In a Year of Skepticism, Global Warming Is Still a Timely Topic
November 2010
The U.S. Weather Service recently reported
that the first half of 2010 was the warmest 6-month period since recordkeeping
began in 1880, and it predicted that the full year's temperatures will also
set a record. In contrast to these warm temperatures, last winter's record snows
and extreme cold temperatures set records across large areas of the United States.
by Rodney
J. Taylor
Aon Environmental Services Group
These extreme weather events have many people confused about climate change
and global warming, especially risk managers trying to prepare for the future
and mitigate the financial consequences of weather-related losses. If steps
are not taken to address these risks, the costs of losses and of insuring against
them will continue to rise.
Recent Weather Fluctuations
The extraordinary weather variations being seen in the United States and
around the world are symptoms of climate change that continues to threaten human
health and property. For example, areas of the Southeastern United States that
were experiencing record drought conditions 2 years ago have since had abundant
rain that has replenished water supplies in reservoirs and underground aquifers.
California had fewer forest fires this year due to cooler temperatures in the
mountains and higher than average rainfall during the summer months.
Outside the United States, Russia has experienced the worst drought in its
recorded history. China has had severe flooding along its major rivers, and
large portions of Western Europe have had temperatures several degrees above
normal seasonal highs. Pakistan has experienced record flooding that has left
more than 20 million people homeless and destroyed more than a million acres
of crops.
Assessing the Risks from Climate Change
In a thought-provoking article, "How Should We Think About Extreme Weather
Events?", Jay Gulledge, director of the Science and Impacts Program at the Pew
Center on Global Climate Change, concludes that the question of whether climate
change has caused a specific weather-related event is essentially unanswerable.1
He suggests that risk managers would be better served by asking whether global
warming changes the odds of certain types of events occurring rather than focusing
on the cause of a particular windstorm, flood, or wildfire. If it is determined
that the odds of a weather-related event have increased, the organization should
then analyze the risks of loss associated with individual operations and facilities
to evaluate its vulnerability if that event occurs. By anticipating events and
vulnerabilities, the risk manager can focus on how to address the associated
risks.
New prediction models based on more recent data also incorporate global warming
projections into their calculations to provide more reliable estimates of future
damage and allow better risk management decision making. More accurate projections
of weather-related events allow risk managers to develop more realistic estimates
of future damage from these events. This facilitates the development of risk
protection programs that can prevent much of the damage that will otherwise
occur.
For first-party losses involving property damage due to floods, storm surges,
tropical storms, tornados and lightning, accurate projections of future events
may indicate that higher insurance limits are needed to cover more severe direct
damage and to pay for longer periods of business interruption following extreme
weather-related events. For third-party claims that allege a corporation's emissions
of greenhouse gases have caused or contributed to global warming, risk managers
need to press their managers to implement reductions in emissions. They should
also review their casualty insurance programs to make certain they provide the
maximum coverage available for climate change claims.
Human needs also must be considered in light of recent flood, fire, lightning,
and windstorm losses. With better information, risk managers can develop plans
to evacuate personnel from impacted areas and to respond to emergency situations
with the resources necessary to provide safety as well as temporary accommodations
and supplies.
Lack of Consensus: General Public versus Scientists
A recent Yale University survey indicated that a relatively large segment
of the American public is personally convinced that global warming is happening
(71 percent). When survey participants were asked if scientists are in agreement
on whether climate change is happening and what is causing it, a majority indicated
they do not believe there is a consensus among the scientific community regarding
the reality and the causes of climate change.2 According
to the survey results, most Americans (69 percent) believe human activity is
a primary cause or has made a substantial contribution to global warming. Many
of the respondents did not perceive that climate change poses a serious threat
to them, their families, or their communities, but do believe they threaten
serious harm to others in places far away. They also do not believe that serious
impacts of global warming will be observed in their lifetimes.
Contrary to the opinions expressed in the survey results from the Yale study,
there is a high degree of consensus among scientists on the basic facts of climate
change. Disagreement among them involves only the details. The vast majority
of scientists agree that global temperatures are rising and that human activity
is a significant factor in the warming that has taken place since the beginning
of the mid-20th century. There is less agreement on the timing of future events
and on the consequences of not taking measures to prevent greater accumulations
of greenhouse gases in the atmosphere. This uncertainty is due, in part, to
concerns that climate conditions may reach a "Tipping Point" where the rate
of change accelerates and damage becomes irreversible. Some scientists believe
this could occur in the next few decades if permafrost in the upper half of
the Northern Hemisphere begins to melt, releasing massive quantities of CO2
into the atmosphere as it thaws.
