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14 DECEMBER 2012 VOL 338 SCIENCE www.sciencemag.org
1424
POLICYFORUM
Every sector of the economy telegraphs
climate risks to its insurers. In turn,
climate change stands as a stress test
for insurance, the world’s largest industry,
with U.S. $4.6 trillion in revenues, 7% of
the global economy ( 1– 6). Insurers publicly
voiced concern about human-induced climate
change four decades ago ( 1). I describe indus-
try trends, activities, and promising avenues
for future effort, from a synthesis of industry
progress in managing climate change risk [see
supplementary materials (SM)].
Increasingly, multifaceted weather- and
climate-related insurance losses involve prop-
erty damage, business disruptions, health
impacts, and legal claims against polluters.
Worldwide, insured claims that were paid
for weather catastrophes average $50 billion/
year (about 40% of total direct insured and
uninsured costs); they have more than dou-
bled each decade since the 1980s, adjusted
for infl ation ( 7, 8). Insurers must also adjust
to risks emerging from society’s responses to
climate change, including how structures are
built and energy is produced.
Where there are risks, there are also oppor-
tunities. Responding to the push of sharehold-
ers and regulators and the pull of markets,
a trio of global initiatives [United Nations
Environment Programme Finance Initiative
(1995), ClimateWise (2007), and the Kyoto
Statement (2009)] has aggregated 129 insur-
ance fi rms from 29 countries (table S1). Mem-
ber commitments include supporting climate
research, developing climate-responsive prod-
ucts and services, raising awareness of climate
change, reducing in-house emissions, quanti-
fying and disclosing climate risks, incorpo-
rating climate change into investment deci-
sions, and engaging in public policy. Since the
mid-1990s ( 3), these and many other insur-
ers, reinsurers, intermediaries, brokers, indus-
try associations, catastrophe-loss modelers,
and regulators have engaged in this work (see
the fi gure) (fi g. S1, A to C), often in partner-
ship with universities, development agen-
cies, nongovernmental organizations, foun-
dations, think tanks, and governments ( 9).
These increasingly sophisticated efforts were
sustained through the economic malaise of the
past few years; one-fi fth of the activities iden-
tifi ed in the fi gure began after 2008.
Climate Science, Adaptation, and Mitigation
As past experience is an ineffective predic-
tor of future losses, many insurers are using
climate science to better quantify and diver-
sify their exposure, more accurately price
and communicate risk, and target adaptation
and loss-prevention efforts (table S2). Insur-
ers also analyze their extensive databases
of historical weather- and climate-related
losses, for both large- and small-scale events
( 7– 11). Insurers from North America, Asia,
and Europe have expanded their collabora-
tions through the three latest Intergovern-
mental Panel on Climate Change assess-
ments into projects such as harmonizing
economics-based insurer catastrophe mod-
els with climate models. Insurers’ models
extrapolate historical data rather than simu-
late the climate system, and they require out-
puts at fi ner scales and shorter time frames
than climate models.
Insurers can reactively adapt to rising
losses by tightening availability, prices, and
terms. Instead, some have sought to help vul-
nerable customers improve their resilience to
a changing climate. Strategies include fi nan-
cial and physical risk management, often
in collaboration with noninsurance enti-
ties (table S3). Insurers have championed a
broadened defi nition of sustainability that
includes resilience to disaster and a low car-
bon footprint. Beyond signaling that loss-
prone development is unsustainable, insur-
ers are supporting interventions with bene-
fi ts for both emissions reduction and adapta-
tion (table S4 and fi g. S2). Integrated actu-
arial and environmental science is enhancing
adaptive capacity to climate change in the
developing world, where poor populations
enjoy little access to insurance. Decades ago,
public and nonprofi t sectors offered microin-
surance (small premiums for modest cover-
age), with commercial insurers later adding
tens of millions of policies for life, health,
and property (table S5). Some employ para-
metric and index-based triggers for climate-
sensitive crops and livestock by using remote
sensing. Others promote adaptation, e.g.,
improved soil management.
Numerous insurers aim to curb green-
house-gas emissions from homes, businesses,
transport, industry, and agriculture (table S5).
They have brought to market at least 130
products and services for green buildings.
Many pay claims that fund rebuilding to a
higher level of energy effi ciency after losses.
Insurers have introduced at least 65 offerings
for renewable energy systems.
Some climate-change mitigation technol-
ogies align with lower-risk behavior. Nearly 3
million pay-as-you-drive policyholders enjoy
more accurate roadway accident premiums
using telematics to verify distances driven.
This price signal could reduce U.S. driving
by 8%, worth $50 to $60 billion/year, thanks
to reduced congestion and lower probability
of accidents, while reducing cross-subsidies
from those who drive less than average to
those who drive more ( 12). Risk-based pre-
mium credits are also offered for low-emis-
sions vehicles and green buildings (table S5).
Other products insure fi nancial shortfalls if
energy savings or low-emissions power gener-
ation projects underperform or manage risks
in carbon-trading transactions, ranging from
carbon release from wildfi res to infrastructure
appropriation by foreign governments. Insur-
ance strategies assuming these risks and min-
imizing losses align with the broader policy
objectives of verifi able, bankable, and persis-
tent emissions reductions.
