The Governor of the Bank of England, Mark Carney, recently gave a speech1 at Lloyd’s of London covering the risks posed to financial stability by climate change. The speech focused on the current exposures, and lessons that can be learnt from how the insurance industry assesses and responds to risks.

The speech acknowledged the growing consensus that climate change is unequivocal, and considered how the increase in weather-related events has affected the frequency and size of insurance claims. Physical, third party and transitional risks were identified, with a particular focus on transition risks - the financial risks which could result from the process of adjustment towards a lower-carbon economy. Carney highlighted how a carbon budget imposed on the natural resource and extraction sectors had the potential to render existing energy reserves “stranded” and unusable without expensive carbon capture technology. The exposure of UK investors, including insurance companies, to these shifts is potentially huge.

The impact of climate change on physical risks faced by insurers has affected the market. Notwithstanding insurers’ capacity to model and adapt, their response can pose acute public policy problems, such as the unavailability of cover in some flood-prone parts of the Caribbean, resulting in collapse of property values and abandonment of entire neighbourhoods. Carney cited Flood Re, the publicly- backed UK insurer of flood risks as an example of how such issues have been addressed by government.

But what about third party liability risks mentioned? These arise where losses are suffered as a result of the effects of climate change and compensation is sought from others held responsible for damaging the environment, or not complying with regulations. Is there a real risk that liability policies such as public, D&O or professional liability insurance will be impacted?

In our view, it seems cases on climate change litigation have been most noticeable in the US, but as the speech accepts, these have been unsuccessful so far. It seems the US has been the focus for such private class actions, due to the lack of regulation in comparison to other jurisdictions. Claims have been based on nuisance, negligence, product liability, breach of fiduciary duty and even human rights (breach of Article 8(1), right to respect private and family life).

However, we would expect there are a host of difficulties with succeeding with such claims in English Courts which include for example, determining the appropriate court, lack of evidence and establishing a causal link. Due to these difficulties, and without US style rules for class actions (recent reform of group litigation in England is confined to competition law), it seems insurers and policyholders need not worry about a real impact from these liability risks, yet.