Understanding and Managing Environmental Risks

George Boire – Marsh Canada

Understanding and Managing Environmental Risks

George Boire – Marsh Canada

July 26, 2006

March 29, 2007March 29, 2007

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Agenda

Environmental Risk Management

– What are the risks

– How can they be managed

– How environmental insurance can help

Climate Change Risks

– What are the risks

– What insurers are doing

– Emerging solutions

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Types of Environmental Risks

Legacy or Historical Risks

– Past activities on a site (s) have resulted in pollution conditions

– Ongoing legal issues (e.g. fines, suits) related to past activities

– Joint, several and retroactive liability regime

– Typically an issue during transactions

Operational Risks

– Ongoing activities of company have inherent environmental risks

– New Regulations can result in the need for expenditures/upgrades

Contracting and E&O Risk

– Contractors & consultants who perform work for others and/or on 3rd party sites

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Types of Environmental Risks (cont.)

Transactional/Contractual

– Indemnities and liabilities associated with land ownership/transfer

– regulatory (cleanup levels, liability releases, “re-openers”, etc.)

– tort (injuries, damages)

– financial (financial statement disclosures/reporting)

– contractual (credit risks, corporate disclosures)

Financial cost uncertainties associated with remediation

– for identified pollution conditions

– for “unknown” pollution conditions

Reputational

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Managing Environmental Risk - Drivers

Regulatory

Company and Industry policies

Management liability concerns

– new corporate governance regime (e.g. SOX)

Stakeholders

– Clients

– Shareholders

– Lenders

– NGOs

– Neighbours

Transactions (e.g. mergers, divestitures, plant closings)

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Environmental RiskDeveloping a Strategic Approach

Be aware of constant changes

– Regulations

– Liability framework

– Lack of case law in some areas

– Shareholder expectations

Involve wide range of expertise, including:

– Corporate counsel

– Risk managers

– Health and safety experts

– Accounting departments

– Outside experts

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Environmental Insurance Tools

Environmental Impairment Liability (commonly referred to as Pollution Legal Liability)

Combined GL/EIL (e.g. AIG’s Eagle policy)

Contractors Pollution Liability

Cost Cap/Remediation Stop Loss

Insured Fixed-Price Cleanups

Lender Liability (aka “Secured Creditor”)

Errors & Omissions (e.g. > 70% environmental)

Note: Different insurers use different names for similar coverage

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What Are the Practical Business Consequences of Climate Change?

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What Are the Practical Business Consequences of Climate Risk?What Are the Practical Business Consequences of Climate Risk?

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What are the Practical Business Consequences of Climate Risk?

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Name Your Climate Risk— Climate as a Fundamental Business RiskName Your Climate Risk— Climate as a Fundamental Business Risk

Storms, wildfires, windstorms, sea-level riseeffect on facilities, power, transport, communications

Heat waves and new disease vectors

Lost business resources: forest resources, water supplies, biodiversity

Reputational risks; shareholder concerns; litigation possibilities

Compliance and competitive risks

Storms, wildfires, windstorms, sea-level riseeffect on facilities, power, transport, communications

Heat waves and new disease vectors

Lost business resources: forest resources, water supplies, biodiversity

Reputational risks; shareholder concerns; litigation possibilities

Compliance and competitive risks

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Drivers for Corporate Consideration of Climate Risk

Regulatory Drivers: International Agreements Take Effect

European obligations through EU ETS (January ’05)

Kyoto Protocol entry into force (February ’05) – applies to companies doing business in EU, Japan, Canada, Russia

Montreal negotiations confirm post-2012 focus and rules for flexible compliance mechanisms (December ’05)

Increasing long-term focus in international negotiations (December ’06)

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Increasing Scientific Consensus:

UN International Panel on Climate Change – assessment by 2500 leading climate scientists (2001)

National Academy of Science confirm IPCC findings

11 Joint National Science Academies:

“There is now strong evidence that significant global warming is occurring . . . . It is likely that most of the warming in recent decades can be attributed to human activities.” (Summer 2005)

New IPCC review – “unequivocal” human impacts

Increasing Focus on Climate Instability and feedbacks

Stern Review on “costs of inaction”

Drivers for Corporate Consideration of Climate Risk

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Climate Change and Carbon Market Risk

Insurance Industry impacts

– E.g. Increasing weather-related losses

– E.g. legal action against companies, and their D&Os, for weather related losses

Risk in the Carbon Market

– Driven by legally binding commitments to cut GHG emissions

– Risks associated with generation of emission reductions through project-based transactions (e.g. In Canada and/or CDM and JI)

– Risks associated with actual trading of GHG emissions reduction credits

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Climate ChangePreparing for Climate Risk

Analysis and disclosure

– Increased demand to disclose climate-related risks

– Carbon Disclosure Project

World Economic Forum reporting framework seeks disclosure of:

– Greenhouse-gas Emissions

– Physical risks to facilities and operations

– Compliance costs

– Strategic implications for growth

– Management structures

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Climate ChangeInsurance Questions

Re Insurers and other stakeholders (i.e. shareholders/investors) may ask insurers about potential impacts

– On financial positions

– On availability/cost of insurance

Could lead to insurers asking companies about:

– Carbon-management policies and practices

– Directors and officers liability

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MMC Climate Change Initiatives

Helping clients build resiliency to the negative economic impacts of climate change.

Helping clients take advantage of the economic opportunities created by climate change.

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MMC Climate Risk ActivitiesMMC Climate Risk Activities

RISK SIDE

Risk Mapping and Assessment

Driving new insurance product development (eg. D&0)

Economic analysis for emissions trading regulatory design and corporate strategy

OPPORTUNITY/ NEW MARKETS SIDE

Renewable energy operational risk insurance coverage (eg., wind, hydro, solar, biomass)

Optimizing carbon value – credit delivery guarantees

RISK SIDE

Risk Mapping and Assessment

Driving new insurance product development (eg. D&0)

Economic analysis for emissions trading regulatory design and corporate strategy

OPPORTUNITY/ NEW MARKETS SIDE

Renewable energy operational risk insurance coverage (eg., wind, hydro, solar, biomass)

Optimizing carbon value – credit delivery guarantees

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GHG Emission Reduction Project Risks

Counterparty risk – credit-worthiness of project proponents

Carbon regulatory risk – host country and international policies governing the approval and issuance of credits

Political/country risk

Technology performance risk

Carbon performance risk

Non-compliance risk

Validation and verification risk

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Traditional and Emerging Insurance Solutions

Traditional policies are available to provide financial protection against delays, business interruption, machinery breakdown, loss, damage or liability during the fabrication, installation, construction, and operational stages of projects

Emerging hybrid packaged product – Credit Delivery Guarantee

– Swiss Re, AIG and Munich Re are developing and perfecting products that provide an insurance based guarantee that contracted emission reduction credits will be delivered as agreed

– Based on a mix of traditional insurance and alternative risk transfer products

– Note: Limited track record of carbon market and lack of available underwriting data make CDG very much an “emerging” product

– Stay Tuned………

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Thanks!

George Boire

SVP Environmental

Marsh Canada Limited

416-349-4791

George.boire@marsh.com