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By Peter H. Stone, National Journal
© National Journal Group Inc.
Friday, July 6, 2007

Hoping to keep from being battered by the ripple effect of global warming, prominent players in the multitrillion-dollar international insurance industry are placing more bets on clean-energy investments, new insurance products, and educational measures to curb greenhouse-gas emissions.

Consider:

• American International Group, a large New York City-based insurer, set up a $300 million lending program this spring aimed at backing energy-efficient and clean-energy projects globally.
• Swiss Re, a giant reinsurance company, disclosed this spring that it had assembled a $400 million fund to underwrite clean-energy projects and other green programs in Europe.
• Marsh, the nation's largest insurance broker, teamed up this year with Yale University and Ceres, a coalition of investors and environmental groups, to educate some 200 corporate board members about their legal obligations to respond to climate-change issues.

"We have acknowledged that it's a serious global problem," said Alice LeBlanc, who directs AIG's office of environment and climate change. "We're in a position to support the transition to get the world to a low-carbon economy."

These recent initiatives underscore how a small but growing number of prominent insurers, brokers, and reinsurers have concluded that they face significant financial risks from global warming. They are, as a result, simultaneously trying to protect themselves and to capitalize on the opportunities that climate change presents.

"There is no industry that is insured that is not in jeopardy of hundreds of millions in losses from the impact of global warming," said Mindy Lubber, the president of Ceres. "The insurance sector has been a very important sector when they want to be. The reality is that the power and leverage of the insurance industry is extraordinary."

To be sure, in recent years many insurers have suffered costly and sobering losses from hurricanes, droughts, floods, and other weather-related catastrophes whose severity and frequency, some scientists contend, are at least partly a result of global warming.

For instance, insurers racked up record losses of $230 billion in 2005, $65 billion of which came from Katrina and two other hurricanes alone. And Ceres calculated in 2005 that U.S. insurers have experienced a fifteenfold increase in weather-related losses over the past 30 years. Private insurers are hardly alone in feeling storm-tossed. Two federal insurance programs could face payouts of more than $900 billion because of floods and crop losses stemming from global warming, according to a worst-case scenario in a Government Accountability Office study this year. The study strongly urged Uncle Sam's flood insurance and crop insurance programs to analyze the probable long-term consequences of climate change.

The GAO report, requested by the Senate Homeland Security and Governmental Affairs Committee, prompted panel Chairman Joe Lieberman, ID-Conn., to remark, "We're looking at more floods, droughts, pestilence, fires, and storms."

Likewise, a new study from Zurich-based Swiss Re, the world's largest reinsurer (an industry that handles large disasters and backstops regular insurers), predicts more trouble for private insurers because of global warming. Swiss Re's report concluded that in recent decades "insured losses have shown a rising trend due mainly to weather-related catastrophes" and predicted that global warming will "aggravate the loss situation."

Although many insurers still haven't committed significant resources to tackling global-warming issues -- and some are fleeing states hit hard by hurricanes in recent years -- several U.S. and European insurers have been in the vanguard of private-sector efforts to respond to climate change. Swiss Re and other large insurance companies, brokers, and reinsurers are seeking new ways to lessen their risks and capitalize on market opportunities. For instance, Swiss Re announced in April that it had closed on a $400 million investment fund, the European Clean Energy Fund, which will provide capital to clean-energy projects and produce carbon credits or tradable renewable-energy certificates.

"This is not a new topic for Swiss Re," said Mark Way, who runs the firm's sustainability, issue-management, and reporting unit, adding that the reinsurer first wrote about the issue in 1989. Way added that reinsurers typically look 50 to 100 years ahead in projecting their risks. "A reinsurer's timeline is a lot longer than your general insurer," he stressed. "We saw the risks but also the opportunities."

Swiss Re, Munich Re, and a few other large European-based reinsurers have generally moved earlier and more aggressively on climate change than have their U.S. counterparts, according to several industry officials and regulators. "I've personally found more difficulty in getting American insurers [to] the level of consciousness that Europeans have shown," said Mike Kreidler, Washington state's insurance commissioner. And Frank Nutter, the president of the Reinsurance Association of America, says, "The U.S. companies have been much more reticent to speak out on climate change. U.S. insurers rarely have scientists on their staffs. They focus on the consequences of extreme weather rather than the causes."

