By Dorian Hicks Director, PwC United Kingdom
As floods, wildfires and other environmental disasters increase in frequency and severity, the insurance industry has already found itself on the frontline of climate change. True, the financial liabilities are curtailed by the time limits on weather-related policies. Yet this cap doesn’t apply to air pollution and other long tail environmental damage claims.
How big are the risks? Research indicates that traffic pollution is now so bad that it could be stunting lung development in children.
Other research reports reveal four in five urban areas have illegal air pollution levels and air pollution now kills more people every year than smoking.
These research findings have strong echoes of the scientific links between smoking and ill health that led, albeit over many decades, to the $206 billion Tobacco Master Settlement Agreement (MSA). What the tobacco manufacturers were doing was legal at the time, but they still found themselves liable for retrospective damages.
If we look at car manufacturers, energy companies and others that could be in the immediate firing line for possible air pollution claims, they too are doing nothing illegal and aren’t obliged to put out health warnings – yet. But as implausible as it might once have appeared, there is a real possibility that they too could be held liable for damages stretching back decades.
And this may only be the beginning. Given the now almost universal acceptance that global warming is putting lives at risk, could carbon emissions eventually be considered as a form of pollution and hence the focus of severe fines and claims?
Historical parallels
How imminent is the risk of major lawsuits? History shows that what are initially seen as fringe protest movements can eventually move into the mainstream and create the groundswell for major policy change. The suffragettes, for example, once faced vilification and imprisonment, but are now celebrated as heroes. Could climate activism follow the same trajectory? A lot of people are putting up economic arguments against a move to zero emissions. In a telling parallel, advocates for the abolition of slavery faced similar opposition, but eventually won the day.
Counting the cost
If public opinion does move decisively against carbon emissions – and it’s beginning to – what liability scenarios would this open up? Test cases are already underway in a number of countries. However, the real gamechanger would be a move by governments to seek compensation or shift the regulatory goalposts, just as occurred in the Tobacco MSA. There are already signs that governments are responding to political pressure by shortening the timetable for moving to zero emissions. Norway is already committed to 2030 and in the UK, where only recently a 2050 target has been agreed, the Labour Party has floated the idea of moving the current deadline forward to 2030.
Bringing forward the zero emission target could have significant ramifications. In particular, might governments be tempted to force polluting businesses to help pay for the huge costs of zero emission transition, either through taxation or legal action against prior emissions? A faster transition could also open up the risk of mis-selling claims against businesses such as construction companies. Houses being built today are expected to last long beyond 2050 but are not being built in line with zero emissions standards, and could therefore need major refurbishment in the near future, particularly if current targets are accelerated. Are customers being adequately warned about the costs they might have to bear? Having had some personal experience of what’s involved in creating a carbon neutral home from scratch, it’s clear that switching over existing buildings would be an expensive job.
Hard numbers on the risks
What then does this mean for you as an insurer? Yes, this is still a ‘what if’, but the compensation claims risk should still be factored into underwriting, scenario planning and capital management. And it isn’t just motor, energy or construction companies that could be liable, but conceivably any of your business clients that move goods or rely on fossil fuels for heating, cooling or electricity.
Crucially, this is also an opportunity for your business to be part of the solution, using your close understanding of the risks to mitigate the impact and accelerate the development of greener alternatives. Car manufacturers are a case in point. In a previous article, I set out how there are already electric models available today that are cheaper over their lifetime than petrol equivalents.
You could therefore reinforce the business case for a quicker transition by applying hard actuarial numbers to the lifetime costs, along with the potential claims risks from petrol and diesel emissions or the possibility that such vehicles could be rendered obsolete by taxation or regulation.
Agent of change
Nobody can ignore the grave environmental threats we face. As an insurer, it’s time to take the initiative, both in safeguarding your business from claims ahead and as a risk advisor and good corporate citizen. At the very least, you’ll bolster your defence that when the science was clear you made changes to limit the impact.
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