GLOBAL WARMING AND INSURANCE

1. GLOBAL WARMING AND INSURANCE A Gathering Storm or Just “Hot Air” Presented by: Rodney J. Taylor, J.D., P.E., CPCU, CLU, ARM Managing Director Aon Environmental Risk Services November 8, 2007

2. Global Warming Defined “Global Warming refers to the increase in the average temperature of the Earth’s near-surface air and oceans in recent decades and its projected continuance” • Temperatures rose 0.74º C (1.33º F) during the last 100 years • IPCC concluded: “Most of the observed increase…since the mid-20th century is very likely due to…anthropogenic greenhouse gas concentrations.”

3. Greenhouse Effect • Naturally occurring greenhouse gases increase Earth’s temperatures 33º C (59º F) • Without GHG, Earth would be uninhabitable • Major GHGs: • Water Vapor (Avg. 54%) • Carbon Dioxide (18%) • Methane (7%) • Ozone (6%) • Increases in concentrations since 1750: • CO2 - 31% • Methane – 149%

4. Global Warming (1850 to 2007) The year 2006 was sixth warmest year on record, exceeded by 1998, 2005, 2003, 2002 and 2004 Source: Climatic Research Unit and the UK Met. Office Hadley Centre Brohan, P., J.J. Kennedy, I. Haris, S.F.B. Tett and P.D. Jones, 2006

5. Concentrations of CO2 in the Atmosphere

6. CO2 Concentrations and Temperature Change

7. Concentrations of CO2 Are Expected to Increase • Present - 383 ppm • Much higher than any time during last 650,000 years • Fossil fuels = ¾ of the increase in past 20 years • Future rate of change will depend on economic, sociological, technological and natural developments • IPCC models predict concentrations of 541 ppm to 970 ppm by the year 2100 • Resulting temperature changes of 1.1º C to 6.4º C (2.0º F to 11.5º F) by the year 2100

8. Projected Temperature Increase by Year 2100

9. Global Warming & Risk Management • Concerns regarding Global Warming include: • Melting of glaciers/polar ice • Rising ocean levels • More severe tropical storms/hurricanes • Changes in precipitation • Draught • More severe forest fires • Heat related deaths and diseases • Tipping Point – Point where damage is irreversible and/or rate of change accelerates

10. Global Warming & Risk Management

11. Run-Off from Glacier Melt in Greenland

12. Change in Thickness of Glaciers (1955 to 2005)

13. Rising Sea Levels Due to Global Warming • Sea levels are up 130 meters (400 ft.) since the last ice age (18,000 years ago) • Most occurred 6000 years ago • Last 3000 years, sea levels were nearly constant • Since 1900 – rising at 0.15 mm/yr. • Since 1993 – rising at ten times that rate (1.5 mm/yr.) • Global Warming contributes rise in two ways: • Expansion of sea water as the oceans warm • Melting of ice over land

14. Changes in Sea Levels (1880 to 2005)

15. Estimated Sea Level Changes by Year 2100 • IPCC Models 110 mm to 770 mm (4.34 in. to 30.34 in.) • May be altered by: • Melting glaciers/polar ice • Thawing of permafrost • Impacts of sea level rises: • Coastal erosion • Higher storm-surge • Flooding and coastal inundation • Impacts to groundwater • Loss of wetlands and habitat • 634 million people live at levels of 30 feet or less above sea level • Also home of 70% of the world’s largest cities

16. Results of Sea Level Rise are Already Apparent Scenes like this are common from the Pacific to Antarctica

17. Results of Sea Level Rise are Already Apparent Cape Hatteras Lighthouse • Built in 1797 • Rebuilt 1870 • Moved 2780 ft. inland in 1999

18. Shortage of water affecting >2 billion people Causes: Natural forces Over-use Inefficient agriculture Agricultural & industrial pollution Lack of water treatment facilities (90% of the world dumps untreated sewage and industrial waste in rivers and streams Exacerbating factors: Rapid industrialization in India and China Worldwide Drought Conditions

19. Worldwide Drought Conditions Ship Stranded in Bed of Former Aral Sea in Uzbekistan

20. Worldwide Shortage of Usable Water Industrial Growth is Changing China and Adding to the Water Shortage

21. Changes in Patterns of Precipitation • With Global Warming not all areas will experience water shortages • Some regions will have more rain • Hurricanes and tropical storms will cause more flooding and damage • Earlier snow melt and lighter winter snow pack will change amounts of water in many areas • Coupled with a decrease in the moisture content of soils

