Sustainability Risks Create Challenges for Actuaries

July 8, 2008

Sustainability risks are one of the most critical emerging risk areas of the 21st century and actuaries will need to develop mitigation and financing strategies for handling them.

“Sustainability risks are going to have a substantial impact on risk management and insurance, specifically on actuaries, who need to consider these risks in setting premiums and loss reserves,” said Dan Anderson, Professor-Actuarial Science, Risk Management and Insurance, University of Wisconsin, to attendees at the Casualty Actuarial Society (CAS) Spring Meeting in Quebec City.

Anderson explained that sustainability risk management is the management of risks emanating from the environmental and social justice areas. Examples include global warming/climate change, boycotts against major corporations by non-governmental organizations, environmental liability, ecosystems, social responsibility, and directors and officers (D&O).

“Corporations today are increasingly being pressured to address environmental and social responsibility performance,” he said.

Anderson noted that sustainability risks raise questions for actuaries such as: Are sustainability risks creating the potential for long-term liability claims? “That’s something that you’re going to need to keep your eye on. I would anticipate there are some increasing IBNRs out there that we don’t know about,” he remarked.

While claims-made policies should help to mitigate D&O, chemical, pollution and discrimination claims, Anderson observed that in the case of global warming/climate change, claims may fall under occurrence policies which could trigger many policy years. “Even if these suits are not successful, defense costs coverage could be large,” he said.

Rod Taylor, managing director, Aon Environmental Services Group, explained that from a risk standpoint, there are a number of challenges that companies and their insurers face from sustainability issues.

For example, in the case of global warming, Taylor noted that it was not yet certain how general liability and D&O liability insurance coverages might be affected.

“Global warming is not excluded from general liability policies, but you will have to determine whether or not there is an occurrence and whether there is bodily injury or property damage associated with whatever is alleged to have happened,” he said.

Taylor believes that D&O claims related to global warming will become less difficult to bring forward. “You only have to prove that persons making decisions related to global warming were not informed or did not make correct decisions,” he said.

According to Taylor, global warming/climate change exclusions are already being seen in some general excess liability insurance policies.

“These are being issued to certain kinds of business and you are going to see more of them issued to companies in the petroleum, auto manufacturing, and power generation industries,” he said, adding: “Going forward I think it is going to be very difficult for certain industries to get coverage for global warming.”

John Vargo, director of risk management, Johnson Controls, Inc, noted that before 2000 sustainability was a relatively new concept and social investing was immature. Since 2000, however, there has been much greater awareness about sustainability.

“At the beginning of 2007 there were more than 230 social mutual funds in the U.S. influencing trillions of investment dollars, and they were growing at about 30 percent annually. The funds’ managers evaluate companies not just based on their financial performance, but based on their environmental and social programs,” Vargo said.

“So it could definitely have an impact on your company’s stock price if they refused to hold your stock because your environmental or social responsibility records are not acceptable, even though your financial performance is acceptable,” he explained.

Referring to the development of a culture of sustainability at his company, Vargo said: “It starts with executive leadership, but it is really important to have all stakeholders in the company come together. When you bring everyone together and everybody is working towards the same goal, that’s when you can create a good culture of sustainability at the company,” he said.

Source: Casualty Actuarial Society

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