Understanding and Managing Environmental Risks George Boire – Marsh Canada July 26, 2006 March 29, 2007

Marsh 2 Agenda Environmental Risk Management – What are the risks – How can they be managed – How environmental insurance can help Climate Change Risks – What are the risks – What insurers are doing – Emerging solutions

Marsh 3 Types of Environmental Risks Legacy or Historical Risks – Past activities on a site (s) have resulted in pollution conditions – Ongoing legal issues (e.g. fines, suits) related to past activities – Joint, several and retroactive liability regime – Typically an issue during transactions Operational Risks – Ongoing activities of company have inherent environmental risks – New Regulations can result in the need for expenditures/upgrades Contracting and E&O Risk – Contractors & consultants who perform work for others and/or on 3 rd party sites

Marsh 4 Types of Environmental Risks (cont.) Transactional/Contractual – Indemnities and liabilities associated with land ownership/transfer – regulatory (cleanup levels, liability releases, “re-openers”, etc.) – tort (injuries, damages) – financial (financial statement disclosures/reporting) – contractual (credit risks, corporate disclosures) Financial cost uncertainties associated with remediation – for identified pollution conditions – for “unknown” pollution conditions Reputational

Marsh 5 Managing Environmental Risk - Drivers Regulatory Company and Industry policies Management liability concerns – new corporate governance regime (e.g. SOX) Stakeholders – Clients – Shareholders – Lenders – NGOs – Neighbours Transactions (e.g. mergers, divestitures, plant closings)

Marsh 6 Environmental Risk Developing a Strategic Approach Be aware of constant changes – Regulations – Liability framework – Lack of case law in some areas – Shareholder expectations Involve wide range of expertise, including: – Corporate counsel – Risk managers – Health and safety experts – Accounting departments – Outside experts

Marsh 7 Environmental Insurance Tools Environmental Impairment Liability (commonly referred to as Pollution Legal Liability) Combined GL/EIL (e.g. AIG’s Eagle policy) Contractors Pollution Liability Cost Cap/Remediation Stop Loss Insured Fixed-Price Cleanups Lender Liability (aka “Secured Creditor”) Errors & Omissions (e.g. > 70% environmental) Note: Different insurers use different names for similar coverage

Marsh 8 What Are the Practical Business Consequences of Climate Change?

Marsh 9 What Are the Practical Business Consequences of Climate Risk?

Marsh 10 What are the Practical Business Consequences of Climate Risk?

Marsh 11 Name Your Climate Risk— Climate as a Fundamental Business Risk Storms, wildfires, windstorms, sea-level rise effect on facilities, power, transport, communications Heat waves and new disease vectors Lost business resources: forest resources, water supplies, biodiversity Reputational risks; shareholder concerns; litigation possibilities Compliance and competitive risks Storms, wildfires, windstorms, sea-level rise effect on facilities, power, transport, communications Heat waves and new disease vectors Lost business resources: forest resources, water supplies, biodiversity Reputational risks; shareholder concerns; litigation possibilities Compliance and competitive risks

Marsh 12 Drivers for Corporate Consideration of Climate Risk Regulatory Drivers: International Agreements Take Effect European obligations through EU ETS (January ’05) Kyoto Protocol entry into force (February ’05) – applies to companies doing business in EU, Japan, Canada, Russia Montreal negotiations confirm post-2012 focus and rules for flexible compliance mechanisms (December ’05) Increasing long-term focus in international negotiations (December ’06)

Marsh 13 Increasing Scientific Consensus: UN International Panel on Climate Change – assessment by 2500 leading climate scientists (2001) National Academy of Science confirm IPCC findings 11 Joint National Science Academies: “There is now strong evidence that significant global warming is occurring.... It is likely that most of the warming in recent decades can be attributed to human activities.” (Summer 2005) New IPCC review – “unequivocal” human impacts Increasing Focus on Climate Instability and feedbacks Stern Review on “costs of inaction” Drivers for Corporate Consideration of Climate Risk

Marsh 14 Climate Change and Carbon Market Risk Insurance Industry impacts – E.g. Increasing weather-related losses – E.g. legal action against companies, and their D&Os, for weather related losses Risk in the Carbon Market – Driven by legally binding commitments to cut GHG emissions – Risks associated with generation of emission reductions through project-based transactions (e.g. In Canada and/or CDM and JI) – Risks associated with actual trading of GHG emissions reduction credits

Marsh 15 Climate Change Preparing for Climate Risk Analysis and disclosure – Increased demand to disclose climate-related risks – Carbon Disclosure Project World Economic Forum reporting framework seeks disclosure of: – Greenhouse-gas Emissions – Physical risks to facilities and operations – Compliance costs – Strategic implications for growth – Management structures

Marsh 16 Climate Change Insurance Questions Re Insurers and other stakeholders (i.e. shareholders/investors) may ask insurers about potential impacts – On financial positions – On availability/cost of insurance Could lead to insurers asking companies about: – Carbon-management policies and practices – Directors and officers liability

Marsh 17 MMC Climate Change Initiatives Helping clients build resiliency to the negative economic impacts of climate change. Helping clients take advantage of the economic opportunities created by climate change.

Marsh 18 MMC Climate Risk Activities RISK SIDE  Risk Mapping and Assessment  Driving new insurance product development (eg. D&0)  Economic analysis for emissions trading regulatory design and corporate strategy OPPORTUNITY/ NEW MARKETS SIDE  Renewable energy operational risk insurance coverage (eg., wind, hydro, solar, biomass)  Optimizing carbon value – credit delivery guarantees RISK SIDE  Risk Mapping and Assessment  Driving new insurance product development (eg. D&0)  Economic analysis for emissions trading regulatory design and corporate strategy OPPORTUNITY/ NEW MARKETS SIDE  Renewable energy operational risk insurance coverage (eg., wind, hydro, solar, biomass)  Optimizing carbon value – credit delivery guarantees

Marsh 19 GHG Emission Reduction Project Risks Counterparty risk – credit-worthiness of project proponents Carbon regulatory risk – host country and international policies governing the approval and issuance of credits Political/country risk Technology performance risk Carbon performance risk Non-compliance risk Validation and verification risk

Marsh 20 Traditional and Emerging Insurance Solutions Traditional policies are available to provide financial protection against delays, business interruption, machinery breakdown, loss, damage or liability during the fabrication, installation, construction, and operational stages of projects Emerging hybrid packaged product – Credit Delivery Guarantee – Swiss Re, AIG and Munich Re are developing and perfecting products that provide an insurance based guarantee that contracted emission reduction credits will be delivered as agreed – Based on a mix of traditional insurance and alternative risk transfer products – Note: Limited track record of carbon market and lack of available underwriting data make CDG very much an “emerging” product – Stay Tuned………

Marsh 21 Thanks! George Boire SVP Environmental Marsh Canada Limited