climate products using insurance to facilitate low carbon / mitigation technology deployment 21 may...

Climate ProductsClimate Products

Using Insurance to Facilitate Low Carbon / Mitigation Technology Deployment

21 May 2010Lindene PattonChief Climate Product OfficerZurich Financial Services

The challenging intersection of private asset management, public

good protection, consumer protection and other public policy

goals

Climate Products© Z

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5/21/2010 2Using Insurance to Facilitate Low Carbon / Mitigation Technology Deployment


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Disclaimer

The information in this publication was compiled from sources believed to be reliable for informational purposes only. All information herein should serve as a guideline which you can use at your risk. We trust that you will use this information to reflect on your own studies, operations and believe that these samples may serve as a helpful platform for this endeavor. Any and all information contained herein is not intended to constitute legal advice and accordingly, you should consult with your own attorneys when developing programs and policies. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication, its contents and sample policies and procedures, including any information, methods or safety suggestions contained herein. Moreover, Zurich reminds you that this cannot be assumed to contain every acceptable safety and compliance procedure or that additional procedures might not be appropriate under the circumstances The subject matter of this publication is not tied to any specific insurance product nor will adopting these policies and procedures ensure coverage under any insurance policy.


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The Challenge…

Integration of the greenhouse gas emissions into the ‘global’ operating model

Who should pay ?

Where should public policy makers target ?

How do you deal with existing capital investment that is either carbon intensive and / or not adequately ‘hardened’ for the changing climate ? – Power plants– Individual homes– Tax districts

How do we finance “next generation” low carbon essential services ?– Power– Water– Transportation– Land Use


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Limitations of the Carbon Credit ?

Tenor of the instrument– Short term

– Spot

– Futures

Tenor of the “challenge” policy makers want to address– Multi-generational

Will constituents / consumers accept ‘essential services’ financed by volatile commodities whose value are largely influenced by political actions ?


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Financing

Debt

Venture Capital

Government Grants

Government Loans

Carbon Trading

Equity Investors

Compliance Buyers / Investors

Bond Issuance / Financing

High Risk / Volatility Tolerance

Risk averse / low risk tolerance

Continuum of Risk Tolerance

Different behaviours and commitment – Different GoalsNeed to Align & LeverageNeed multiple types of capital to move forward

Disclaimer: slide contains generalizations not applicable in all circumstances


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Market Drivers and Public Policy Tools: “Carrots and Sticks”

Directive:– Compliance

– Caps / limits of emissions

– Taxes

– Import restrictions

Incentives– Grants

– Loans

– Loan Guarantees

– Tax credits– Production

– Investment

– Allowances of Market Based Credits (Carbon Markets)

– Other

Impact: Consumer Price Protection Regulation


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Carbon Regulation Today: Reality

Mixed Public Policy Solutions:- cap and trade; and - all other incentives to achieve

mitigation of and adaptation to climate change

Other incentives accompany cap and trade Goal: achieve other public policy objectives, such as:

- Energy security- Specific technology development / promotion

- Redistribution of “burden” and “benefit” of specific actions

Distorted marketplace presents

Risk profiles impacted by carbon credits, allowances and caps (political and economic risk)


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US Governance Gap:

Environmental Groups, Citizens & Governments Pursue Federal Agencies to act

– SEC

– FTC

– EPA

Administration actionsEstablishes multiple inter-agency tasks forces related to CC adaptation and mitigationSeek organic legal authority

Plaintiff’s Bar

No Action on Capitol Hill ‘Gap-filling’


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What About World Trade Implications ?

When not all countries regulate carbon can you leverage through import restrictions ?

– WTO / GATT implications – see Articles XI and XX– WTO rules do not take precedent over environmental policy– WTO rules prohibit using environmental restrictions as a

means for protectionism……..SO…….

What can we learn from ‘dolphin safe tuna’ and ‘turtle / shrimp’ disputes ?

– Is ‘trade’ a direct cause of the subject environmental problem ?

– Are applications of the rules discriminatory (e.g. turtle / shrimp and ‘aid’ to some WTO members but not others) ?

– What about ‘eco-labelling’ ?


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What is the Role of Insurance in Adaptation to and Mitigation of Risk In General ?

Insurance History / Demonstrated Record of reducing risks– Exploration into emerging markets– Reduction of Fire Risk / Improvement of Existing Building

Stock– Improvements to Worker Safety– Improvements to Vehicle / Driver Safety– Risk Mitigation in Deployment of New Technologies

No amount of insurance will make a poor project / site / product / operation good

Policy makers should engage insurance industry expertise and capital to most efficiently and effectively adapt to and mitigate risks of climate change – including CCS, ‘hardening’, efficiency improvements..

