What are the insurance implications of these issues?
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IMMINENCE AND TANGIBILITY OF RISK
INSTIGATING INNOVATION
All of these changes are ultimately likely to spur innovation, and new products are already entering the market. Parametric insurance, where payouts are based on a triggering event rather than a specific loss, is slowly becoming more established, opening up the possibility of alternative forms of risk transfer. Resilience bonds are being developed, where investors loan money for major infrastructure projects designed to improve resilience against climate risks (such as new sea wall defences), while insurers provide interim cover to those who face the risks pending completion. Negotiations around extending policy periods for real estate are underway. Products that underwrite specific types of new technology or even provide weather cover are an emerging niche. In the US specifically, somestateregulators, notably New York and California, are actively encouraging the industry be more innovative in creating novel insurance products that enable businesses and communities to become more resilient to the risks of climate change 63 . Though these initiatives are not widespread and are currently somewhat weak on detail, nonetheless, it’s a development that could foreshadow future progress.
Of course, green electricity generation and a pivot away from fossil fuels are front and centreofthedrivetonetzeroandit isherethat the impact of climate risk on underwriting strategy can clearly be seen. However, for other business lines, the risks appear less imminent and tangible. While some of the bigger financial institutions, for example, are becoming more sophisticated about making upfront disclosures on renewal, insurers generally are not yet pushing companies harder for more information on climate risk specifically. This is perhaps not surprising, given that corporate and D&O liability cases are still very much in their infancy, but attitudes will doubtless change if and when risks becomemore prevalent and losses start to emerge. Losses could come sooner than expected – and from unexpected quarters. The highest profile climate litigation against companies to date has been product liability cases in the US which have yet to establish a pattern of success. However, Europe’s first high-profile corporate responsibility decision (against Shell, urging a change of strategy based on human rights arguments, as discussed above) is due out in May 2021 62 . If the claim succeeds, it could well spur insurers to ask more searching questions of insureds, consider putting more exclusions in place, or even design new policy clauses.
Stress testing could help insureds (and insurers) to better understand their position on the risk-preparedness spectrum, however some types of risk are easier to gauge than others. For example, it is easier to model D&O risks on the basis of the claims already launched and their current status, than it is for professional indemnity risks, because climate-related claims relating to the actions or inactions of accountants, auditors, lawyers, engineers, surveyors and so on have yet to be brought to court. interest group pressures and access to investment. While underwriters in some business lines are really starting to focus on climate risks and issues, this will become more widespread, particularly if we start to see significant tangible losses - Laura Cooke, Partner, Clyde & Co, London Currently, most of the drivers for change are non-litigious – it’s more about government policy, shareholder and
Clyde & Co https://www.clydeco.com/en/insights/2020/12/ us-insurance-regulatory-responses-to-climate-chang
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62 Climate Case Chart http://climatecasechart.com/non-us-case/milieudefensie-et-al-v-royal-dutch-shell-plc/
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