Beyond Rising Sea Levels: Using the Insurance Asset to Manage Risk and Maximize Opportunity in the “Green” Economic Paradigm Shift

By Lindene Patton

The green paradigm shift:

Climate change is causing much more than just rising sea levels. Climate change is changing the way we power a society that depends more heavily on power everyday; the way we transport ourselves; how we evaluate where we live and work; the way we interact with the environment; and the risk to which we are exposed in both our personal lives and in our businesses1. In other words, climate change is causing an inexorable change in the way we live, work and play by adding a new dimension of risk to our already complex environment. We need to re-think the ways we manage risk and leverage our assets to respond to these changes – including insurance.

Climate change has already begun to cause global changes in public policy, consumer demand, technology and other stakeholder demands, forcing businesses to become more ecologically and climate focused. The Kyoto protocol, the European Union Environmental Liability Directive, the California Global Warming Solution Act and Greenhouse Gases Emissions Performance Standard for Baseload Electrical Generating Resources are merely a select few of many such public policy actions. The physical reality of climate change is causing what looks to be a macro-economic shift and consequential micro-economic changes around the globe affecting a multitude of industries and business sectors.

Climate change creates both risk and opportunity. Business leaders are paying attention but not all are taking action2. Some see property risks; some see liability risks; some see opportunities for economic gain. To take advantage of the opportunities and respond to risk attendant to climate change, certain sectors of the economy must adapt or reinvent their business models. Proper enterprise risk management dictates a re-evaluation of existing risk management tools in response to this “green” paradigm shift. Insurance is one of those tools that can be used to both achieve competitive advantage and corporate social responsibility – if properly leveraged.

Insurance is both an essential advisor and partner in helping its customers and stakeholders take advantage of the opportunities presented by and mitigate the risks of climate change.

Insurance is an integral, if often overlooked, cornerstone of our lives that enables all of us to manage risk – and is an asset which we must leverage to the maximum extent to mitigate and manage the risks of climate change. The insurance asset is not merely a financial one; insurance is an industry which thrives on risk and which possesses the intellectual capital to do so.

The purpose of this article and its companion3 is to explore the use of insurance as a risk management tool in helping businesses and public policy makers adapt to the reality of climate change and attendant business model and risk profile changes.

The impact to business and people and the insurance asset:

Business depends upon stability4 to attract investment capital; individuals depend upon financial and other predictabilities to go about living their lives. Risks, such as those posed by climate change, must be addressed on an enterprise basis to assure investor and consumer confidence for business and on a specific risk basis to address individual needs. Insurance is one of the most common tools applied to address risk and assure stability in the face of fortuity.

Some look at climate change and see property risk; others see liability; still others see pure economic gain and loss potential. In fact, each perspective is correct. However, all of the risks described and more arise out of climate change. As such a suite of risks must be managed to address new and exacerbated risks created by climate change and our societal response to that change.

Today, a variety of operational risk management techniques are used to address systematic risks. Such tools are being developed and modified across industries as our understanding of climate change evolves and improves. Insurance is one of the key risk management tools used to manage non-systematic risk, e.g. fortuitous risks, reasonable system exceedences and other residual risks. When business models and public policies change, so must the risk management tools and solutions which support the affected businesses and individuals, including insurance.




The Unique Insurance Asset – financial tool and intellectual property repository:

Like other businesses operating in today’s environment, insurers must evaluate changes to their own risk profiles arising out of climate change. Insurance must also examine how its core business can respond effectively to the environmental and social challenges presented by climate change. What is unique to insurance and other financial services industries is that their risk profiles are affected by the risk profiles of their customers. Further, with respect to insurance, risk is their core business. As such, insurers find themselves in a unique position. The proper use of technology and underwriting can be combined to better match risk and price, mitigating climate risk to the extent that price is sensitive to such risk5. Properly designed insurance products can also be adapted and created to facilitate public policy goals designed to create or confirm a value for a “public good” of common ownership – such as those aimed at reducing carbon emissions and controlling ecological damage. Insurers collect, manage and analyze vast quantities of data. Insurers possess the know-how to understand the complex business structures of a multitude of industries and their interactive effects, as well as the multiple effects of public policy and societal shifts on those industries impacted by the physical realties of climate change and public policy regulation of conditions deemed by such policy to be related to climate change.

