Understanding and Managing Environmental Risks

George Boire Marsh CanadaJuly 26, 2006

March 29, 2007

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AgendaEnvironmental Risk ManagementWhat are the risksHow can they be managedHow environmental insurance can helpClimate Change RisksWhat are the risks What insurers are doingEmerging solutions

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Types of Environmental RisksLegacy or Historical RisksPast activities on a site (s) have resulted in pollution conditionsOngoing legal issues (e.g. fines, suits) related to past activitiesJoint, several and retroactive liability regimeTypically an issue during transactionsOperational RisksOngoing activities of company have inherent environmental risksNew Regulations can result in the need for expenditures/upgradesContracting and E&O RiskContractors & 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/transferregulatory (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 remediationfor identified pollution conditionsfor unknown pollution conditionsReputational

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Managing Environmental Risk - DriversRegulatoryCompany and Industry policiesManagement liability concernsnew corporate governance regime (e.g. SOX)StakeholdersClientsShareholdersLendersNGOsNeighboursTransactions (e.g. mergers, divestitures, plant closings)

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Environmental RiskDeveloping a Strategic ApproachBe aware of constant changesRegulationsLiability frameworkLack of case law in some areasShareholder expectationsInvolve wide range of expertise, including:Corporate counselRisk managersHealth and safety expertsAccounting departmentsOutside experts

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Environmental Insurance ToolsEnvironmental Impairment Liability (commonly referred to as Pollution Legal Liability)Combined GL/EIL (e.g. AIGs Eagle policy)Contractors Pollution LiabilityCost Cap/Remediation Stop LossInsured Fixed-Price CleanupsLender 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?

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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 RiskStorms, wildfires, windstorms, sea-level rise effect 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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Drivers for Corporate Consideration of Climate RiskIncreasing 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 impactsIncreasing Focus on Climate Instability and feedbacks Stern Review on costs of inaction

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Climate Change and Carbon Market RiskInsurance Industry impactsE.g. Increasing weather-related lossesE.g. legal action against companies, and their D&Os, for weather related lossesRisk in the Carbon MarketDriven by legally binding commitments to cut GHG emissionsRisks 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 RiskAnalysis and disclosureIncreased demand to disclose climate-related risksCarbon Disclosure ProjectWorld Economic Forum reporting framework seeks disclosure of:Greenhouse-gas EmissionsPhysical risks to facilities and operationsCompliance costsStrategic implications for growthManagement structures

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Climate ChangeInsurance QuestionsRe Insurers and other stakeholders (i.e. shareholders/investors) may ask insurers about potential impactsOn financial positionsOn availability/cost of insuranceCould lead to insurers asking companies about:Carbon-management policies and practicesDirectors 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 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

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GHG Emission Reduction Project RisksCounterparty risk credit-worthiness of project proponentsCarbon regulatory risk host country and international policies governing the approval and issuance of creditsPolitical/country riskTechnology performance riskCarbon performance riskNon-compliance riskValidation and verification risk

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Traditional and Emerging Insurance SolutionsTraditional 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 projectsEmerging hybrid packaged product Credit Delivery GuaranteeSwiss 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 agreedBased on a mix of traditional insurance and alternative risk transfer productsNote: Limited track record of carbon market and lack of available underwriting data make CDG very much an emerging productStay Tuned

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Thanks!George BoireSVP EnvironmentalMarsh Canada Limited416-349-4791George.boire@marsh.com

AUDIO: GaryThis is a map depicting the storm tracks of Atlantic Basin storms during the 2005 Hurricane season28 storms in all. 2005 was also the hottest year in recorded history. Emerging scientific literature shows an association between increasing sea surface temperatures and the increasing severity of storms. Recent trends have also shown an increasing frequency for catastrophic weather-related events. Indeed, the Insurance Information Institute reports that 6 of the 10 most expensive hurricanes in U.S. history occurred within just the past 18 months.Our reason for showing you both these maps is that these represent bookendsthe bookends of what we know has happened on the ground and some worst case projections of what else might happen in the future. We want to be very clear about thiswe are not talking about the causes of climate change, who is to blame for this situation, or even whether the United States should regulate greenhouse gases. We are avowedly nondenominational on those issues. Rather, we believe we have a responsibility to our clients to help them understand what the risks are and to help them be the best protected and most resilient you can be in the face of those risks. Some of those risks will be now, some will occur later, but we see our responsibility to be in this as a partnership with our clients for the long haul.Consider the following questions:How many of you are now dealing in some way with climate risk?Is there one area you are most concerned about or currently working on? AUDIO: GaryWhat are these current real-world risks that we are talking about? Lets focus on some key risks that suggest there is a new reality of risk around climate change. In the near term, Katrina really crystallized concern over what volatile weather can do.

