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Part 5 - The Carbon Constrained Economy Emerges - 2010?
             5.1 Insurance Premiums
             5.2 Legal Liabilities

5.1 Insurance Premiums
Description
If the climate was constant and predictable then the frequency and intensity of hazardous weather events would be known and the price of weather related risk could be accurately predicted. The more variable and unstable the climate, the more difficult it is to accurately calculate the risk, the potential losses and therefore the cost.

Potentially, climate change will result in greater climatic instability and variability including the frequency and intensity of extreme weather events resulting in substantially increased risk. This in turn would lead insurers to raise premiums, increase the financial threshold at which insurance kicks in, broaden exclusion clauses or demand greater mitigation efforts from customers. In each of these scenarios, the customer will bear an increasing share of the risk. If this trend continues, at some point the insurer will either withdraw coverage or premiums will reach a point where they will become unaffordable.

Because risk is spread globally through re-insurance, the cost of extreme weather events is also distributed globally. Price "spikes" result from major weather catastrophes and eventually these costs are passed onto businesses and households around the world.

Value at Stake
Risk management is a core component of any business. Most businesses transfer at least a portion of their risk onto insurers and most commercial insurance policies have a weather risk component, which can range from negligible to substantial depending on the geographic location and the attributes of the insured asset. As climate patterns become more unpredictable the cost of the weather component of insurance will rise and as a result, drive up business operating costs. This will impact on competitiveness. As insurers reduce their exposure, a greater proportion of the risk will be transferred back to the business. This in turn will impact on the price of capital as banks factor in their increased exposure of the business to weather events.

In summary, the insurance industry's response to climate change will decrease margins, increase exposure to risk, reduce growth potential, and increase the price of capital.

Developments and Trends
The re-insurance sector has been aware of and taken steps to assess the potential impact of climate change on its own business, that of insurance per se and the economy more broadly over the past15 years. This analysis has convinced a number of major players including Swiss Re and Munich Re to declare human-induced climate change a reality. Insurers are now developing new ways to improve their analysis so as to be able to better manage their risk exposure. Whereas weather risk and premiums are currently determined using a "coarse" geographical analysis, increasingly insurers are developing higher resolution tools. This means that instead of risk being aggregated over a large area making management difficult, insurers will soon have the capacity to determine exactly which geographical location is at risk and price accordingly. This will lead to more equitable pricing and a greater capacity to identify and manage risk.

In the short-term this will drive strategies designed to adapt to an unstable and unpredictable climate as opposed to mitigating the problem. However as the costs of adaptation mount and become prohibitive, the emphasis will shift to mitigation. Smart businesses will be positioning themselves as part of the solution (i.e. mitigation) as opposed to net contributors to the problem to avoid the longer-term economic, social and legal risks from climate change.

Implications
The combination of increased frequency of weather catastrophes, increased cost of insurance and the industry's ability identify specific locations and structures that are at risk from weather events means that the weather and climate change will become increasingly relevant issues for business. Globally premiums are likely to rise, affecting business across the board. Further, the cost of doing business in high weather risk areas will increase more dramatically. This will impact existing businesses as well as future investments given the role that insurance plays in terms of access to and deployment of capital. Ultimately the negative impact on individual businesses could be magnified and translate into economic stagnation and decline on a regional economic basis as capital seeks a safer climate haven.

5.2 Legal Liabilities
Description
The legal fraternity has been keeping a keen eye on developments related to climate change. The potential for climate change and its consequences to be the subject of litigation aimed at both regulators and greenhouse gas emitting corporations has been recognized by a small but increasing number of legal practitioners around the world.

Value at Stake
The legal activism we are seeing emerging is the first phase of the development of a set of legal precedents that could eventually lead to tobacco like class action law suits. Generally speaking however, the focus of legal attention has been aimed at regulators. This may have an indirect impact on the corporate sector as regulators are forced to tighten regulations related to carbon emissions or enact other legislation designed to hold carbon dioxide emitters more responsible for their polluting activities. Either way the suits are attempting to curb greenhouse gas emissions. This has potentially expensive implications for a variety of companies.

In the long-term it is conceivable that class action suits could be launched against large-scale greenhouse gas emitters. Such litigation can have a serious impact on a companies' market value. Class action suits can cost millions of dollars in legal fees and potential compensation. In addition these high profile suits have the potential to distract or even overwhelm management because of large potential adverse outcomes or massive transaction costs. This in turn can damage a company's day-to-day operations.

Development and Trends
The most likely form of this litigation would probably be to accuse a company of a breach of fiduciary duty for failing to adequately factor climate change into business decisions.

Another most likely near-term manifestation of these liabilities comes around disclosure. As noted in the section on proxy voting, much of the shareholder activism around climate change has called for public disclosure of climate change exposure and intended strategic response. If companies fail to disclose this information and this information is seen to be "financially material," this would form a basis for lawsuits as well.

While there are significant obstacles to overcome, this has not prevented the filing of a number of suits. The states of Connecticut, Massachusetts, and Maine have filed a climate change lawsuit against the Environmental Protection Agency for failing to regulate carbon dioxide emissions under the Clean Air Act.

Non-government organizations including Friends of the Earth, in conjunction with Greenpeace and several US cities, filed a suit charging two U.S. government agencies with failing to comply with National Environmental Policy Act requirements to assess the environmental impact, including climate related impacts, of projects they financed over the past decade.

In 2002, the tiny Pacific nation of Tuvalu, which fears it will drown under rising sea levels within 50 years, threatened to bring a lawsuit at the International Court of Justice in The Hague against the US and Australia.

The newly formed Climate Justice Programme, a collaborative venture involving lawyers, scientists and more than 40 civil groups supporting the use of the law to combat climate change, believes that international and domestic laws - covering human rights, product liability, public nuisance, pollution and harm to other states - will be effective leverage points to force emission cuts and make large scale emitters liable for the consequences of their actions.

The Australian Climate Justice Program was launched in 2003 by the environmental group Climate Action Network Australia (CANA). Acting on CANA's behalf, the law firm Maurice Blackburn Cashman has notified the directors of selected Australian companies of the financial risks that climate change presents to their companies, and of their legal obligations to deal with those risks appropriately.

Implications
As the scientific case for action mounts, companies will be forced to take legal liability implications into account as part of their risk assessments. Already Swiss Re is expressing concern about the implications of climate change related legal action on directors and officers liability insurance if shareholder actions claim that directors and officers should be liable for not adequately addressing the potential threats brought by climate-change related regulation to their businesses.

The use of law to force corporate behavioural change has been successful in the past and although there are significant legal obstacles to lining up climate change with tobacco, asbestos and breast implants, history suggests that the potential for successful legal challenges in the future should not be ruled out.

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