ENVIRONMENTAL RISK

Wednesday, October 17 10:45 AM – NOON

Session 138

Session Sponsor: Actuary of the Future “An Inconvenient Actuary”: Environmental Industry Career Prospects [PD] – 1.25 units Moderator: Jim Toole, FSA, MAAA Presenters: Pierre Bull*; James Johnson*; Michel Rochette, FSA You don’t need to be a “green” or a tree hugger to pursue a career in the growing area of environmental industries. Carbon markets have become a multi-billion dollar (and Euro) opportunity for companies and investors as governments look to set up cost-effective means to mitigate greenhouse gas emissions.

Actuaries can play an important role in developing more refined carbon-accounting measures, as well as forecast future carbon prices. Panelists will discuss: x

Carbon and carbon-equivalent greenhouse gases’ contribution to climate change o Basic scientific intro to greenhouse gases; o Recent history with policy-making bodies to set up carbon emission controls; o Why the focus is on energy use.

x

Techniques used to account for carbon emissions o Basic overview of how carbon emissions are accounted for (can go from single entity all the way up to global level) and o Areas where quantitative estimates are still weak with carbon emissions and sequestration

x

Limits to using carbon benchmarking as an environmental performance indicator o Carbon accounting does not cover environmental impacts beyond atmospheric emissions and o Potential loopholes

You will be introduced to the nexus between energy use and environmental impacts through carbon accounting. You’ll learn about a specific growing career opportunity that fits with the skill sets of actuaries, and you’ll gain a better understanding of a few of the basic tools and techniques used in the carbon market.

Value Ladder: Market Coordinator: Jim Toole, FSA, MAAA

Climate Risk Michel Rochette, MBA,FSA 2007 SOA Annual Meeting Enterprise Risk Advisory, LLC

Topics • Physical Evidence of climate changes: risk drivers of environmental risk • Observed and projected physical impacts • Government and industry efforts to face climate change • Risks due to climate change • Proposed Disclosures: – Investor Network on Climate Risk – Carbon Disclosure Project – SEC Proposed Requirements

Physical Evidence of Climate Changes: Risk Drivers "Periodically, major forces dramatically reshape the business world – globalization and the information technology –. Climate change in its complexity and potential impact may rival both of them.“ Michael Porter, Harvard

Physical Evidence of Climate Changes: Risk Drivers • Primary drivers: Gazes produced naturally and by mankind create the green house effect, trapping heat from the sun.

• From year 1000 to 1860, concentration of Co2 has been about 300 PPM. • Since 1860, concentration has increased 36% to 382 PPM.(2000)

Physical Evidence of Climate Changes: Risk Drivers • Greenhouse Gazes (GHG): US Perspective – Carbon Diozide(CO2): 82.4% from energy, transportation, & industrial processes.

– Methane(CH4): 9% mostly from waste & agriculture – Nitrous Oxides(N2O): 5.0% from waste & agriculture – HFCs (replaced CFCs) , PFCs, SFs: 2.2% from refrigeration, insulation industries – US: largest world contributor but on average when measured by head.

– China will reach the US around 2025 but due to other sources of more damaging GHGs. –

Source: US Energy Information Administration

Physical Evidence of Climate Changes: Risk Drivers – ALL GHG have a Global Warming Potential (GWP) measured as a ratio of CO2: • • • • • •

Carbon Dioxide(CO2): (1) Methane(CH4): 21 Nitrous Oxide(No2):310 HFCs: 140-11 700 PFCs: 6 500 – 9 200 SF6: 23 900

Physical Evidence of Climate Changes: Major Sources of GHGs Country/ World Source of GHG

USA

Europe (EU 25)

China

Energy

40%

46%

40%

50%

Transportation

24%

31%

23%

6%

Industry

19%

11%

15%

34%

Source: 2003 WRI

Observed Physical Impacts: Global Temperature • Between year 1000 and 1860, temperature fluctuated +/- 0.5C. • Since 1860, the warmest 10 years have occurred since 1990, 2005 was the warmest ever.

• Average annual increase is 0.9C over the past 30y • If trend continues, projection of an increase of global average temperature between 1.4C and 5.8C by 2100. (9 separate scientific models confirm that trend)

Observed Physical Impacts: Global Temperature • Increase could accelerate if other phenomenon interact: – Higher temperature →More intense Fires → Burn trees which store GHG – More deforestation → reduction in natural GHG sequestration by forests.

