Dr Franziska Arnold-Dwyer appeared by audio-visual link from London to speak on issues arising from the intersection of insurance, climate change and the law. Dr Arnold-Dwyer, an Associate Professor of Law at University College London, frequently speaks on sustainable insurance topics, and her book Insurance, Climate Change and the Law was published earlier this year. She has published widely on insurance law and is one of the editors of the next edition of MacGillivray on Insurance Law.
Our experts discuss and reflect on the themes raised by Dr Arnold-Dwyer in her keynote presentation.
Insurers as climate risk carriers
The insurance sector is at the front line of climate change, as it meets the challenges of paying the insured costs of increasingly severe climate-related loss events and making provision for future claims. Dr Arnold-Dwyer spoke about the complex range of risks that climate change poses for insurers. She has broadly classified these risks into three groups: physical risks, transition risk, and liability and litigation risk.
Physical risk
Climate change poses obvious physical risks for insurers, with extreme weather events increasing both claims costs and claims risks for property / material damage, business interruption and life insurance policies. Recent, local illustrations of the physical risks posed by extreme weather events are, of course, the Auckland Anniversary floods and Cyclone Gabrielle, which together saw insurers pay out over more than NZD3 billion across more than 112,000 separate claims.
Extreme weather events may also pose a risk for insurers’ investments if those investments are vulnerable to physical risks, placing further financial pressure on insurers at times when claims are high. These risks have flow-on effects for premium costs and the availability of insurance. This is a live concern, with the Reserve Bank reporting in May 2024 that premium costs in New Zealand have outstripped inflation over the last decade. We have previously predicted that the pressures of climate change risks may result in a partial retreat by insurers from the market: see our article here.
Transition risk
Additional risks arise from the process of transitioning to a net zero or low carbon economy. The regulatory burden on insurers is continuing to increase, with all licensed insurers with more than NZD1 billion in total assets, or annual gross premium revenue of more than NZD250 million, now required to produce climate statements in accordance with the Financial Markets Conduct Act 2013. A failure to comply with this disclosure regime will carry significant financial penalties, and regulators are not the only party that will be keeping an eye on compliance with the climate-related disclosure regime. Australia has already seen proceedings issued by shareholders against companies who allegedly fail to disclose information about climate change-related business risks: see our discussion of McVeigh v Retail Employees Superannuation Trust.
Other examples of transition risk include:
- reductions in the value of insurers’ investments if their owners and managers do not adapt;
- new technologies – while new technologies bring business opportunity, novel areas are also difficult to price accurately; and
- reputational risk arising from insufficient action.
Liability and litigation risk
Litigation is also a significant area of risk. Insurers may face direct litigation and pecuniary penalties if they fail to comply with their climate-related disclosure obligations or make misleading statements about sustainability (that is, greenwashing).
Climate litigation also poses risks to insureds, leading to claims under their liability policies or their director’s and officers’ insurance policies, all ultimately affecting risk pricing and potentially the availability of cover. Climate litigation is increasingly being used as an “enforcement strategy” to force climate action and accordingly there is, as Dr Arnold-Dwyer highlighted, a need for climate litigation risk models to identify and evaluate these risks, particularly so that insurers continue to meet their solvency capital requirements.
Dr Arnold-Dwyer also spoke to climate litigation in the UK and Europe, where there has been a measure of success for plaintiffs. For example, in R (on the application of Finch on behalf of the Weald Action Group) (Appellant) v Surrey County Council, in June 2024, the UK Supreme Court considered Surrey County Council’s decision to grant planning permission to an oil company to produce hydrocarbons for a 25-year period. Ms Finch, on behalf of Weald Action Group, argued that it was unlawful for Surrey County Council not to require the applicant’s environmental impact assessment to include an assessment of the impacts of greenhouse gas emissions arising from the eventual use of that oil as fuel (known as “scope 3” emissions). The Supreme Court agreed. While the case made clear that the production of scope 3 emissions does not preclude the granting of a permit, the Supreme Court’s decision may impact the process for how approval is sought, and will incentivise litigants to challenge planning decisions where there are flaws in the process followed.
Dr Arnold-Dwyer also spoke to ClientEarth v Shell plc, a derivative action bought by ClientEarth, a shareholder of Shell plc, alleging that Shell’s directors were in breach of their duty to act in the best interests of the company, including having regard to the company’s impact on the community and environment, by failing to properly address the risks of climate change through its operations. While the claim was dismissed, demonstrating the courts’ traditional reluctance to interfere with business decisions made by directors and management, this case demonstrates the potential risks of activist claims upon directors.
Climate change litigants have also enjoyed a measure of success in New Zealand, with our Supreme Court allowing claims brought by a climate change activist to proceed to trial in Smith v Fonterra. This judgment demonstrates a willingness of the courts to hear novel claims and a reluctance to strike out such claims even where the chances of success may remain low – which will impact on any insurer who may be on risk for defence costs. Our discussion of that case and the ClientEarth case may be found here.
Insurers as enablers
Having traversed the range of risks which climate change poses, Dr Arnold-Dwyer briefly introduced her vision for the insurance industry supporting others to take climate mitigation action. For example, she suggested that insurers may:
- Insure environmentally friendly infrastructure projects and invest in projects that allow the financing and development of “green” products. Dr Arnold-Dwyer has encouraged insurers to look for new opportunities to develop projects and invest in climate-friendly opportunities.
- Facilitate a managed withdrawal from greenhouse gas emitting activities. While there is no current requirement for insurers to withdraw cover for large emitters, Dr Arnold-Dwyer warned of the impact of a reactive and disorderly withdrawal and encouraged insurers to start planning for a managed withdrawal.
- Adapting existing insurance products in ways that allow policyholders to shift behaviours, take mitigation measures and assist in activities enhancing climate change preparedness. Dr Arnold-Dwyer suggested that insurers could use existing communication networks to develop green products, reward policyholders for adopting sustainable practices, and use policy wording to encourage and deter behaviours. At claims time, insurers can use claims as an opportunity to ‘build back better’ and invest in future climate change resilience.
These ideas warrant further examination, as the risks associated with climate change continue to compound.
Public private partnerships
Finally, Dr Arnold-Dwyer spoke to the partnerships which have arisen between the public and private sectors to address insurance gaps, with the Flood Re Scheme operating in the United Kingdom to provide subsidised reinsurance to insurers that cover high flood risks, and our own Toka Tū Ake Natural Hazards Commission. However, while there are benefits to these schemes in the form of high penetration of insurance that might otherwise not be available, it is not clear that Government-led partnerships are the best mechanism for creating incentives to mitigate risk or build resilience in a way that will be sustainable in the long term.
Dr Arnold-Dwyer’s session was a useful reminder of the many ways in which the need to take action in response to climate change is affecting the insurance industry and is likely to affect it further in the near future. The good news is that climate change offers the insurance industry opportunities as well as risk.
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