Risk managers must avoid buying onto the arguments of climate change extremists
on either side of the issues. There is no laboratory where experiments can prove
the validity of assumptions regarding global warming, so we must rely on simulations
to predict future climate conditions. However, even though our understanding
of how climate processes work is far from complete, and our ability to observe
what is happening is limited, we must recognize that the models we use for climate
change projections are not completely accurate.
Proactive Risk Management
Risk management measures that can be taken to mitigate the financial consequences
of first-party climate change losses include accurate analysis of loss potential
and the purchase of insurance with adequate limits to respond to more frequent
and more severe weather-related events. With the exceptions of flood losses,
weather-related events are not excluded from standard physical damage insurance
policies. For homeowners, flood insurance is customarily purchased through the
Federal Emergency Management Agency (FEMA) National Flood Insurance Program
(NFIP).
In some areas, windstorm losses are also insured outside of the commercial
marketplace. State programs have absorbed these risks where rates are not allowed
to rise to levels that will attract commercial insurers. First-party property
damage policies should also be examined to evaluate the protection provided
for unusual risks associated with weather-related events, such as sewer backup,
sinkhole damage, and pollution from hazardous materials released by windstorms,
floods, lightning, and wildfires.
Third-party claims that allege bodily injury or property damage due to global
warming caused by or made worse by emissions of greenhouse gases may not be
covered by general and excess liability policies in some jurisdictions. The
pollution exclusions in these policies may apply to releases of CO2 and other
harmful substances in the normal course of business (steady-state discharges)
or as a result of sudden and accidental catastrophic events. Environmental insurance
policies may be used to supplement the protection provided by general liability
policies, but even with this additional coverage, there may be uninsured risks.
Gaps in coverage should be analyzed and alternative risk management measures
should be taken where these gaps cannot be closed by insurance.
Liability claims may also be filed against directors and officers of corporations
as a result of climate change events. These may involve allegations that the
strategic decisions of corporate executives failed to take global warming into
account. For example, companies that generate large volumes of greenhouse gases
should be looking at measures to reduce emissions in anticipation of regulations
that will make continued emissions much more expensive. Claims may also allege
that the executives failed to make decisions that could have led to new business
opportunities based on climate change, and that these decisions affected the
value of the corporation or its revenue.
Awareness of climate change factors may also provide important insights for
contractors as they address a changing landscape of risks in carrying out their
work. In such activities, risk managers cannot assume that the past will be
an accurate predictor of future events. They should calculate the odds of more
weather-related delays than in previous years and expect that these delays will
be more disruptive than would be expected from a review of past events. If a
builder's contract specifies a certain number of rain and snow days as "normal,"
the risk manager may want to consult more contemporary models as these contract
conditions are negotiated. Additional protection at the job site against wind,
rain, lightning and flooding may also be necessary to avoid damage to stored
materials, equipment, and structures under construction. Measures may also have
to be taken to assure proper management of materials and construction activities
to assure that mold does not develop from wet materials or the incursion of
rain or flood water into buildings under construction. Storm water barriers
should also be designed to contain larger volumes of water and more frequent
rainstorms.
The variation in weather-related events is likely to be more extreme for
contractors that work in areas outside the United States than for those that
work only on domestic projects. Monsoons, tsunamis, earthquakes, and volcanic
eruption must be added to wind, rain, lightning, flood and wildfire risks as
causes of potential job site losses. Transportation of materials and equipment
may also be at higher risk of damage due to storms at sea and conditions that
disrupt land-based transportation.
Conclusion
Climate change is a timely topic in spite of some peoples' perceptions that
global warming is a hoax or that the results are remote in terms of where and
when damage will occur. Risk managers need to focus their efforts on the use
of up-to-date models and comprehensive risk analysis to anticipate more severe
weather-related events and to address their corporations' vulnerabilities to
first-party, third-party, and executive liability claims. Where the internal
resources to evaluate and address risks are inadequate, risk managers should
seek assistance from climate specialists, insurance brokers, and consultants
that can assist in the understanding and management of global warming risks.
While some view climate change risks as the next generation's problem, serious
financial impacts of weather-related events are already being seen in many regions
of the world. Prudent risk management measures supported by strong corporate
policies can mitigate the consequences of many events that will be devastating
if no action is taken. Risk managers should put aside their skepticism, study
the facts, and take appropriate actions while there is time to prepare for a
warmer future.
1Jay Gullege, "How
Should We Think About Extreme Weather Events?," Pew Center on Global Climate
Change (blog), September 7, 2010.
2Yale School of Forestry & Environmental Studies,
American Opinions on Global Warming Summary.
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