22. Changes in Patterns of Precipitation

23. Changes in Patterns of Precipitation

24. Changes in Weather Coupled with Changes in Demographics (U.S.) • 53% of population live in coastal areas (17% of land area) • 23 of the 25 most densely populated counties are coastal • Since 1960, coastal populations have increased by 150% • Coastal values exceed 50% of total values in many states • Florida – 80% • New York – 65% • Connecticut – 62% • Growth in coastal values is accelerating

25. 3rd most populous state Population growth is twice that of most other states Florida’s population: 2007 – 18 million 2030 – 28 million Insured values: 1988 - $566 billion 2007 - $2.4 trillion 2014 - $5.0 trillion (projected) Example - Florida

26. Commercial Property Values in Coastal Areas

27. Why Should Risk Managers Care? • If people cause Global Warming - People can stop it • If informed - Some people will reduce their impact: • Carbon footprint • Energy use • Water use • Recycling • If voluntary measures not effective – Legislation will be passed to regulate activities • If someone is at fault – They will pay

28. Changes in the Number of Catastrophic Events

29. Changes in the Costs of Catastrophic Losses

30. Global Warming & Risk Management • Estimated costs of Global Warming: • 1 meter rise in sea level - $600 billion to $900 billion • Doubling CO2 in the atmosphere – • $27 billion increase in windstorm storm damage annually • 65% increase over 2006 levels • $175 billion increase in flood damage annually • 70% increase over 2006 levels) • Stern Report - $9 trillion damage due to Global Warming on a world-wide basis • Cost to reverse damage – 1.5% of GNP annually

31. Global Warming & Risk Management • Insurers’ reactions to Global Warming: • Most current changes involve Property Insurance • Changes include: • Rate changes in areas subject to greater risks • Limiting the number of policies issued in high-risk areas • Withdrawal from markets

32. Global Warming & Risk Management • Risks have been transferred to insureds or government insurance programs • Rate surcharges assessed by insurers for windstorm • Forces others to subsidize insureds in high-risk areas • State programs have been implemented to preserve insurance • Federal programs provide the only coverage available for some risks (e.g., flood insurance) • There is a current effort to add windstorm damage to the National Flood Insurance Program

33. National Flood Insurance Program Statistics For 2005: • Loss payments totaled $13.1 billion • Annual premium collected was $2.2 billion • Average flood claim was $87,512 • Up from $39,094 in 2004.

34. Global Warming & Risk Management Future Global Warming Risk Issues : • Utilities that emit CO2 into the atmosphere may be charged with the costs of storm damages • Oil companies may be asked to pay for seawalls to prevent damage from rising oceans • Automobile manufacturers may be asked to pay bodily injury claims due to higher temperatures • Foreign entities may sue U.S. manufacturers for damage to resources anywhere in the world

35. Global Warming & Risk Management – Legal Issues • Global Warming claims to date have taken two forms: • Challenge to Regulatory Inaction – Claims against government agencies to require corporate entities to reduce their emissions • Target Corporate Defendants – Claimants, including governmental entities, seek declaratory and injunctive relief against emitters based on common-law nuisance theories

36. Global Warming & Risk Management – Legal Issues • Massachusetts v. EPA - Type 1 Claim • October 20, 1999 - Environmental groups petitioned the U.S. EPA to regulate greenhouse gas emissions from new motor vehicles • Petition was denied by the EPA • 12 states, 3 cities, 2 territories and dozens of environmental groups asked the U.S. Court of Appeals to rule on the EPA’s decision not to regulate • From denial, case was appealed to the U.S. Supreme Court

37. Global Warming & Risk Management – Legal Issues • September, 2007 - The U.S. Supreme Court: (1) ordered the EPA to comply with its mandate to regulate emissions of air pollutants from new cars; and (2) determined that greenhouse gases are “pollutants” subject to the Act • Could result in the application of Pollution Exclusions in liability policies to claims alleging emissions of greenhouse gases • While the ruling is narrow, its implications are broad • Expect the EPA to now look at regulation of emissions of CO2 from fixed sources as well as automobiles Question: Is CO2 the kind of Pollution the liability insurers intended to exclude?

