Climate Change – A changing physical and liability risk landscape

By Marie Sundell, Legal Director at Clyde & Co LLP, IUMI Professional Partner,

Climate change has been described as one of the defining issues of our time and recent years have seen a monumental shift in governmental and public interest in environmental, social and governance issues. Increasing pressures from investors, regulators and consumers mean businesses can no longer afford to ignore the risks associated with climate change.

Insurers' exposure to the physical risks of climate change is expected to rise in coming years. Warmer ocean temperatures may increase the intensity of future hurricanes – anyone involved in yacht insurance will know only too well the devastating effects of the 2017 hurricane season. A rise in sea levels and storm surges may imperil port infrastructures and operations. Increased rainfalls can make certain waterways more dangerous with the risk of groundings and collisions rising as vessels and pilots struggle with changing conditions. Droughts and low water levels, as those seen in Europe in 2018, may leave inland waterways affected.

The industry's transition towards a low-carbon economy, driven largely by the IMO's strategy on reduction of greenhouse gas emissions from ships, comes with opportunities as well as risks. New technologies and fuel blends may, in the shorter term, increase the risk of machinery related claims and liabilities by reason of non-compliance. Ship owners and insurers will likely also be impacted by future environmental regulations e.g. regulations aimed at reducing black carbon emissions.

With increased climate change awareness come increased liability risks. Climate change litigation is on the rise and the future may well see claims brought against greenhouse gas contributors such as shipping companies and port operators. Insurers are aware of the risks and many have already announced plans to phase out underwriting of and investments in fossil-fuel, notably coal, assets.

The changing regulatory landscape and increased scrutiny of both underwriting and investment portfolios may pose challenges to insurers but with enhanced global interest in climate change also comes more available data e.g. through enhanced catastrophe modelling and climate related disclosures, which may assist Insurers to better understand and manage direct and indirect climate change exposures.

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