Insuring Against Climate Change Risk: Emergent Disclosure Challenges
Most global companies currently engage in sustainability reporting, an exercise that is most often mandatory and is becoming increasingly quantitative. Simultaneously, there is an emerging question about the insurability of climate change risk. The intersection of climate change reporting and insurability gaps raises the question of whether the scope and sufficiency of existing property and casualty ("P&C") insurance coverage adequately addresses climate change risk, and the disclosure implications if it does not. 

Climate change reporting has become increasingly normalized in the United States and Europe through SEC and EU reporting requirements. The SEC's 2010 guidance on climate change disclosures in Regulation S-K, the "central repository for [the SEC's] non-financial disclosure requirements," clarified that existing SEC disclosure regulations require companies to consider the consequences of climate change and emphasized the need for "[a]ppropriate disclosure ... as to the material effects...." Likewise, the 2014 Directive of the European Parliament and Council ("Directive") requires large companies to disclose relevant and useful information on specified topics, including climate change, in annual reports as of this year (2018). Associated nonbinding guidance underscores that material risk and performance impacts to corporations underpin the Directive. 

The convergence of law and practice (notwithstanding reportedly lax SEC enforcement) has prompted companies to review material climate change-related effects on their business, for example, in the context of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factor" sections of periodic reports filed under the Securities Exchange Act of 1934. Whether the risks presented by the effects of climate change are insurable is therefore becoming an important consideration. 

In 2018, the Geneva Association, a leading insurance think tank, issued a report classifying climate change-related risk as a "core business risk." Global annual average weather-related losses have multiplied. Members of the P&C sector have questioned the sufficiency of reinsurer balance sheets, as the frequency and magnitude of global catastrophic events trend higher. They have warned of a growing "protection gap" and emphasized the balance sheet implications of litigation-related losses under existing insurance policies (California litigation involving utility fires that have produced billions in insured property losses, to name one). 

Because insurance decisions are business functions—the sort of decision likely to be elevated within companies to management—changes to P&C insurance coverage may, where material, rise to the level of known trends and uncertainties, putting a burden on management under SEC guidance to determine whether a material impact on the company is reasonably likely to occur. The SEC has pursued investigations, and shareholders have pursued litigation, alleging insurance shortfalls and concealment of insurance liabilities as contravening mandatory financial disclosures. Accordingly, climate change risk may be a very real consideration for corporations at senior management levels. 

For all of these reasons, now may be the time to consider climate change-related insurability or liability challenges, and their disclosure ramifications. 

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