But several U.S. companies, including Marsh and AIG, have already devised new products and investment vehicles to reduce the risks that global warming poses.

Both Marsh and AIG are offering carbon-emission credit guarantees aimed at spurring renewable-energy and energy-efficiency projects by giving companies ways to participate in the growing number of markets in carbon-emissions trading and carbon-offset projects worldwide. At the end of last year, the global carbon-trading market reached $30 billion versus $11 billion in 2005, according to a recent study by a World Bank unit. About $24 billion of the 2006 total involved the European Union.

Further, AIG's new $300 million lending program, which is backed by loan guarantees from the Overseas Private Investment Corp., will help support a variety of energy-efficiency projects and performance upgrades for refineries, power plants, pipelines, and other energy clients. In an earlier sign of its commitment on global warming, AIG hired LeBlanc in 2005 to help spearhead its climate-change initiatives. She had previously worked with both an environmental group and financial institutions.

Along with Lloyd's of London, AIG is sponsoring a forum -- under the aegis of the Center for Health and the Global Environment at Harvard Medical School and the Insurance Information Institute -- that will include academics and business stakeholders. Its goal is to devise ways to better incorporate climate-change factors into long-term catastrophe modeling, a crucial risk-forecasting tool for insurers.

Meanwhile, Travelers and other large insurers have taken steps to curb greenhouse gases with new products designed to encourage their customers to buy or think green. Last winter, for example, Travelers offered owners of hybrid cars in Georgia a 10 percent discount on auto insurance. The insurer has a similar program in 43 other states, making the company a large player in the market for hybrids.

These and several other insurance giants also seem to think that if they move adroitly, there are financial opportunities for an industry with huge investment resources at its disposal. "Clearly, there will be tremendous investment in energy over the next 20 years," said Tim Wagner, Nebraska's insurance industry regulator.

In the short run, however, it's probably not surprising that some private insurers that were swamped by hurricane claims have sharply curtailed writing policies in several key coastal states, leaving some homeowners and businesses unprotected. To fill that void, several state governments -- including those of Texas, Florida, the Carolinas, Rhode Island, and Massachusetts -- have created "insurers of last resort," which assume risks that private companies will no longer handle. (Claims filed with Texas's insurers of last resort have tripled in recent years. In North Carolina, they have quadrupled.)

Typically, insurers still writing property coverage in those states are asked to contribute to the last-resort entities to keep them solvent. According to insurance industry data, last-resort insurers issued more than 2 million policies to businesses and homeowners in 2006, almost double the number issued in 2001.

Insurance commissioners nationwide are scrambling to keep insurers from using global warming and its effects as an excuse for abandoning their states. "As insurance regulators, we need to work with the industry to make sure they stay in markets to help mitigate the risks," says Washington state's Kreidler. "Florida is the poster child [of what happens] when you have the collapse of homeowners insurance."

Despite the recent spread of last-resort insurers, Kreidler says insurers seem to be concluding that "they can't just avoid insuring risks. They have to stay in the market." He added that more insurers are deciding that "they have to be part of the solution."

Meanwhile, Kreidler, Wagner, and other regulators who have witnessed the devastation caused by fierce storms are trying to prod insurers to become more engaged in combating global warming. In 2005, the regulators were preparing to meet in New Orleans in September to discuss climate change when Hurricane Katrina hit in late August.

That session was canceled, but regulators met a few months later in Chicago to begin assessing the risks created by global warming for many of the multibillion-dollar insurance companies they oversee.

The regulators, who are part of a task force on global warming formed by the National Association of Insurance Commissioners, are now considering requiring insurance companies to disclose detailed information about how they assess climate-change risks and how they intend to address them. "I've felt it was important that the insurance industry become more aware of climate change and get more engaged," says Nebraska's Wagner, who has been co-chairing NAIC's task force along with Kreidler.

Despite intense prodding from consumer and environmental groups, however, the prospect of NAIC's acting may be slim, because many insurers are balking. Andrew Logan, who tracks insurance for Ceres (which has been pushing for more disclosure), said, "We're surprised and a little disappointed that the industry has been slow in dealing with the climate-change issue," noting that insurers have a long history of promoting auto and consumer-product safety. Wagner acknowledged that many insurers regard the prospect of mandated disclosure as "unwelcome."

Wagner stressed that the task force isn't giving up, because the stakes are so high: "Climate change is taking place, and the insurance industry will be impacted in significant ways."