Again, no single storm can definitively be tied to climate change, but there are increasing trends. Whether the issue is hurricanes, windstorms, wildfires, or sea-level rise, businesses face threats to their facilities, the power supply, transportation networks, supply chains, and communications. Think for a moment about the scale of Katrinaan entire state electric power system wiped out; 160 oil and gas platforms and 450 pipelines damaged; 250,000 to 500,000 homes lost; 600,000 people out of work; some 1.4 million household or hazardous orphan waste containers collected by the EPA not to mention the 1,500 lives lost. Total losses were on the order of $60 billion. This event really highlighted how critical it is for businesses to plan to handle events such as this without relying on governmental assistance, which may takes weeks or monthsif it comes at all.Climate change may have significant health effects as well. The European heat wave of two summers ago left 15,000 dead. An article in the respected British science journal Nature argued that climate loaded the dice making events like this 50 percent more likely. Employees and customers can be affected by new disease vectorsthink about West Nile Virus showing up in places it never has before. The same is possible for malaria and dengue fever.Companies may face lost business resources as well. For a company that relies on freshwater for production, it may face aquifer salinization due to sea-level rise. For a government investing billions in a new hydroelectric dam, it may want to think about the consequence of the lessening snow pack. Timber companies have seen millions of acres of tree loss due to new infestations, and there can be biodiversity losses of source materials for pharmaceutical companies. The leading coating to prevent clogging of stents was derived from a plant discovered on the fragile environment of Easter Island.In an unprecedented atmosphere of business transparency and Internet information, what a company does today in Ecuador or Indonesia can be known by investors tomorrow in New York or London. Companies face reputational risks from their response to climate issues. This can affect investors, consumer responses, and, even, the ability to attract talented and committed new workers.And litigation continues to be an increasing risk for companies. Oil and gas production companies have been sued by homeowners adversely affected by Hurricane Katrina for contributing to sea-level rise that exacerbated the storm surge and their losses. Plaintiff environmental groups and states have succeeded in demonstrating standing before the courtsmeaning that they adequately showed particularized harm, that the actions they have complained of caused the harm, and that court action could help. More claims of common law nuisance and other causes of action are being contemplated by environmental groups.Lastly, companies face increasing compliance and competitive risks. New compliance costs may impose penstroke risks where with the stroke of a pen by a legislature or regulator, huge new compliance costs may be incurred.

AUDIO: GaryMMC has been leading the industry in developing risk mapping and assessment tools for climate risk, including for the United Kingdom government and the United Nations. We have been developing new diagnostic tools to understand these risks across an entire enterprise. Marshs sister company NERA has performed analyses to help companies understand whether to enter into the trading markets or to achieve emissions reductions themselves. And we have been driving the insurance markets to offer new and responsive products. Working, for example, on enhanced business interruption to cover the Kyoto compliance implications of power generation shutdowns we recently had a call with our colleagues working on this issue from Thailand to Turkey -- or on enhanced D&O or business liability coverages.MMC has actively developed insurance coverages for new renewable energy technologies that are emerging in part in response to climate change. This has included the placement of operational risk coverage for offshore wind generation and increasingly for hydroelectric and solar power. We are actively working with the insurance markets to promote a comprehensive approach to protecting greenhouse gas emission reduction credits generated by Clean Development Mechanism projects in developing countries. This includes addressing the full spectrum of risks posed by those projects from front-end insurance due diligence, to back-end protections against: new technology risk; counter-party credit risk; host country political risk for things like civil instability, claims of ownership of carbon credits, or lack of currency convertibility; as well as for new regulatory risks associated with the Kyoto approval process. The carbon credit market is expanding very rapidly, and these kinds of approaches should help to lubricate the trading market by giving investors and project developers far greater assurance of the reliability of emissions credits that are generated.