Unfortunately, only hindsight is 20/20, and insurers did not always collect data in a manner which systematically anticipated the effects of climate change. The essential raw data, however, often exists. That gold mine of data can be tapped and interpreted using the vast amount of professional experience in the industry to develop unique risk management solutions to assist its stakeholders to adapt to the effects of climate change. But this raises one of the key problems of developing sound climate change policy: various stakeholders too often look to insurance as the residual risk manager, after all their business models or public policies have been developed and public policy has been implemented. This lessens insurers’ incentives to participate in solving climate change issues by identifying and quantifying new risks in ways designed to set price signals which public policy makers and businesses can use to determine whether insurance or other risk mitigation techniques are the most efficient solution to lessen the risks posed by the effects of climate change. Insurance should instead be viewed as an integral business and societal partner in the development of public policy and business solutions designed to mitigate climate risk in the most efficient manner by providing accurate risk pricing signals, not just to respond by compensating for the damage climate change has caused. While insurance cannot ever substitute for leadership on public policy, insurers can certainly serve by meeting their corporate responsibilities and also serve their stakeholders by participating in partnerships in which the insurance asset is used to maximize shareholder value – which should in turn mitigate climate risk to the extent pricing signals are functioning with respect to this “public good”.


Insurance, through proper matching of price and risk associated with climate change, can be used to encourage activities that reduce GHG emission, thereby reducing the risks of climate change and improving ecological stability.

What insurance can do – facilitate public policy and responsive business models:

Properly designed risk management solutions can facilitate public policy goals designed to reduce the effects of climate change as well as facilitate market entrance and sustainability for a business directed at achieving these same public policy goals by increasing investor confidence with respect to disaster planning and other risk exposures; and mitigating actual business interruption and other consequential risks attendant to climate change6,7. Certain risk management tools can both facilitate the implementation of new business models and execution of specified policy goals. As such, insurance is both an essential advisor and partner in helping its customers and stakeholders take advantage of the opportunities presented by and mitigate the risks of climate change.


I. The “Green Business” Frontier: How Climate Change is Changing Consumer Behavior, Business Models, Expectations and Risk Finance


The Changing Physical and Business Climate:

People and businesses can expect that climate change will have a substantial impact on all aspects of their lives. Leading scientists8 tell us that over the past 100 years:

• Average mean global temperature has increased by 0.74°C

• Average sea level has risen by 0.17m

• Artic sea ice has melted by 8 percent since 1978

• Green house gas concentration has increased by more than 30 percent since 1750

• The frequency and severity of weather events has increased.

• Population patterns have changed, increasing concentrations at coastlines and rivers edge.

Over the next 100 years these same scientists expect:

• Global surface temperatures are projected to increase by 1.4- 5.8°C

• Average sea level is predicted to rise by 0.18-0.59m

• Artic sea ice is projected to melt entirely during summer months

• Hot extremes (heat waves) and heavy rain events are predicted to be more frequent

• Intensity of tropical cyclones is projected to increase

• Weather patterns are predicted to become more volatile


Insurance, through proper matching of price and risk associated with climate change, can be used to encourage activities that reduce GHG emission, thereby reducing the risks of climate change and improving ecological stability.

The physical conditions listed above all create new and exacerbated risks in our lives and businesses. As noted above, these risks can also include risks to human health as communicable disease vectors alter. Insurance provides risk solutions for the fortuitous risks such as those listed above. However, when the frequency or likelihood of such an event is determined solely by actions which are under the direct control of the insured, fortuity is lost and insurance is ill-equipped to transfer, mitigate and manage such risks. As such, insurance must work hand-in-hand with good public policy makers and stakeholders to avoid this limitation in order to drive a suite of risk management solutions to manage the climate change risk.

However, focusing merely on the physical risks misses a host of risks created by public policy and societal changes driven by climate change. As noted, much of our legal systems in respect to natural resource rights assume that fossil fuels, certain foodstuffs, water and a modest amount of ecologic diversity is essential. Much of the law is silent with respect to rights associated with ownership, access and use of natural resources essential to some alternative energy and “clean(er)” energy business models. Regulatory schemes focused on business regulation and consumer protection are similarly designed around business models driven by our current energy and transportation economic structure and models. As such, there are regulatory uncertainties surrounding issues such as advertising claims. What will a regulator agree is truly “recycled” or “environmentally friendly” or “sustainable” and what claims will the regulator decide are tantamount to deceptive and false advertising – creating other tort liability? The aforementioned are but a few of the potentially unaddressed liability issues impacting the willingness of business to invest in and develop climate friendly activities. Uncertainty with respect to these natural resource rights and other legal system dynamics can result in new tort exposures and other uncertainties. Insurance can be used to mitigate these new liabilities, as well as making it possible for people and businesses to engage in activities desired by the public policy and consumer shifts. In other words, insurance, through proper matching of price and risk associated with climate change, can be used to encourage activities that reduce GHG emission, thereby reducing the risks of climate change and improving ecological stability.



