Insuring Against Climate Change(A)

Insurance executives would seem to have little in common with environmental activists, but some of the earliest and most vocal calls for addressing the risks of climate change have come from the insurance industry. That’s actually not surprising, given the massive losses the insurance industry faces from more powerful hurricanes and many of the other disruptions predicted as impacts of climate change. What has been surprising is how far U.S. insurers have lagged behind European and other global insurance companies in sounding the alarm on climate change. Now, facing increasing pressure from a wide range of investors to address the risks of climate change—risks brought home to the U.S. by the terrible wake up call of Hurricane Katrina—there are signs of change among U.S. insurance companies.
Notably, May 15 insurance giant American International Group (AIG) became the first U.S. insurance company to adopt a policy to reduce the risks of climate change. In the policy, AIG “recognizes the scientific consensus that climate change is a reality and is likely in large part the result of human activities that have led to increasing concentrations of greenhouse gases in the earth’s atmosphere.” To address the issue, AIG has established a new Office of Environment and Climate Change, and is working to factor climate change into a wide range of its business activities. It is developing new insurance products to serve renewable energy projects and financial instruments to boost markets for tradable carbon emission credits. It is also working to boost its investments in renewable energy and energy efficiency technologies, develop green real estate projects, and provide consulting services to help companies boost energy efficiency and reduce greenhouse gas emissions. AIG has also committed to measuring its own energy use and greenhouse gas emissions and boosting energy efficiency programs to reduce its carbon footprint.
AIG’s policy comes after increasing pressure from investors to address the risks of climate change. Trillium Asset Management joined other investors in filing a resolution last year asking AIG to report on the risks of climate change, and this year we filed a resolution asking the company to report on its overall environmental and social policies. We withdrew that resolution after AIG agreed to starting disclosing information on these issues. The company released the new climate policy as part of this new reporting.
Ceres, a national coalition of investors and environmental groups, has worked to focus attention on risks the insurance industry faces from climate change, and praised the new policy. Ceres president Mindy Lubber commended AIG for being the first U.S. insurance company to address climate risk and said, “This is an important step that signals to the market and policy makers that climate change is a critical insurance issue.” Ceres has been seeking improved U.S. insurance industry practices on climate change through the Investor Network on Climate Risk, a group of 50 institutional investors that manage nearly $3 trillion in assets. Working with Ceres and the INCR, in December 2005, twenty leading U.S. investors with combined assets of more than $800 billion, sent a letter to 30 of the largest publicly-held insurance companies in North America urging them to disclose their financial exposure from climate change and steps they are taking to reduce those financial impacts. Also as part of INCR, Connecticut State Treasurer Denise Nappier co-hosted an insurance industry and climate change summit in Hartford in October 2005.
Insurance regulators and brokers have also expressed concern about climate risk. Earlier this year, the National Association of Insurance Commissioners announced a new task force designed to examine the impacts of climate change and possible measures that insurers and regulators can take to reduce risk. In April 2006, the largest insurance broker in the U.S. Marsh released a risk alert on climate change.