or
liability during the fabrication, installation, construction, and
operational stages of projects
Emerging hybrid packaged product – Credit Delivery Guarantee
– Swiss Re, AIG and Munich Re are developing and perfecting
products that provide an insurance based guarantee that
contracted emission reduction credits will be delivered as agreed
– Based on a mix of traditional insurance and alternative risk transfer
products
– Note: Limited track record of carbon market and lack of available
underwriting data make CDG very much an “emerging” product
– Stay Tuned………
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Thanks!
George Boire
SVP Environmental
Marsh Canada Limited
416-349-4791
[email protected]
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