Effects on Energy Technology:

In light of the fact that many sovereigns and multi-lateral organizations have imposed carbon constraints and ecological standards under their law and / or in their contracts, the availability of insurance to manage risks for the new business models which are needed to comply with these new laws and expectations is essential. Further, carbon limits may well require the creation and development of “green(er)” and “clean(er)” power technologies and related business models, including wind, solar, geothermal, biomass and other emerging technologies. Concerns related to the predictability of business model risks for these technologies abound. However, insurance underwriting experience from analogous exposures is being applied to extend and adapt insurance products to respond to these new and improved technologies to accept risk that would otherwise restrict development of, or the operational stability and sustainability of, these “green(er)” and “clean(er)” power sources As such, insurance is available for all types of alternative power generation and for many modifications necessary to make fossil fuel power generation more climate friendly. But, if a company currently operating in a fossil fuel environment simply extends their business model without a deep review of its existing insurance structures to assure adaptation, unfortunate gaps in coverage are possible on a wide variety of fronts – business interruption, supply chain management, advertising exposure – just to name a few. Given that International Energy Agency (IEA) scientists tell us that to cut global GHG emissions in half by 20509 we should focus on restructuring our approach to power, perhaps with the following recipe10, we need to assure that our risk management tools contemplate these businesses and their unique risks:

• Start with 30 new nuclear power plants around the world;

• Add 17,000 wind turbines, 400 biomass power plants, two hydroelectric dams the size of China’s Three Gorges Dam, and 42 coal or natural-gas power plants using CCS technology;

• Build everything by 2013; and

• Repeat every year until 2030.


Basic Property and Casualty Coverages:

Traditional energy insurance operations focus on fossil fuel driven activities: exploration, production, transportation, generation and transmission. When new business types are implemented, such as solar or wind power, unique and new supply chain challenges are presented. These new underwriting exposures must be evaluated and changes to insurance policies may be required to respond to the unique damage potential created by these alternative energy sources, technologies and delivery systems. Both first and third party damages in these environments are different from those of the fossil fuel chain.


Business Interruption Extensions and Complex Claims Consequences:

The supply chain risks for the new business models are exacerbated when catastrophic weather events (anticipated to increase in frequency with climate change) occur because such events cause surge demand on the supply chains. The resultant business interruption risk is heightened. Developing unique insurance products which mitigate the demand surge risk is critical. Further, when carbon constraints are added to the mix, the shutdown of a “green(er)” power source may mean that the only way to run the business will be to use not so “clean” power, resulting in an additional exposure to requirements to purchase offsets if the insureds’ allowances have been exceeded.

The above discussions are narrow and are limited to the fossil fuels chain, but the same types of discussions can be had for building materials, essential goods supplies – water and food chains, and the like – because each of those industries is affected by climate change, as are their customers and stakeholders.


Energy Efficiency Opportunity, Risk and Insurance:

Other scientists suggest that if we are to reduce the risks of climate change, we must become more efficient in the use of what we have. To that end, products which use electricity must be reconfigured to be more efficient and / or innovative new products developed which achieve the same desired performance characteristic in an alternate way (much like alternative energy is to fossil fuel power). Underwriting insurance for existing products which have efficiency characteristics will require adjustment to risk analyses and underwriting criteria, but in an adaptive form. Thus, the extension of insurance underwriting to adapted products should be a predictable exercise, unless extreme loss potential arises from the adaptation. By contrast, underwriting innovative or new products requires the underwriter to become familiar with the new product’s characteristics when it functions properly and its failure characteristics and frequency. That said, analogies are often possible based upon insurance industry experience with other risks – and such analogies are being used today to provide insurance to these new and more efficient technologies.


Transportation and Insurance:

Others note we need to change the way we transport ourselves; and either where we live or how we live in that location. Insurance can be applied in this context to facilitate public policy goals, too. Insurance for hybrid cars has been available for many years11.


