Objective: Ceres will work with both insurers and regulators in the insurance sector to increase the availability of information on the impact of man-made greenhouse gas emissions and on the affordability of insurance for individuals and businesses.

Commitment: We commit to the following:

1. To pursue research which highlights the risks the insurance sector faces from climate change, making the point that the industry is likely to pass that risk burden onto government and taxpayers.

2. To work with institutional investors and technical experts to engage U.S. insurers, encouraging them to both consider the risks posed by climate change as well as the opportunities for new products and services that would help their corporate clients reduce their exposure to climate risk.

3. To focus in particular on the need for better climate risk disclosure from insurers.

4. Given that the insurance industry in the US is regulated primarily at the state level, insurers are likely to pass many of the costs of climate change onto state governments. We commit to leverage a strategy that focuses on insurance regulators in some or all of these states.

Background: Climate change has the potential to impact nearly every segment of the insurance industry, including: property (increased losses from severe weather), health and life (global disease spread and loss of life from severe weather), directors and officers’ liability (potential shareholder suits for breach of fiduciary duty on climate change), and invested assets.

However, the insurance industry is likely to respond to increased claims in these areas as it has in the past: by shifting the risk burden to consumers and taxpayers. As the financial burden for the physical impacts of climate change is likely to fall to the states and their taxpayers, it is critical to engage state insurance regulators who have the potential to become key allies both in pushing for state and federal policy action on climate change, and in encouraging the insurance industry itself to become an ally on these issues.

Though in many instances the direct risk that insurers face related to climate change may be limited, there is still considerable value in engaging directly with insurers, reinsurers and brokers. First, there are several key insurance product lines where the industry still faces significant climate-related exposures that it is unlikely to be able to pass on to government. The most prominent of these is directors and officers (D&O) liability insurance, which as a corporate line is unlikely to be subsidized by government. The potential impact on the insurance industry from D&O claims related to climate change lawsuits is potentially enormous, and D&O policies represent an important leverage point over corporate boards of directors, thus making this potentially a fruitful area for focus.

Secondly, the insurance industry remains a trusted voice on risk issues with both policymakers and the general public. European reinsurers such as Swiss Re and Munich Re have published some of the best available data on the potential financial impacts of climate change. These data have helped move the policy debate forward in Europe, and similar research from US insurers and reinsurers might help catalyze policy action in this country. A key hurdle to this is that the industry’s risk models are backward-looking in nature and thus not well equipped to deal with issues like climate change that represent breaks from historic trends. We are thus seeking to convene scientific and actuarial modeling experts to help fix these flaws in the models, and thus allow the insurance industry to accurately model the potential financial impacts of global warming.

Finally, insurers are in a position to help catalyze a broad corporate response to climate change by creating new financial products and services that help companies reduce their carbon emissions (e.g. risk consulting, carbon credit finance; invest in renewables (e.g. carbon credit insurance, structured finance); and which provide incentives for companies to improve their governance and performance on climate change (e.g. D&O policies which provide additional protection to companies that have taken steps to reduce their GHG emissions).

Partnership Opportunity: We are open to discussing partnerships with both investors, who wish to join us in engaging the insurance industry on this issue, and insurance companies themselves.

Update:
Our strategy is proceeding on several fronts:

1. September, 2005: We released a well-received report that examined the potential impact climate change will have on the availability and affordability of insurance, entitled, “Availability and Affordability of Insurance Under Climate Change: A Growing Challenge for the U.S.”

2. We worked with the Investor Network on Climate Risk (INCR) to send a letter to the 30 largest US insurers asking for this type of disclosure. The letter was released in December 2005, with responses expected back by August 2006.

3. We are examining the potential for shareholder suits against corporate directors who put their companies’ assets at risk by not addressing climate change. Corporate board members could face enormous liabilities under such suits, and ultimately the insurers who provide D&O insurance to affected companies would be forced to pay these claims. We believe that this is one of the areas where insurance companies are most exposed to climate risk. We also believe that D&O insurance terms represent one of the most powerful levers that the insurance industry holds over corporate behavior (by virtue of exclusions which put board members’ assets directly at risk). We are talking with several insurers about the possibility of excluding climate change liability from D&O coverage unless a company has taken significant steps to reduce its contribution to climate change. We are working with a mainstream corporate law firm to organize a roundtable discussion for insurers on potential corporate director liability on this issue.