Should the Insurance Industry Take a More Active Role in EIA?

According to a recent article in the Globe and Mail’s Report on Business the only industry that has firmly embraced the reality of climate change is the reinsurance and insurance industry.  Extreme weather events are happening more frequently due to climate change, and surprisingly the insurance industry is convinced that the change is being caused by human activity [3].  Reinsurers and insurers rely on being able to judge that the risks to the projects that they insure can be accurately modelled over the entire lifespan of the project: their financial well-being depends on it.  With the increased occurrence of extreme weather events over the past 40 years, losses incurred have climbed steadily with the weather-related claims paid out doubling every decade since the 1980s [3].  These ever increasing payouts have motivated the world’s biggest reinsurers and insurers to accept climate change as a reality and become experts at modelling the expected changes over the coming decades.  They have incorporated the results of those models into their calculations about the risks associated with the projects that they insure.Rescue-workers-walk-past-homes-destroyed-by-Superstorm-Sandy-Oct.-31-2012-in-Seaside-Heights-New-Jersey.-Mario-TamaGetty-Images-650x433

(Mario Tama, Getty Images 2012)

The Environmental Impact Assessment process is supposed to identify and predict the impacts of a proposed development over its entire lifespan – from planning through construction and operation to decommissioning [2].  Further, the EIA process is to propose mitigation measures for those impacts along with a plan to monitor them over the project lifespan and beyond.  These mitigation measures along with decommissioning and rehabilitation after the completion of the project involve the highest level of uncertainty in the EIA process [2].  For the insurance industry these activities present the biggest financial risk, especially decommissioning and rehabilitation.  The risk increases with time as the extent of the impacts of the project increase leading to the possibility that more people may be affected over a greater area leading to greater compensation costs for the insurer.  Of special concern are decommissioning costs as there is a higher probability that the project proponent may not fulfill their obligations for site rehabilitation leading to those costs being passed on to the insurer [4].  Environmental insurance policies up until now have generally been for specific impacts of a project such as the damage caused by the release of dangerous materials into the air or water, or onto the land.  The world’s largest insurers, such as Munich Re and Lloyd’s, have come to the conclusion that they must incorporate climatic change into their calculations of the risks involved when insuring various large long-term projects [3].  The Insurance industry is concerned with the accuracy of the projected long term effects, cost of mitigation, cost of decommissioning, cost of damages that may be incurred, but uncertainty in the environmental assessment process makes this difficult.  While it is understood that there are uncertainties in the prediction of the future, the communication of those uncertainties to decision makers needs to be improved [1].  Research by the insurance industry has quantified some of those uncertainties [3] and it needs to be shared with the EA community.

Since the insurance industry is able to quantify some of the uncertainties of the EA process, should they take a more active role in EIA?  If so, at what level should they participate?  Should they function within the regulatory process, or as independent evaluators?  Within the regulatory EA system, proponents could benefit from insurance industry expertise when preparing project submissions and regulatory agencies could benefit from better analysis of the risks of the projects they are evaluating.  Perhaps insurance industry evaluation of a project should be a required component of the regulatory process.  I believe including insurers in the EA process would improve the quality of EA.  The EA process would benefit from the ability of the insurance industry to provide insight into the uncertainties in the EA process, especially with respect to impact prediction and mitigation.  Furthermore, the impacts of climate change would be included in all projects regardless of the acceptance of the magnitude of those changes by both proponents and regulators.  It is time for the insurance industry to work with all parties in the EA process to improve that process and help provide a better future.

CBC_Toronto2013

(CBC, 2013)

References:

[1] Gunn, J. & Noble, B. (2014). Uncertainty disclosure and consideration in environmental assessment: An agenda for research and practice. Unpublished, presented on Jan. 7, 2014 at Concordia University.

[2] Noble, Bram. (2008). Introduction to Environmental Impact Assessment: A Guide to Principles and Practice, Second Edition. Toronto: Oxford University Press

[3] Reguly, E. (2013, 12). The smartest guys on the planet. Report on Business, 30(5), 66-76.

[4] Susavidge, M. A. (2002, 03 01). Environmental insurance insuring the deal. Retrieved from http://www.canadianunderwriter.ca/news/environmental-insurance-insuring-the-deal/1000113570/?&er=NA

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