– Higher temperature → thawing frozen soils → Release of GHGs as it may contain close to 30% of carbon stored in soils – Combined with other natural phenomenon like volcanoes

Observed Physical Impacts: Rising Sea Levels • Higher global temperature is causing sea levels to rise from: – Melting of polar caps and glaciers. (30% of total annual increase), especially Greenland.

– Expansion of the volume of the water itself because the sea water temperature is increasing due to the higher external temperature; thus, higher water temperature causes water to expand. (70% of total annual increase)

• From 1870 to 2004: global increase of 200 mm.

• Currently: sea rising more rapidly at 2.6-2.7 mm +/0.7 mm per year globally.

Observed Physical Impacts: Rising Sea Levels • By 2100, best estimates are for sea levels to rise by about 0.3 m. (1 foot) • At that rate, sea increase would be 6 m over the next 500 years.

• Consequences: – More than 4m, every coastal city inundated.

– US northeast vulnerable due to low land and high population density. NY more vulnerable than CA. – Coastal erosion: Florida at risk.

– Combined with wind → more storm surges → more flooding → more physical damage → more deaths and health issues.

Observed Physical Impacts: Hurricanes/Typhoons/Windstorms • Higher temperature is causing more intense hurricanes due to the warming of the oceans.

• Combined with higher sea levels, more sea surges are expected.

• Out of the ten strongest hurricanes ever recorder in the North Atlantic, 3 occurred in 2005.

• Property exposures at risk: Florida at 79% and NY at 61%.

• 15 property insurers insolvent after Andrew in FL in 1992.

• EX: Katrina: – Property losses: 40.6 billion $ – Deaths over 1 200.

• National Flood program will continue to exacerbate the potential impacts by "encouraging" people to live near the coast.

Observed Physical Impacts: Droughts and Fires • Droughts observed in the American West: drier weather, earlier snow melt, higher summer temp. → more frequent and longer wildfires.

• Since 1980, surface burned by wildfires doubled compared to 1920-1980 period.

• Ex: 1991 Oakland/Berkeley Hills fire – 2 billion $ in damage – 25 lives lost, 150 people injured.

• California is the most at risk: 22 out of last 38.

Observed Physical Impacts: Precipitation and Flooding • Higher global temperatures → more water vapor in the atmosphere → more precipitation → more flooding → more damage.

• More physical damage in the US but more lives lost in less developed countries: – 50 billion $ of damage in the US in 1990s.

– Increase of more extreme precipitations in some areas: US western regions and Eastern regions.

Observed Physical Impacts: Other • Warmer temperature →heat waves – Extremely hot days are also three times as common now as they were 127 years ago.

– Consequences: • 52 000 died in 2003 in Europe.

• During the peak, 2000 dying per day in France.

• Warmer temperature → spread of diseases – – – –

more mosquitoes carry malaria and Lyme More pollen in the atmosphere More air pollution → respiratory illnesses More southern diseases moving north.

• Ocean acidification → ocean chemistry → food chain → food for population

Government and Industry Efforts to Face Climate Change

UK Stern Review stated in 2006: – Cost of doing nothing: Risk losing at least 5% of GDP every year for ever.

– Cost of action: around 1% of GDP.

Government and Industry Efforts to Face Climate Change • 1992 United Nations Climate Convention: sharing of information on GHGs, setting up national policies and best practices. 191 nations.

• 1997 Kyoto Protocol: – Legally binding reductions varying by countries.

– Most countries have committed to 8% reductions of emissions from 1990 levels over 2008-2012.

– Different approaches to hedge: • Clean development endorsement in developing nations: CER • Joint implementation: ERU • Emissions trading: EU ETS

Government and Industry Efforts to Face Climate Change • 2007 G8 Summit endorsed the idea of cuts in GHG of 50% by 2050.

• Asia-Pacific Climate Partnership.

• US initiative with 15 countries: 85% of emitters of GHG including China and India.

• Europe adopted in 2007 a target of 20% reduction by 2020 from 1990 levels.

• UK on track to reduce by 15-18% by 2010.