Thus, to continue to live the way we desire and mitigate climate risk, we must explore the best ways to change the way we power ourselves, transport ourselves and house ourselves. We may also need to consider how to best evaluate new ways to protect our foodstuffs, including our water; our health and our environment.


The Point:

To mitigate risks posed by climate change – all means are required…there is no silver bullet …

The Concern:

The actual work is beyond what today’s technology and policy can achieve.

The Risk Management Climate Challenge:

Devising appropriate risk management tools that will assist stakeholders to adapt to the fact of climate change and to succeed in harnessing the opportunities climate change presents a challenge, but a challenge that falls squarely within the comfort zone of qualified insurers.

The Path and Insurance:

To change the way society powers itself, transports itself and protects its assets from the physical realities of climate change, new business models and technologies must be developed, tested and deployed. Each of these activities creates new risks and new natural advantages.

In the energy area, clean(er) power may depend upon certain natural assets – sun, wind, rain and steam. In the transportation area, the feasibility of fleet conversion depends upon current electrical supply systems or other biomass management needs and structures.

As we try to implement the changes, public policy makers, businesses and their stakeholders are quickly finding that our social and economic systems are quite interdependent and that each change to reduce climate and ecological risk involves a choice — generally a very hard economic choice that necessarily requires tradeoffs. There is no “free lunch” in climate change.

To date we have seen pursuit of the “low hanging fruit” — wind power, some efficiency oriented consumer products and the like. But to make our next ecological advances to reduce climate risk, we must now look to the harder activities, and we must make equally hard decisions. Included in the list are choices for approaches to clean(er) coal technologies such as Integrated Gasification Combined Cycle (“IGCC”) generation and Carbon Capture and Sequestration (CCS), off-grid power generation and storage, transportation options and controls, new communication technologies. and the list goes on. But nothing on the list is free and most of the list contains products and services that cost more than those which perform, albeit in an unsustainable manner, the same function today.

Part of the hesitancy to move forward is the economic “price” placed on certain risks that can be born most efficiently by the insurance industry, rather than be engineered out to a zero risk of occurrence value. In other words, the public dialogue to date has focused on the technology and has not yet focused on the business and risk models in a disciplined way because not all the correct stakeholders are at the table. And the cost to engineer out the occurrence potential for a specific risk is quite high in many cases in return for little economic or social value. To determine which risks can be most efficiently assumed and managed by insurance to facilitate achieving the next level of climate risk management, a multi-disciplinary dialogue must proceed. Engineers, economists, underwriters, lawyers and public policy professionals must figure out how to speak the same language to define what risks each party can bear and then move onto the business of reducing climate risk. A very public example of this dialogue is being played out with respect to IGCC and CCS. However, actually implementing the theory of multi-disciplinary dialogue is encountering the reality of inconsistent public policy, competitive forces associated with natural asset advantage and unequal information and knowledge distribution – exposing the great challenges we face in determining how to best address specific stakeholder’s needs and get to the goal of climate risk mitigation12 . But that dialogue, and many others going on in much smaller venues involving risks and liabilities perceived to be of a lesser magnitude with respect to “greener” technologies, is proceeding every day and insurance knowledge and tools are being used to manage much of that new risk in each case. To get to this next step, we all must focus on and articulate what risks exist and determine how to best manage same with insurance and other enterprise risk management tools.


About the author

Lindene Patton is Chief Climate Product Officer for Zurich Financial Services (Zurich). She is responsible for product development and proposition management related to climate change. Patton is a frequent speaker on emerging climate and environmental issues.

She is an advisory board member for the University of California at Santa Barbara’s Bren School of Environmental Science and Management. Patton also serves on numerous government and non-governmental advisory boards, including the U.S. Environmental Protection Agency (EPA) Environmental Financial Advisory Board, the Bureau of National Affairs’ monthly publication, the Environmental Due Diligence Guide, and the Environmental Technology Verification Program.

Patton is an attorney licensed in California and the District of Columbia and an American Board of Industrial Hygiene Certified Industrial Hygienist. She holds a Bachelor of Science in biochemistry from the University of California, Davis, a Master of Public Health from the University of California, Berkeley, and a Juris Doctor from Santa Clara University School of Law.



1. A recent European example of the far-ranging risks associated with climate change is the reported migration of exotic and deadly communicable diseases into Italy as disease-carrying insect populations historically unknown there are enabled by climate shifts to move northward.