– After all … insurers are in the business of risk …


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Insurance Can Be Applied to Facilitate Mitigation & Adaptation …

Insurance focuses on risks to private assets

Insurance is the ultimate economic shock absorber

Insurance accounts for 7% of the global GDP (WIF 2010)

Climate Change is about risks to both private assets and public good

The Key : Find the IntersectionsLand usePowerWaterTransportation

Focus on public / private partnership

Insurers are creating products today to facilitate adaptation and mitigation to climate change risk …


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What Do Insurers Need to Assist Stakeholders to Adapt to and Mitigate Risk of Climate Change ?

Insurers must be allowed to use their core skills to send risk based price signals

– Higher cost should incentivize risk reduction– Government indemnity or pools which spread or mask risk may inadvertently

increase moral hazard and overall risk

Climate Policy that addresses governance gaps– Government should consider regulation / law changes that recognize the costs of

mitigation must be passed on to users IF we are to truly incorporate this EXTERNALITY

– Policy makers must consider new / emergent resource / rights conflicts that present in a non-fossil fuel paradigm

Climate Policy that enables markets to function properly– Incentives should be constructed carefully to avoid moral hazard increase and

market instability– Consider whether finance subsidies “undo” incorporation of the EXTERNALITY– Transition from subsidy to independence must be mapped

Climate policy that recognizes the regional nature of climate change– One size does not fit all impact risks – especially with respect to CCS– Solutions should be regionally tailored but globally aligned / compatible


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Mitigation: The challenge of existing capital investments

Current capital investments in ‘essential services’ do not generally fully account for GHG emissions

Current ‘essential services’ investments are based upon bond-type financing in exchange for certainty of purchase – even if the technology becomes outdated during the capital earn out / payback period

The risk of ‘stranded assets’ presents if regulation and tort liability emerge and affect the asset ?

– Who pays ?

– Owner ?

– Users / consumers ?

– Does that answer change depending upon regulation ?

– Consider unintended consequences


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Mitigation: The challenge of new capital investments – costs of externality

Will society trade in certainty in price and delivery for constant technology upgrade ?

What are the options for ‘transition’ to low carbon technology ?

– Must we distort markets to transition ?

– If so, how do you transition from subsidy ?

Subsidies do affect risk profiles – – They inject political risk into business models

– Insurance underwriters should pay attention to such details and should adjust their contract accordingly

– But this may leave the political risk un-mitigated …


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Mitigation: Insurance and Surety can address operational risks of low carbon technology – including pilot projects

Insurance to respond to risk of bodily injury, property damage and business interruption for ongoing operations

Surety – not insurance – would address no fault “guarantee” – Need market history and stability to hedge and manage volatility

Risk Management for “PILOTS” should be the same as it is for “COMMERCIAL” applications.

“PILOTS” represent a SUBSTANTIAL MARKET SHARE– What governments do with “pilots” may FOREVER shape the

marketplace


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Innovation: New technology & new land use new business models; new insurance needs to meet the 2050 Targets


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Current Zurich climate change product activities

Insurance products

responsive to government legislation,

consumer and policy creating

market demands

1. Carbon creditsa. Political risk coverage for carbon creditsb. Carbon credit securitization

for multilateral and multinational banks lending to CDM projects

2. Motora. Discounts for hybrid vehiclesb. Pay-as-you-drive auto insurance: telematics / other basis - commercial (in process)

3. Alternative energy: full suite of p/c coverage Solar Wind Hydropower Biomass Geothermal Wave / tide (under review)


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Insurance products

responsive to government legislation,

consumer and policy creating

market demands

4. Directors and OfficersCoverage extension for climate

related / environmental mismanagement claims

5. Green BuildingConstruction Wrap: GL / WC / PI for “green” building projects

6. Recovery, buyback and disposal structured insurance of solar panels (WEE Directive)

7. Energy conservation insuranceproduct warranty (under consideration / review) derivative based coverage structures

8. Carbon capture and sequestrationCCSAGSFA


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9. Green Edge / Better Green: Property coverages: commercial and personal lines

a. Green re-build extensions – addresses efficiency and sustainability b. Off-grid power BI extension – addresses DERc. Fortification / resilience recognition – addresses weather appropriate

10. Water Re-Use / Reinjection / Storm Water Run-Off Coverage (in process)

11. REDD+ / Agricultural Programs – in development; Sustainable Mining – in development

Products and other responses

to physical risks,

consumer demands and public policy

climate products using insurance to facilitate low carbon / mitigation technology deployment 21 may...

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