• EU Emission Trading System (ETS) began operation in January 2005.

– Cap and Trade System.

– Being discussed at the US Congress right now.

• Previous success: Remember acid rain.

Government and Industry Efforts to Face Climate Change • US Supreme Court in April 2007 that EPA has authority to regulate GHG emissions from cars and trucks. Considered a pollutant.

• California adopted climate change legislation to reduce GHG to 1990 levels by 2020, implementing caps starting in 2012 and mandatory reporting.

• Nine North East and Mid Atlantic states have signed the Regional Greenhouse Gas initiative.

(RGGI): – Goal to reduce by 10% GHG to 1990 level by 2018.

– 1st regional Cap and Trade by 01-2009.

Government and Industry Efforts to Face Climate Change • US Climate Action Partnership: group of business leaders: – Implement cap and trade – Development of policies to encourage zero emitting technologies

• NAIC: Climate Change Task Force • AIA and Ins. Inf. Institute have published analysis papers on climate changes.

• UK Climate Change Working Party where some actuaries are involved. Read Sept 07 Issue of UK The Actuary.

Climate-Induced Risk "Regulatory policy will set the rules of the game that will affect how the burden will fall.. It is time to know how you will respond. At a minimum, all companies should know their carbon footprint, where their emissions are coming from and in what amounts.“ Andrew Hoffman, University of Michigan Co Author of Climate Change: What’s your business strategy?

Climate-Induced Risk • Regulatory/Compliance risk: – Fines for non compliance to new regulations on GHG including new upcoming mandatory national and regional GHG reductions as outlined.

– European operations more at risk.

– Miscalculation and lack of certification of carbon footprint coupled with lack of disclosure.

– Less risk for US companies but: • Affected if they have international operations in countries covered by Kyoto even if US didn’t sign.

• In the US, must keep track of CA and North East States.

• Proposed SEC disclosures.

Climate-Induced Risk • Investment and Shareholders’ Risk: – For ins. Cos: States have the prudent person rule as it relates to investments.

– For pension plans: fiduciary responsibility.

– Ex. 7 Billion $ pipeline in the McKenzie Valley could be at risk if permafrost melts.

– Investor Network on Climate Risk: • New risk policy model on climate risk.

• Seek to asses and obtain information on how companies are managing climate related risks.

• Corporate Governance Score Card on Climate Risk.

Climate-Induced Risk • Litigation risk: – When making investments, cos could be accused of not taking environmental issues into account.

– Lawsuits by states for non compliance, especially for high emitters of GHGs. – Lawsuits by shareholders for lack of planning by Board of directors if companies suffer from climate changes.

– Class actions suits could come when people will be more affected: Ex. Katrina. The Maldives – Big potential impact on D/O type insurance coverage.

Climate-Induced Risk • Physical risk: – Impact on property damage of clients of insurance companies as well on insurers’ own properties.

– Impact business and supply chains: interruptions.

– Necessitate more extreme modeling of events even for life insurers as indirect impacts of physical changes will affect both lives and health: Ex. heath waves and lack of preparedness by governments.

Climate-Induced Risk • Reputation and business risk: – Risk related to lack of climate risk preparedness/ corporate resilience/perceived inaction.

– One short-term approach is to commit to be a carbonneutral company.

– Proactive: • Energy field: – BP – American Electric Power to build the 1st gasification power plant.

– ConocoPhillips funding alternative fuels research.

Climate-Induced Risk • Reputation and business risk: – Proactive: • Banking: – HSBC has a set up a carbon offsetting program: electricity consumed in London offset by projects in New Zealand with wind power.

– Citigroup and BOA have committed 50 billion $ and 20 billion $ of future investments be made in sustainable business activities over the next 10 years.

• Insurance: – Swiss Re doing research and committing to being carbon neutral in operations by 2013.

– AIG has become the 1st US company to adopt a corporate climate change policy.

– Fireman Funds new “green coverage” for green buildings.

Proposed Disclosures • Global Reporting Initiative: – Principles and standards linking environmental, social and economic performance. – GOAL: Sustainability reporting which allows investors to assess the capacity of companies to create value in a resource-constrained world, including their impact on the climate.

Proposed Disclosures • Carbon Disclosure Project: – Now at CDP5: sent to 2 400 companies.

