Climate Change

natdis

PI/Project Contact:

Erwann Michel-Kerjan and Howard Kunreuther

In partnership with:
Carnegie Mellon’s Climate Decision Making Center
University of California-Berkeley
Potsdam

Project Description

The direct and indirect impacts of climate change — activities to limit future emissions of greenhouse gases, and activities undertaken to adapt to climate change — are all likely to have major implications for the insurance and financial industries. The Wharton Risk Center research activities in conjunction with Carnegie Mellon’s Climate Decision Making Center focus on four key areas:

1. Direct Climate and Weather Related Impacts
Direct losses from extreme weather-related events (such as hurricanes, floods, and ice storms) as well as more permanent changes in regional weather and climate patterns (such as changes in mean temperatures, changes in storm tracks) will impact many lines of insurance, notably: property and casualty (P&C); business interruption (BI); health and life; crop; and marine insurance.

2. Directors and Officers Coverage
Insurers have had to cover liability claims against directors and officers of firms due to lawsuits by shareholders or customers. If senior management ignores potential impacts from climate change, and pursues polices which could place the future value and earnings of a company at risk those firms might be charged by shareholders with failure to prepare their companies for climate related financial exposures. This might be particularly true if it became clear that basic knowledge about climate change and its impact was ignored. Companies might also end in court due to their carbon dioxide emission (first case in New York court was in 2004).

3. New Technologies, Emissions Control Policies and Trading Systems
Insurance may be called upon to provide protection against potential losses and liabilities associated with a variety of new activities that result from climate change. These include: technology risks; insurability of carbon credits; trespass and liability from CO2 sequestration; liability associated with other advanced technologies; political risks.

4. Impact on Shareholders’ Value
The capital that insurers accumulate comes from two major sources: the premiums collected and the return on the investment obtained from their assets. Large insurers and reinsurers are thus major investors. If climate change decisions made by firms becomes a criterion for the investment community to evaluate the value of the firm, these decisions will certainly impact on insurers/reinsurers portfolio.

While climate change may impose new risks, it also offers new business opportunities for the insurance and reinsurance industry, both through the expansion of existing lines, and the development of new lines of risk transfer mechanisms.

 

Selected publications:

Short-Term Thinking Without Long-Term Focus Cold Hamper Climate Talks. BRINK, Dec. 3, 2015

Risk Management and Climate Change” Nature Climate Change, 2013.

“Insuring Future Climate Catastrophes” Climatic Change, December 2012. DOI: 10.1007/s10584-012-0625-z.

“Redesigning Flood Insurance” Science, 333(6041): 408-409.

“Encouraging Adaptation to Climate Change: The Need for Long-Term Flood Insurance”
Natural Hazards Observer, 2009

Climate Change, Insurability of Large-Scale Disasters and the Emerging Liability Challenge” University of Pennsylvania Law Review (2007) Vol. 155: 1795.