Category Archives: Environmental Risk

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The Risks of Climate Change

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climate change

Unless we have an unusually cold winter, it’s quite possible that 2010 will go down as the hottest year on record. Through the first eight months, this year has equalled 1998 for that dubious honor.

This in and of is not a harbinger of global warming doom, but it does provide a reminder that the era of climate change is upon us and that society — and business — must prepare now for a future that is “very likely” to include higher temperatures, more erratic weather, greenhouse gas emission restrictions, energy challenges and all the other risks that such realities entail.

In many ways, the insurance industry has been the proverbial canary in the coal mine when it comes to climate change. Some scientists believe that warmer oceans have fueled more powerful hurricanes over the past decade, and back in 2004 (when four hurricanes, Charley, Frances, Ivan and Jeanne, made landfall in Florida) and 2005 (when the “three sisters” Katrina, Rita and Wilma devastated the Gulf Coast) many industry companies began launching initiatives to research and advocate for governmental action to slow carbon dioxide emissions. Allianz partnered with the WWF. Lloyd’s proclaimed in 2006 that society must “adapt or bust.” Munich Re has focused on helping create insurance for adaptation through the Munich Climate Insurance Initiative.

Many other insurers, reinsurers and brokers have launched similar efforts.

For most risk managers, environmental risks have leapfrogged many other threats. In the past, they were mainly under the radar and only relevant in certain industries that may have to deal with Superfund sites or chemicals that the EPA has deemed dangerous.

But now?

They affect virtually every company from retail and manufacturing to financial services and construction. And climate change has been the main driver of this new priority placed on environmental exposures as it has the potential to intensify many other risks (like oil scarcity, something Lloyd’s recently warned could have “expensive and potentially catastrophic consequences” for companies who don’t prepare).

For all these reasons, we will continue to talk about the risks of climate change — especially during the next five days of “Climate Week NYC 2010.” Since we are right here in the Big Apple and this summit will be bringing together so many smart people with so many smart things to say about climate change, we will try to attend some of the events this week and report back what they have to say

Later today, I will be sitting in on a panel Swiss Re is hosting about climate change adaptation that will feature experts from the UN, the World Bank, Oxfam, Swiss Re and the Caribbean Catastrophe Risk Initiative. Tomorrow, Virgin head Sir Richard Branson of Virgin, UN Secretary Ban Ki-moon and Ted Turner will add their thoughts. And on Wednesday, another group of revered thinkers will discuss the risks that climate change poses to low income countries. Altogether, there are at least 20 other interesting presentations planned.

We will try to make it to as many events as possible and let you know what all the fuss is about.

Check back throughout the week.

Environmental Risk: Not a Hot Topic For Spain’s Businesses

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spanish flagBack in May, the European Union’s environmental liability directive was officially put into place, exposing European risk managers to greater liabilities for environmental damage caused by companies that pollute as part of their normal business operations.

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But not all of the EU’s 27 member states are taking charge of their new responsibility. Spain, for one, has shown a lack of awareness when it comes to environmental risks, legislation and avenues of protection available.

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According to the Business Environmental Liability study, more than half of the 700 businesses studies in Spain did not have environmental liability coverage.

The survey also revealed that of those companies that said they had cover in place against environmental damage, only 10% had a policy that conformed to established regulations (Law 26/20071). Companies cited their multi-risk policy/financial guarantee, public liability and general business insurance policies as providing environmental risk protection. However, these products do not conform to the requirements of Law 26/20071 on Environmental Liability.

It seems apparent that many businesses in Spain do not fully understand the implications of the EU’s environmental liability directive. In fact, a whopping 65% of companies surveyed said they were unaware that the Spanish government has the ability to make it a requirement for these companies to have a fund, collateral or insurance to cover them from possible environmental damage.

Though numerous insurers jumped at the chance to offer environmental liability coverage to the EU market, a lack of demand has been evidenced from the beginning of the directive’s establishment.

Risk managers don’t seem to be “aware of how much of a strict regime is now in place and the cost of responding to that regime if you have a problem,” said Simon White, London-based environmental branch manager for XL Insurance.

Why is Spain a laggard when it comes to this topic? If the country’s businesses don’t get on board soon with the EU’s environmental liability directive, it will affect not only their bottom line, but also their reputation.

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Demand for Oil Cos To Prove Disaster Preparedness

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In a likely move, investors are demanding improved disclosure of oil disaster response plans. In fact, 58 investors representing $2.5 trillion in assets came together recently to demand just that.

The group penned a letter to G. Steven Farris, chairman and CEO of Apache, a company that recently purchased $7 billion of oil and gas fields from BP. As the letter states:

“The April blowout at BP’s Macondo well in the Gulf of Mexico, and the explosion and fire on the Deepwater Horizon drilling rig that killed 11 workers, has led to one of the greatest environmentally-related destructions of shareholder value in history. The shareholder harm that has flowed from the BP spill has focused investor attention on governance, compliance and management systems needed to minimize risks associated with deepwater offshore oil and gas development worldwide.”

The 1-page letter (with 10 pages of questions and signatures) goes on — urging all companies, including Apache, involved in subsea deepwater drilling to be open and transparent with investors and stakeholders regarding the programs they have in place for managing risks. The questions submitted inquire into the amount of money spent on R&D with respect to safer offshore drilling technologies, contingency plans, lessons learned from BP Macondo and the well blowout, contractor selection and oversight and governance and management systems.

With pressure like this, it is hoped that the Exxon’s and BP’s of the world will be forced to answer tough questions regarding managing the extreme risk they encounter. Like every other public company, they must answer to the owners — the shareholders. Let’s hope they do . . . and do so truthfully.

The Gulf is Not the Only Place Experiencing an Oil Spill: UPDATE

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[Updated with video]

With eyes and media attention still focused on the Gulf of Mexico and the largest oil spill in U.S. history, it’s no wonder little attention has been paid to, what some are calling, possibly the largest oil spill in the Midwest.

A 30-inch pipeline burst earlier this week and spilled some 800,000 gallons of oil into the Kalamazoo River, which flows into the enormous Lake Michigan. The spill has reached 35 miles of the river and left animals and plants in and along the river coated with oil.

The owner of the pipeline, Enbridge Energy Partners, responded to the leak by placing 28,000 feet of boom and more than 300 clean-up workers at the site. Governor Jennifer M. Granholm criticized Enbridge officials, however, claiming there are too few workers on site for the size of the spill and that the oil had reached farther than previously known.

Other officials also questioned Enbridge’s response. Representative Mark Schauer, a Michigan Democrat, said he was angry that it took Enbridge several hours on Monday to report the leak after it was discovered. He said he feared that the leak may have started earlier on Sunday and that the amount of oil in the river could be much more than the company’s estimate.

The Environmental Protection Agency is involved and recently released a statement that the spill may have exceeded one million gallons. With Lake Michigan only 80 miles downstream from the spill, many are fearing the worst, including Gov. Granholm.

Granholm warned of a “tragedy of historic proportions” if the oil reaches Lake Michigan. “The last thing any of us want to see is a smaller version of what has happened in the Gulf,” Granholm said Wednesday. “From my perspective the response has been anemic.”

Enbridge’s President and CEO Patrick D. Daniel has taken responsibility for the spill, claiming, “This is our mess. We’re going to clean it up.” Hopefully that happens before the oil spreads to the Great Lakes.

Here’s a video of yet another oil disaster: