Agenda -Part 2

1. Agenda -Part 2 11:25-11:30 Overview on Part 2 11:30-11:45 Insurance managers - Daniel Hoffmann and Granger Morgan 11:45-12:00 Questions and Discussion 12:00-12:15 Forest, fisheries and ecosystem managers in the Pacific Northwest and Western Canada -Tim McDaniels 12:15-12:30 Questions and Discussion 12:30-13:00 Lunch

2. Part 2: Studies of Decision Makingin Four Specific Contexts • We've proposed to study four specific decision contexts. • The point of this part of the project is to examine a set of specific settings in which climate is likely to be very important, and the decision-making implications of our limited ability to make predictions about future climate can be worked out in detail. • For that reason we have been very careful to select settings in which we think climate will play an important role: • • insurance industry (potential large liability exposures) • • the high arctic (anticipated large climate changes). • • high latitude forest and fishery resources (anticipated substantial impacts). • • power industry (probably will take the brunt to early serious controls).

3. Climate is only one variable While we have been careful to select decision contexts in which we believe that future climate is likely to be a major factor, it is important to remember that even in these cases climate is not the only thing that will change over coming decades. Indeed, often, even in these cases, climate is likely to be of second order importance compared with other important variables such as new technology, changing public policy, changing economic relationships, and social and instructional infrastructure.

4. Decision case studies…(Cont.) While climate, and possible future climate policy, can impose stress on social, economic and ecological systems, so too can many other factors. Just as there are limits to our ability to make predictions about future climate, so too there are limits both to our ability to identify likely sources of future stress, and to make meaningful predictions about those stresses. However, with some effort, at least some of these can be identified, and when possible, be generalized.

5. Decision case studies…(Cont.) Typically, we will not use detailed scenarios but rather will use simpler parametric methods. Thus, for example, if future natural gas prices look to be critical to a specific class of decisions, in the projects in Part 2 we will not develop long detailed stories about how those prices might be shaped by future technology and by developments in the US, Europe, the Middle East and the Former Soviet Union but will simply truncate the causal chain, posit a range of possible future oil prices, and work from there. Later of course, outputs from Part 3 may help us refine this treatment.

6. Decision case studies…(Cont.) Once results from the climate science elicitation studies from Part 1 become available, we will use them, along with the other sector-specific information we have developed, to begin to create a set of decision support tools that are appropriate given the limitations on the predictive information that we are likely to be able to acquire. As results become available from the work in Part 3 of the Center's research, these tools will be modified to incorporate additional information and uncertainty about climate policy and its impacts. Different tools will be developed in different contexts depending upon the details of the sector and the problems they face.

7. Agenda -Part 2 11:25-11:30 Overview on Part 2 11:30-11:45 Insurance managers - Daniel Hoffmann and Granger Morgan 11:45-12:00 Questions and Discussion 12:00-12:15 Forest, fisheries and ecosystem managers in the Pacific Northwest and Western Canada -Tim McDaniels 12:15-12:30 Questions and Discussion 12:30-13:00 Lunch

8. Climate Change and Global Warming – Risks to the Insurance Industry

9. Climate Change and Global Warming – A Fact to Reckon With 1870 Rhone Glacier, Switzerland 1999

10. … and the same here : Grinnell Glacier and Lake (1910 to 1977) Pretty soon we will have to settle for Non-Glacier National Park!

11. Overview - The Insurance Industry • Primary Insurance Carriers • Business Area: short- and medium-term risk • Products: Health & Life, P&C • Backstop provided by Reinsurance Carriers • Reinsurance Carriers • Business Area: Backstop for primary carriers; • Long-term, catastrophic, specialty, and high exposure risks • Products: CAT insurance, high excess, specialty products (BI, D&O, ART, derivatives, guaranties, bonds), asset management

12. Financials of the Insurance Industry • Revenue and Assets • Revenues from premium and investments • Premium Revenues: US$2.2T global • Assets (U.S. Life Insurance companies only): • Total: US$2.8T • Real Property Holdings: US$60B • Equal to ~15% of total assets and reserves of major pension funds and retirement programs • Return on premium: mostly negative (ratio ~1.06) • Return on Investments/Assets = Profitability • (Source: Innovest, personal communication, 2003)

