{"id":18765,"date":"2023-07-21T14:27:44","date_gmt":"2023-07-21T19:27:44","guid":{"rendered":"https:\/\/blogs.law.columbia.edu\/climatechange\/?p=18765"},"modified":"2023-07-21T14:27:44","modified_gmt":"2023-07-21T19:27:44","slug":"a-climate-adaptation-toolkit-for-the-insurance-industry","status":"publish","type":"post","link":"https:\/\/blogs.law.columbia.edu\/climatechange\/2023\/07\/21\/a-climate-adaptation-toolkit-for-the-insurance-industry\/","title":{"rendered":"A Climate Adaptation Toolkit for the Insurance Industry"},"content":{"rendered":"
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On July 21, 2023, the Sabin Center launched its latest report, Modelling Climate Litigation Risk for (Re)Insurers<\/em><\/a>. This report, which forms part of the Sabin Center\u2019s broader Climate Law and Finance Initiative<\/a>, provides a toolkit to help academics, attorneys, insurance practitioners, and industry regulators model (re)insurer climate litigation risk.<\/p>\n

Insurance and Climate Change<\/u><\/strong><\/p>\n

The increasingly apparent physical and societal impacts of climate change are \u201cshaking the foundations<\/a>\u201d of the insurance industry. Stories about climate change and insurance dominate the news<\/a>, as insurer after insurer<\/a> pulls out of markets<\/a> like Florida<\/a> and California<\/a> that are at high risk of climate change-driven catastrophes.<\/p>\n

In response to the growing threat of climate change, the insurance industry has made significant investments<\/a> in modelling and quantifying<\/a> physical climate risks. However, alongside physical risks, companies face a rising tide of climate change-related litigation. The most prominent corporate climate lawsuits bring \u201cmitigation claims\u201d that attempt to hold companies responsible for their contributions to climate change. However, other categories of litigation arise from corporate failures to adapt to climate change, or climate change-related violations of the law. The economic impact of climate litigation can be enormous. In 2019, for example, the utility company Pacific Gas and Electric Company (\u201cPG&E\u201d) entered what has been called \u201cthe first climate bankruptcy<\/a>\u201d after announcing that it faced more than $30 billion in potential liability<\/a> from a series of devastating fires in northern California that were made far worse by climate change<\/a>. As the physical consequences of climate change become apparent, companies that fail to adapt their infrastructure and operations to this new reality<\/a> face increasing litigation risk.<\/p>\n

Insurers are exposed to climate litigation through multiple product lines and industries. Fossil fuel companies, sometimes invoking coverage under decades-old General Liability policies<\/a>, have already asked insurers to defend and indemnify them against expensive emissions-related lawsuits. Other companies, like chemical manufacturers, face lawsuits<\/a> if they fail to prepare for climate-driven floods, storms, and wildfires<\/a>, and may make claims under Environmental Insurance<\/a> policies for damages arising from post-disaster pollutant spills. Even more broadly, a wide range of companies purchase Directors and Officers (D&O) Insurance<\/a> that covers, among other things, litigation arising from a broad range of corporate misstatements. An increasing number of these companies face climate-related \u201cgreenwashing\u201d claims<\/a> arise from corporate misstatements about climate change or the environmental benefits of their products.<\/p>\n

Since the PG&E bankruptcy, insurance regulators around the globe have increasingly<\/a> demanded<\/a> that insurers and reinsurers quantify, and plan for, climate litigation risk. However, the emerging risk of climate litigation has proven particularly difficult to model. In 2015 Mark Carney, then-Governor of the Bank of England and Chairman of the Financial Stability Board, warned that climate litigation poses \u201clong-tail risks\u201d for insurers that may be \u201csignificant, uncertain and non-linear.<\/a>\u201d Since that warning, the number of climate-related cases has more than doubled<\/a>, but insurers and regulators still struggle<\/a> to identify and quantify exposure to climate litigation risk.<\/p>\n

Insurers Must Be a Target For, and Source Of, Climate Adaptation <\/u><\/strong><\/p>\n

Protecting the insurance industry from unquantified risks is a worthy goal in and of itself, because the insurance industry, like banking and other financial services<\/a>, is a critical piece of economic infrastructure. Unanticipated losses from climate change litigation could jeopardize insurers\u2019 ability to underwrite risk more broadly and could ripple throughout the economy<\/a>. Pricing climate risks to insurers is therefore a necessary climate adaptation measure that will increase the financial sector\u2019s resilience against climate change.<\/p>\n

Accurately pricing climate litigation risk is important for two reasons. First, the insurance industry, like banking and other financial services, is a critical piece of economic infrastructure, and pricing climate risk represents a necessary economic adaptation to the realities of climate change. Second, accurately priced liability insurance represents a powerful tool in the fight to mitigate the worst impacts of climate change. At its core, liability flows from real-world harm, and preemptive efforts to limit liability may in turn avert that harm. By creating tools to model and price litigation risk, we can (1) make sure that GHG-emitting companies begin to bear the costs of those activities even before emissions claims win in court<\/a>, and (2) encourage companies to reduce real-world risk by adopting climate adaptation measures and risk assessment processes<\/a>.<\/p>\n

The Sabin Center\u2019s Newest Report Provides a Toolkit for Modelling Climate Litigation Risk<\/u><\/strong><\/p>\n

The Sabin Center\u2019s latest report — Modelling Climate Litigation Risk for (Re)Insurers<\/em><\/a> —<\/em> assembles a toolkit to help academics, attorneys, insurance practitioners, and industry regulators model (re)insurer climate litigation risk. This toolkit was developed through a review of the literature surrounding climate litigation risk assessment and insurance, supplemented and informed by first-hand interviews with 16 specialists familiar with climate litigation risk analysis. The work was supported by a grant from Willis Towers Watson.<\/p>\n

Modelling Climate Litigation Risk for (Re)Insurers<\/em> offers three clear takeaways for academics, insurance professionals, and policymakers attempting to understand (re)insurer exposure to climate litigation:<\/p>\n