June 19, 2008 / 3:14 PM / 11 years ago

Insurers broaden coverage for climate change risks

NEW YORK (Reuters) - Insurers are developing new ways to help commercial customers adapt to emerging climate change risks, a panel of experts said on Wednesday.

Cars drive along a road in central Brussels February 7, 2007. Insurers are developing new ways to help commercial customers adapt to emerging climate change risks, a panel of experts said on Wednesday. REUTERS/Yves Herman

Underwriters are busy coming up with new insurance policies, and fine-tuning already existing products, to provide broader coverage to companies grappling with a wide range of emerging climate-related risks.

These include regulations that are being crafted or implemented around the world requiring companies to provide greater disclosure of risks, and to reduce energy use in order to meet new carbon emission rules.

Insurers are rolling out the new products in the wake of increasing scientific evidence that man-made carbon dioxide emissions are fueling an increased chance of global catastrophes.

Swiss insurer Zurich Financial Services is one of those actively developing insurance products to meet rising demand, said Chief Climate Product Officer Lindene Patton on a panel at a green business summit in New York.

“There are new physical realities that confront us,” said Patton. “And there is clearly a new political will.”

One example is coverage to help firms plan for unexpected costs arising from using new technologies that have not been tried and tested over a long period of time, said Ranjini Pillay, vice president of underwriting at American International Group Inc’s risk finance division.

A driver for such insurance was the need for producers of corn-based ethanol — a fuel additive for cleaner vehicle combustion — to be able to build plants with technology that was largely untested, leading lenders to seek some kind of assurance that costs from delays would not spiral out of control, and result in missed debt payments, said Pillay.

“We developed a product that would insure for those risks, where the policy proceeds could be used for one of two things. One is if there is underperformance in the acceptance test, you have additional monies to bring it up to acceptance, and the second one being to potentially pay the banks while you are tweaking the system,” said Pillay.

In a similar vein, another type of policy can protect firms from potentially higher costs if they have to offset their energy use by buying credits in a carbon market in order to meet federal regulations, such as those already in place in Europe.

“This (policy) hits at the delta between the contractual price and the stock price,” Pillay said.

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