13. The Dawning in the Insurance Industry “The insurance business is first in line to be affected by climate change. It is clear that global warming could bankrupt the industry …” Franklin Nutter,President, Reinsurance Association of America, 2003 Why…? - Climate Change is a global phenomenon, - The Insurance Industry is a global player

14. Awareness of the Insurance Industry • Primary Insurance Companies • Late in awareness • Reason: Revenue and Assets • Awareness increases due to exposures in liability coverage • Reinsurance Industry • Highly aware overall, as risk research/quantification has shown increased exposure • Leaders: Munich Re and Swiss Re • Implementation of programs to • Limit risks • Assess business opportunities

15. Source: J. Holdren, KSG, Harvard University

16. Potential Climate Change Cost

17. Threats to the Insurance Industry • Liquidity Risks • Investment Portfolio Risks

18. Exposure of the Insurance Industry • Property and Casualty (P&C) Insurance Physical Damage to Property due to increased Frequency and/or Severityrelating to: • Flooding – as a result of increased precipitation, rise in sea level and change of weather patterns; • Storms – as a result of change in ocean currents/weather patterns • Compounding loss effect – as a result of increasing population, infrastructure density, increase in property value, and event characteristics

19. Naturalcatastrophes 11 September loss(liability and life) Exposure of the Insurance Industry in billion US$, 2001 prices. Source: Swiss Re sigma 2001 11 Sept • Upward trend expected to continue: • higher insurance penetration • growing values • value concentration in coastal areas • changing hazard cycles and trends, e.g. natural & man-made climate change 60 1992 Hurricane Andrew 1999 Storms Lothar/Martin 50 Total Estimated Loss: US$38 to 50B, incl. third party liability 1994 Northridge Earthquake 40 30 20 10 0 1970 1975 1980 1985 1990 1995 2000 Man-made catastrophes 11Septemberloss(property and business interruption) Worldwide economic losses due to natural disasters appear to be doubling every 10 years and next decade will reach US$150B • Source UNEP Financial Initiatives Climate Working Group Report 2002

20. The Reinsurers Speak … Relating to P&C exposure, Munich Re reported that natural disasters caused US$55B in damage in 2002, primarily related to weather-induced property damages across France, Austria, Poland and Italy. Percentage Distribution Worldwide Source: http://www.munichre.com/pdf/natcat_natural_catastrophes_2002_e.pdf

21. Exposure of the Insurance Industry 2. Health and Life Insurance Increased risk to human health as a result of weather/climate patterns: • Thermal Stress • Natural Disasters • Vector-borne Diseases (see next slide) • Mortality Rates

23. Exposure of the Insurance Industry • Other Exposure • As a result of change in frequency and severity of events • due to climate change, unpredictability of loss exposure • relating to the following exposures: • Business Interruption • Agro/crop loss • Existing CAT coverage • Weather derivatives • Project finance • Directors & Officers (D&O) • Errors & Omission (E&O) • Technology relating to carbon mitigation and associated technologies

24. In Summary “It is estimated that US$2.7 trillion of the $10 trillion U.S. economy is susceptible to weather-related loss of revenue, meaning that an enormous number of companies have "off balance sheet" risks related to climate” John Dutton, Dean Emeritus Penn State's College of Earth and Mineral Sciences Of this amount… the exposure for the global insurance industry is approximately US$800 billion to US$1 trillion, a significant Liquidity Risk!

25. Can there be any other potential threats to the insurance industry…? You betcha!

26. Yes, … and they might be big! Do you recall Dean Dutton’s statement? “It is estimated that US$2.7 trillion of the $10 trillion U.S. economy is susceptible to weather-related loss of revenue, meaning that an enormous number of companies have "off balance sheet" risks related to climate”

27. Threats to the Insurance Industry • Liquidity Risks • Investment Portfolio Risks

28. The Insurance Industry… • …is a major investor as well as a Third Party Administrator. • U.S. life insurance companies ALONE • Have assets in excess of US$ 2.8T • Account for 14% of the total assets/reserves of major pension funds and retirement programs • Have fiduciary responsibilities as a Third Party Administrator for approx. US$300B in assets under management • … and because the above is for U.S. life insurance companies only, that is only the tip of the iceberg