– Survey by CERES undertaken for institutional investors – 280 - in order to understand the risks and opportunities of companies impacted by climate change.

– Investors are now elaborating climate related ratios: Low Revenues/Co2 would indicate high climate.

– See www.cdproject.net: AXA, Aetna, Aegon, Allstate, Aviva.

Proposed Disclosures – SEC: • Being pressured to issue guidelines on disclosure covering carbon disclosures and potential impact of climate changes on companies: scenarios.

• Item 101 of Regulation S-K on the discharge of materials into the environment • Item 303 of Regulation S-k on disclosure around future trends likely to affect profitability.

• 96% of electric utilities provide disclosure on climate risk while only 15% of property-casualty insurers do so.

Final thoughts • According to AXA in its 2005 SEC filing: "20% of the World GDP is affected by climate change while for insurance companies, climate change is more important than interest or FX risks. “ “ The insurance industry will face new challenges in the coming years in increases in future claims, which will become harder to assess based on past events. "

Thanks

To Ellen Bull, librarian at the Society of Actuaries for her continued support and help in preparing this presentation.

Contact Michel Rochette, MBA, FSA • Enterprise Risk Advisory • 954-607-6969 • Michel.rochette@enterprise-riskadvisory.com

SOCIETY OF ACTUARIES 2007 Annual Meeting (October 2007) Session Topic:

“An Inconvenient Actuary�: Environmental Industry Career Prospects

Value Ladder:

Market

Session:

All Sessions

138

10,165

50

Actual Attendance

9,013

50

Number of responses

4,529

16

Return rate (# of resp./actual att.)

50%

32%

Overall rating of this session

3.82

4.31

4.31 3.82

Provided you with practical technical information

3.95

3.79

3.79 3.95

Will enable you to make better business decisions

3.81

4.00

4.00 3.81

Prepared you to impact industry-wide changes

3.66

4.00

4.00 3.66

Knowledge of Subject

4.20

4.71

Effectiveness of Delivery

3.82

4.25

Expected Attendance

Overall Rating

All Sessions

1

Learning Experience

2

Indicate your level of agreement with the following. This session:

Pierre Bull

Presenter Effectiveness1

This Session

Number of participants indicating presenter included commercial promotion in presentation

Michel Rochette

0

Knowledge of Subject

4.20

4.40

Effectiveness of Delivery

3.82

3.79

Number of participants indicating presenter included commercial promotion in presentation

Jim Toole

Moderator Effectiveness 1 : Rate the moderator's skills in managing this session

Rate the level of audience interaction for this session (7=high, 1=low)

0 3.84

4.07

4.73

4.22

4.71 4.20 4.25 3.82 0 4.40 4.20 3.79 3.82 0 4.07 3.84 4.22 4.73

1

The rating scale used: Excellent (5), Very Good (4), Good (3), Fair (2), Poor (1), and N/A (no value).

2

The rating scale used: Strongly Agree (5), Agree (4), Neither Agree nor Disagree (3), Disagree (2), Strongly Disagree (1), and N/A (no value).

Evaluation Tips to keep in mind when reviewing the responses: Numerical evaluations tend to give you a pretty good feeling for how well the attendees responded to the session as a whole. Scores in the range of 3 to 5 are considered successful programs. Written comments come from people who may have a strong opinion, therefore they tend to be very good or very bad. Repetitive comments that point to the same theme could be an indication of an area you may want to capitalize on in the future or work on for future presentations.

Perception Solutions, Inc.

www.perceptionsolutions.com

12/5/2007

SOCIETY OF ACTUARIES 2007 Annual Meeting (October 2007) Session Evaluation (Participants' Comments) Session 138 138

Value Ladder

138 138 138

Market

Market Market

Market Market

Perception Solutions, Inc.

Overall Comments Regarding This Session Fantastic topic - SOA mtgs. should continue to bring such awareness & external interests/__.

Interesting, enjoyable, but largely irrelevant. Hinted at follow-up roundtable to discuss actuaries role, but this should have been covered in the session.

Need more session like this.

Thanks!

This was an excellent session and I wish I didn't have to catch a train; would have liked to stay for panel discussion.

www.perceptionsolutions.com 12/7/2007

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