Lloyd’s coverholder Sage Partners – the name behind the first-ever carbon credit-based forest insurance policy in New Zealand – wants to hammer home an important message when it comes to climate change, especially for those who might one day find themselves liable after not acting soon enough.
“Simply put, the argument around climate change is boiled down to, ‘We cannot keep doing what we’ve been doing, and how we’ve been doing it’,” said Sage managing director Geoff Manks (pictured) in an interview with Insurance Business.
“My view is that the emissions trading scheme (ETS) is a mechanism to drive behavioural change amid changing weather patterns and dramatically increasing catastrophe losses. At its core, the ETS is an economic lever to enable investment and technology and other solutions in order to change behaviour.”
Under New Zealand’s ETS, certain industries such as transport, oil, and other industrial companies are required to report their annual greenhouse gas emissions to the government. In the New Year, amendments to the Climate Change (Forestry Sector) Regulations 2008 are coming into effect. Changes include a new carbon accounting approach and a new exemption from carbon liabilities.
“The activity in carbon forestry has exploded in the last 18 months, and I don’t see that changing in the next 18 to 24 months either,” declared Manks, who has been in insurance for over three decades and set up Sage to create “some real expertise in very bespoke areas of risk,” one of them being carbon forestry.
“We wrote the first carbon forest policy back in 2009, which was the first of its kind in Australasia... That started our involvement in the sector, and now we are the only forestry insurer writing carbon forestry risks in New Zealand.”
Given the highly specialised nature of what it offers, the wholesale insurance provider and New Zealand Underwriting Agencies Council member currently works with no more than 25 broking companies.
Looking ahead, Manks believes there’s a “global tsunami that is sitting in the insurance world” around climate risks.
He told Insurance Business: “Mark Carney, the former governor of the Bank of England, raised the issue a number of years ago that insurers need to be carrying on their books, reserves for environmental liability claims.
“My view is we may well see a similar scenario eventuate – as we saw a number of years ago with asbestos claims – where initial raising of concerns was dismissed until it was proven that they were causing harm, and the billions of dollars that cost the insurance industry in liability claims as a result.
“I think there’s a parallel between asbestos and the potential climate liability that will arise over the next while… Those that don’t have proper contingencies on their balance sheets do so at their peril.”
According to AM Best estimates, net asbestos losses as of 2020 amounted to US$100 billion.
“Whether businesses, in general, are taking a more proactive approach to their climate and environmental obligations, [I would say] definitely ‘yes’,” stated the Sage boss.
“The movement has been going on for many years and it has cemented itself now as the norm, to the point where I know of very substantial New Zealand companies that have been told by even bigger global players that they will not buy their product unless they have their emissions offset and reduction programmes in place.”
Manks continued: “But I think you’ve still got a lot of companies out there who haven’t really picked up the baton and made changes to their businesses yet and companies still out there who don’t have a strategy to reduce their emissions, and they’re the ones, I think, that might find their liability programmes impacted due to the nature of their businesses.”
As for the imminent impact on the insurance industry, Manks said it wouldn’t just be directors and officers (D&O) liability insurance providers likely to bear the brunt.
“There is potentially a three-fold component to the contingent liability issues sitting out there,” Manks told Insurance Business. “If your business, knowingly, is contributing to climate impacts that impact on other parties through land erosion or property damage or physical health issues, then that would be a general liability issue.”
Possibly a third, in addition to D&O and general liability, is statutory liability under the Climate Change Response Act.
What are your thoughts on climate risk liabilities? Discuss in the comments below.