29. Exposure of the Insurance Industry • 4. Value of Assets • Unless, rigorously evaluated from a prospective threat • emanating from emission of greenhouse gases (GHG) • resulting in climate change, the value of the assets could • be impaired due to: • Direct but Hidden (Off-Balance Sheet) Carbon Liabilities affecting the market value of the assets’ securities • As a result of potential disclosure requirements/regulation of GHG, the carbon exposure of GHG-emitting companies could be as high as 35%, resulting in a financial risk of up to 10% of current market value (Source: Innovest, personal communication, 2003) • Extra cost associated with climate change: The water industry could face additional cost of $47B by 2050 and $1T by 2070 • (Source: J.T. Houghton, Climate Change 2001, Oxford University Press)

30. Exposure of the Insurance Industry • 4. Value of Assets – Part II • Indirect Effects of Climate Change, affecting the market value of the assets’ securities • As a result of more complex climate variations and its effects, increase of cost to doing business (COGS), resulting in increase of Assets’ liabilities. • Ex 1: Fishing Industry – As a result of current changes, increase COGS to new fishing areas/potential loss of fishing at all. • Ex 2: Agriculture/Food – As a result of temperature and precipitation changes, increasing unpredictability of crop yield, resulting in loss of market share • Ex 3: Basic high energy consuming Industry (Steel, Chemicals) – As a result of increased energy cost, emanating from the power companies, COGS will increase • => Increased COGS will result in Loss in Market Value of Assets

31. Exposure of the Insurance Industry • 5. Value of Insurance Industry’s Securities • The largest and ultimate threat to the Insurance industry and, thus in the value of its own securities is based on a timing issue. • In fact the timing issue relating to climate change, if not properly prepared for by the insurance industry at large, may become its death knell. • The ultimate threat is the compounding effect of a • CONVERGENCE • of liquidity (underwriting) exposure • AND • of investment portfolio exposure

32. Who is Aware of this? … Insurance Analysts As a result of larger exposures of the industry in 2001, insurance analyst at Lehman Brothers lowered earning estimates to account for “higher-than normal level of catastrophes” (FT.com, April 27, 2001) Can you imagine the reaction when Convergence starts to affect the Industry?

33. … and Increasingly the Insurance Industry “The insurance business is first in line to be affected by climate change. It is clear that global warming could bankrupt the industry …” Franklin Nutter, President Reinsurance Association of America

34. Plans for Research on Insurance Building on the initial results of the other work of the Center we will prepare a background paper in which we will develop a preliminary taxonomy of the climate-related risks and opportunities that confront the insurance industry, and suggest a preliminary set of decision analytic and other tools that could help the industry to better understand and think about these issues. In refining this paper we will be assisted by several industry experts including Richard (Rich) Soja and Peter Thompson in Chubb's global property underwriting department in Warren NJ, and Mike Ewbank an energy underwriting specialist in Chubb's Chicago IL office, Howard Kunruther at Wharton, and a number of Daniel Hoffmann's professional contacts.

35. First Expert Workshop We will then convene a small invitational workshop with participants drawn from leading insurance, reinsurance, capital investment and risk assessment firms. We will use the workshop to revise and refine the taxonomy and define an appropriate set of analytical needs. The result will form the basis of the research agenda for years two and three, during which, in collaboration with several experts from the industry, we will undertake a program of systematic analysis and tool development. With assistance from Paul Fischbeck, this may include work that makes use of real options.

36. Insurance…(Cont.) While much of this work may involve the application of existing analytical methods, given the high, and likely irreducible, levels of some of the relevant uncertainties, it seems probable that there will also be a need for the development of new tools and methods (such as those employed in our previous work on mixed levels of uncertainty and bounding analysis). However, the specifics should be driven by the needs identified by key actors in the industry.

37. Examples of Possible Analysis How adequate are current efforts to rate the climate-related vulnerabilities for investments by major industrial sector? What could be done to improve such measures? How soon, and to what extent, will it be possible to know the contribution that climate change makes to weather related losses? (How big would they have to be to be detectable? How does this compare with what we can hope to know?) What are specific insurance/investment risks in the arctic (shipping in NW passage; structures on permafrost); to NW timber holdings; to power company's asset values?

38. Examples …(Cont.) Losses from catastrophic weather events 1950-2000 • While many in the industry believe that recent escalating weather related losses are driven by climate change, many of the climate data don't support this conclusion. • We need to look at: • adequacy of risk assessment tools; • the way those assessments are being used; • risk portfolios. Atlantic hurricane frequency 1948-2001 Source: IPCC (above); NOAA (below).