38. Global Warming & Risk Management – Legal Issues • California v. General Motors Corp., et al.  - Type 2 Claim • CA A.G. sued automakers, alleging vehicles’ emissions contributed to Global Warming • Alleged harms included: • Reduced snow-pack • Loss of fresh water sources • Rising sea levels • Salt water incursion in aquifers • Erosion of beaches • Increased ozone pollution • Heightened risk of wildfires • Increased flooding • Health effects on sensitive populations • Adverse impact on animals and fish

39. Global Warming & Risk Management – Legal Issues • The U.S. District Court (N. California) dismissed the case, finding it presented a non-justiciable “political” question • Required court to determine what is “unreasonable” in the context of CO2 emissions • Forces election between competing interests: • Reducing emissions • Preserving economic/industrial development • Claims implicated: • Congress’s power over interstate commerce • Executive Branch’s power over foreign policy • Court could not identify precedent to assist it with legal and factual difficulties in allocating fault and damages

40. Global Warming & Risk Management – Legal Issues • Comer & Cox v. Nationwide Mutual Insurance Company • Original complaints – Against insurers for Katrina flood damage • Amended to include claims against coal, oil and refining companies • Allegation: “Hurricane Katrina evolved into a storm of unprecedented strength and destruction, fed and developed by global warming caused by the production of greenhouse gases by the defendant corporations • Damages alleged include: • Loss of property and use of property • Loss of business and income • Cleanup expenses • Disruption of lives • Loss of loved ones • Mental anguish and emotional distress

41. Global Warming & Risk Management – Legal Issues • The U.S. District Court (S. Mississippi) dismissed the case by refusing to certify the class (homeowners suffering damage due to Hurricane Katrina) • Court determined fact-specific inquiries must be resolved on the basis of evidence adduced at trial • The nature and extent of property damage from a common cause (Hurricane Katrina) will vary greatly in its particulars • Depends on location and condition of the property before the storm; and • Combination of forces that caused damage • Opinion stated: “I do not believe that a class action of this nature is a superior method of resolving the issues…”

42. Global Warming & Risk Management – Legal Issues General and Excess Liability Insurance • Coverage issues in Global Warming cases: • Complaints are likely to be construed to implicate either: • Manufacturing activities conducted by insureds over a long period of time, or • Products manufactured by insureds over long periods of time

43. Global Warming & Risk Management – Legal Issues General and Excess Liability Insurance • Coverage issues in Global Warming cases: • What policies are triggered by the claims? • Katrina (one policy) • California Auto Makers – 50 years or more • Lost policy questions • Choice of law issues • Do greenhouse gas emitting activities constitute an “occurrence” under the CGL Policy(ies) • Do harms alleged constitute “Bodily Injury” or “Property Damage? • Was the defendant aware of the harmful nature of its emissions? • Do exclusions (especially Pollution Exclusions) apply?

44. Global Warming & Risk Management – Legal Issues Directors & Officers Liability Insurance • Coverage issues in Global Warming Cases: • Allegations that defendants: “…Knew or should have known that their emissions of carbon dioxide and other greenhouse gases contribute to global warming” • Involve potential liability of officers and directors who failed to act prudently in the face of “corporate knowledge” of likely injury or damage

45. Global Warming & Risk Management – Legal Issues Directors & Officers Liability Insurance • Coverage issues in Global Warming Cases: • Scrutiny will be greater if executives actively misrepresent or conceal relevant facts • Information in the possession of Directors and Officers that differs from the corporation’s official statements may fuel shareholder litigation • D&O policies are written on claims-made forms that will result in only one policy being triggered by Global Warming claims

46. Global Warming & Risk Management – Legal Issues • Based on what is currently known, plaintiffs face an uphill battle in pursuing claims against corporate emitters for Global Warming damages • Many courts will simply refuse to recognize and wrestle with the complex issues • Some cases will be inextricably intertwined with matters of domestic and international environmental policy that involve “political’ questions • Causation issues – plaintiffs must prove the injury or damage is the result of the defendant’s emissions • Science has not yet established that more severe storms and floods are the result of Global Warming • Allocation of damages will also be challenging

47. Global Warming & Risk Management – Legal Issues • Even though it will be difficult for plaintiffs to win cases alleging Bodily Injury or Property Damage due to Global Warming, the insurance industry is not going to escape unscathed • Duty to defend is broader than duty to indemnify • Insurers must defend claims even if they are groundless • Defense of Global Warming claims will be expensive because of the technical evidence that must be produced and reviewed • It is likely that insurers will spend millions of dollars defending claims related to Global Warming • Expect to see Climate Change and Global Warming Exclusions in insurance policies in the future

48. Conclusions • Global Warming is just beginning to be recognized by insurers as a significant risk factor in property, liability and D&O insurance policies • Risks of loss from windstorms, floods, storm surges and other climate change phenomenon are likely to increase in the future • Sophisticated modeling capabilities give insurers the ability to predict losses, but these tools are not widely used by the insurance industry • Property insurers are using these models to avoid serious losses – risks are being shifted to insureds and government-operated insurers • D&O claims pose a significant future risk to insurers and to corporate risk managers • Global Warming claims are difficult for plaintiffs to win, but are expensive for insurers to defend