2. “How companies think about global climate change: a McKinsey Global Survey, February 2008.

3. This is the first of two articles designed to address the use of insurance as a means to manage risk and maximize opportunity in a changing climate. A companion article which focuses on specific applications of insurance will follow in EBR’s next issue.

4. Stability with respect to conditions that impact the specific business model. Such conditions of importance could be political, financial, social and / or legal.

5. The challenge created by climate change is that the “asset” at issue is a natural or ecological resource (e.g., the stability of the global climate) and, as such, is a “public good” with common ownership rather than a private asset. Economic theory is often challenged when applied to the pricing of a “public good” or “global resource” of common ownership. Typical pricing indicators may not be reliable with respect to such assets. Therefore, some are motivated to set public policy that creates a price either directly or indirectly through regulation.

6. Examples of products that are both good business and facilitate public policy goals to reduce GHG emissions, include pay-as-you-go car insurance. Pay-as-you-go car insurance is predicated on historical loss experience which indicates that miles driven is one of the key indicators of risk, and thus drives pricing. The pay-as-you-go car insurance structure should result in lower customer costs for fewer miles driven. As such, customers should be encouraged to drive only when necessary because they will save money by eliminating unnecessary trips; fewer trips and fewer miles driven should translate into GHG emission reductions.

7. An example of unique business risks associated with new business opportunity created by climate change in which insurance can play a facilitating role involves the creation and development of “green(er)” and “clean(er)” power technologies and business models, including wind, solar, geothermal, biomass and other emerging technologies. Concerns related to the predictability of these business model risks abound. These risks can include a legal system which does not recognize ownership rights to the “source” of the power or which does not recognize the necessary rights for storage – because the legal systems currently only address right derivative or attendant to fossil fuel driven programs, such as mineral rights. However, insurance underwriting experience from analogous exposures is being applied to extend and adapt insurance products to respond to these new and improved technologies to accept risk that would otherwise restrict development of or the operational stability and sustainability of these “green(er)” and “clean(er)” power sources.

8. IPCC 2007. It is not the author’s intention to endorse IPCC’s scientific analysis, but it is to suggest that prudent businesses will take the data and predictions very seriously.

9. The need to cut GHG emissions in half by 2050 was articulated and posited as a “tipping point that could lead to intolerable impacts on human well-being…”, by “Confronting Climate Change: Avoiding the Unmanageable and Managing the Unavoidable”, United Nations Foundation, Sigma Xi, the Scientific Research Society report February 2007; see and,20867,21102081-601,00.html. It is not the author’s intention to endorse these scientific analyses, but it is to suggest that prudent businesses will take the data and predictions very seriously.

10. International Energy Agency, as reported by the Los Angeles Times 12/13/07. It is not the author’s intention to endorse these scientific analyses, but it is to suggest that prudent businesses will take the data and predictions very seriously.

11. Farmers Insurance has offered a hybrid car discount since 2005 and offers such coverage in 37 states in the United States. Many European insurers offer motor coverage tailored to hybrid and other flex fuel or alternative fuel vehicle. See Ceres: ‘From Risk to Opportunity: 2007 – Insurer Responses to Climate Change’October 2007. Source:

12. The dialogue with respect to IGCC and CCS has focused on the physical and tort liability risks associated therewith as part of an overall dialogue regarding the financial risks associated with developing and implementing IGCC and CCS. So far in the process, we have learned that CCS is not appropriately addressed as a monolithic risk. In fact, the actual geologic structure of choice for sequestration may have a huge impact on the willingness of the insurance industry to assume liability for damages. Because some types of geologic structures have a long-standing history of being able to retain gases in a stable manner, such structures may be immediately insurable, where other underwriting criteria are satisfied. The insurance industry has a long history of insuring enhanced oil recovery (EOR) activities to which both technology and geological / physical asset analogies can be drawn for risk-profiling purposes. By contrast, other types of geologic structures may not have — at least the data is not publicly available at this time — the history of successful operation as a sequestration structure. Consequently, while the engineers may have considered both processes as CCS, the underwriters do not. The implications for insurance availability and natural advantage based upon physical asset ownership could be significant in determining the feasibility of the further development and implementation of the CCS technologies. The availability of insurance and other risk management tools for both short-term and long-term liability for CCS is critical to the determination of the willingness of stakeholders to support development and implementation of this technology as a climate risk mitigation tool.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.