39. Second Expert Workshop • At the end of year three, with preliminary results in hand, we will convene a second workshop at which we will expose our work to critical review by experts from across the industry, and seek advice on how it should be revised, redirected, and extended. • We will communicate our results and seek input and involvement from the expert and lay communities concerned with insurance/investment matters via: • • The two workshops described. • • Professional and popular publication. • • Briefings to relevant government and private-sector decision makers.

40. Agenda…(Cont.) * * * * * Part 2 * * * * * 11:30-11:45 Insurance managers - Daniel Hoffmann and Granger Morgan 11:45-12:00 Questions and Discussion 12:00-12:15 Forest, fisheries and ecosystem managers in the Pacific Northwest and Western Canada -Tim McDaniels 12:15-12:30 Questions and Discussion 12:30-13:00 Lunch 13:00-13:15 Arctic-region decision makers - Hadi Dowlatabadi 13:15-14:00 Questions and Discussion

41. Agenda -Part 2 11:25-11:30 Overview on Part 2 11:30-11:45 Insurance managers - Daniel Hoffmann and Granger Morgan 11:45-12:00 Questions and Discussion 12:00-12:15 Forest, fisheries and ecosystem managers in the Pacific Northwest and Western Canada -Tim McDaniels 12:15-12:30 Questions and Discussion 12:30-13:00 Lunch

42. Basic Issue How to manage ecosystem harvests (forestry, fisheries), and the dual objective of maintaining rich ecosystems and biodiversity, given irreducible uncertainties about climate, and a host of other uncertainties regarding ecological systems, resource productivity, values, markets, and many other important influences?

43. Context • Forestry: how we harvest the eco-productivity of non-agricultural land ecosystems • Fisheries: how we harvest aquatic ecosystems • Given the scale of harvest systems, these economic harvest flows potentially conflict with ecosystem and biodiversity preservation • a constant tradeoff for managers, affected publics, NGOs, concerns about eco-service flows • Forest land is more privately owned in WA and Oregon, nearly all public in BC

44. More context • These harvest systems are always subject to massive uncertainties: • scientific, social, economic and institutional • Management has been, in technical terms, as if uncertainties were minimal ; linked to short term political and economic objectives • Growing involvement of civil society advocating stronger preservation orientation, growing emphasis on new institutional structures to address conflicts

45. Recognizing Irreducible Uncertainties • Acknowledging IU about climate means we face issues of uncertainty about biodiversity preservation, and continuity of economic flows in these systems much more directly and likely with much greater potential loss over next century or so. • How to design, compare, build broader technical and societal support for management alternatives given this context?

46. Feedbacks and interrelated effects • Climate (specifically winter temperature) affects pine beetle infestations • Infestations kill trees over huge areas, change land cover, create massive fire hazards, but still allow harvest • Will change species mix, age classes • Accelerates and then reduces harvests • Creates massive ecosystem change in parks

47. Interrelated effects (cont.) • Glacial runoff will decline (to zero?) in coming decades • Effects on habitat at mid-high elevations will be fast and huge • Reduced Sp/Su flows in major rivers • Columbia River example: changes in storage requirements, fish flows, flood control, fish production could all be substantial • These are already enormously contentious, complex decision processes, subject to heavy constraints

48. Decision Analysis Challenges • Value tradeoffs: biodiversity objectives, economic objectives, flexibility, learning • Creating alternatives: characterizing complexity; robust, adaptive approaches; societal learning, across whole domains and regions • Decision processes that involve civil society groups, managers and technical specialists

49. Our basic approach • Model archetypes of management decisions in each domain • Influence diagrams, consequence tables, expert elicitations, some DA modeling • Define robust strategies that characterize different fundamental approaches and illustrate consequences • Foster a greater emphasis on learning and adaptation as a generic response to uncertainty • Engage managers, experts and civil society groups in comparison, discussion of strategies

50. Information Needed From Part 1 • Limits on confidence regarding what will be known about the rate of and extent of climate change over next 100 years for PNW and BC • Implications for extreme weather events, average temperature, rainfall • This will be input to mental model characterizations of experts regarding the implications of these uncertainties for particular kinds of resource management decisions