Technology, Governance, and Policy
When risks are too great or undefi ned, insurers
withdraw coverage or increase prices. Climate
change mitigation and adaptation present dual
challenges in this regard: unintended risks
(e.g., nuclear power and weapons prolifera-
tion) and climate vulnerabilities (e.g., biofuels
and water needs) (tables S6 and S7). Insurers
abhor unquantifi ed and unpriced risks, as well
as market distortions, such as equally subsi-
dizing technologies that have divergent risk
profi les ( 13).
Emerging technologies lack the opera-
tional history desired for underwriting. The
most unwieldy of these are “climate-engineer-
ing” techniques, ranging from carbon capture
and storage (CCS) to artifi cially modifying
the radiative properties of the atmosphere.
Insurers have entered the CCS market in a cir-
cumscribed manner, excluding riskier strate-
gies or fi nancial arrangements, limiting cover-
age to short time frames, and ceding long-tail
risks to the public sector. Conversely, energy
effi ciency is arguably the lowest-risk mitiga-
tion strategy (followed by renewables), with
abundant benefits ( 14). Societal dithering
forces reliance on approaches that are riskier
and less amenable to insurance underwriting.
The Greening of Insurance
CLIMATE CHANGE
Evan Mills
Insurance industry trends show how
market-based mechanisms support
climate change mitigation and adaptation.
Lawrence Berkeley National Laboratory, Berkeley, CA
94720, USA. E-mail: emills@lbl.gov
Published by AAAS
on December 13, 2012www.sciencemag.orgDownloaded from
www.sciencemag.org SCIENCE VOL 338 14 DECEMBER 2012 1425
POLICYFORUM
Insurers are dually exposed
to internal governance risks
(e.g., underestimating cli-
mate-related losses) and those
taken by their customers (e.g.,
polluters). More than one in
four corporate directors antic-
ipate liability claims stem-
ming from climate change
( 15). Litigation often requires
insurers to furnish legal
defense and to pay damages.
Insurers have responded with
new liability products and by
excluding climate-change
claims where customer behav-
iors are unduly risky. Insur-
ance regulators and investors
are seeking climate-risk dis-
closure (table S8 and fi g. S3),
compelling insurers to for-
mally consider climate change in operational,
business, and investment practices. Liability
risks are rising as climate science becomes
more settled.
With $25 trillion in assets—equal to global
mutual funds or pension funds—insurers are
central players in world financial markets.
They have invested at least $23 billion in
emissions-reduction technologies, securities,
and fi nancing, plus $5 billion environmentally
focused funds (table S9 and fi g. S4).
Emissions from insurers’ energy-inten-
sive buildings, data centers, and business
travel are 12 megatons CO2/year with a
10-fold variation in carbon intensity (per
unit of revenue) across companies ( 9).
Scores of insurers have reduced their emis-
sions, with at least 26 carbon neutral (table
S10 and fi g S5).
Insurers have influenced public policy,
striking agreements on pricing risk and gov-
ernment’s role in risk management and shap-
ing land-use planning and energy policy in
many countries. They have engaged in cli-
mate policy forums since the mid-1990s ( 2,
3), including participation in the international
climate negotiation process. Lloyds of Lon-
don is one of the more prominent; they view
climate change as the industry’s number-one
issue ( 5). Insurers are uneasy with mercurial
policies on natural hazards and energy. Shifts
in public incentives or indemnity practices
can adversely influence risk-taking (moral
hazard), heightening insurers’ exposures.
From Risk to Opportunity
Climate-focused efforts have benefi tted mil-
lions of insurance customers and have mobi-
lized billions of investment dollars, although
public and policy-maker engagement in these
efforts remains low. Little climate-related
innovation has occurred in certain market seg-
ments, e.g., life and health (microinsurance
being an exception), maritime, aviation, and
heavy industries. Greater scale is needed if the
insurance industry is to realize its potential.
Independent auditors found an 88% com-
pliance rate among signatories of the Climate-
Wise principles (table S1) ( 16). Yet, many
companies remain on the sidelines or offer
only token gestures, perhaps because of insuf-
fi cient demand, ideological discomfort with
policy responses, inadequate science literacy,
or inertia to institutional change. Insurers face
external barriers as well. Some regulators and
consumer groups resist risk-based pricing and
insurer innovations ( 17).
It is argued by some that private insurers
have not effectively advanced climate change
mitigation and adaptation and that the risks
may even become uninsurable ( 18). Manda-
tory climate-risk disclosure identifi ed a broad
consensus on the relevance of climate change
among U.S. insurers, but only one in eight
companies have a formal strategy.
Public insurers could be similarly criti-
cized ( 19). As insurer of last resort (e.g., $1.3
trillion coverage for fl ood and $115 billion for
crops in the United States), they could learn
from their private counterparts. Governments
could boost demand for market-based “green
insurance” by using it in their own operations.
Promising scientifi c frontiers include loss
modeling under future climates, preferably
on a public-domain platform, to yield better
economic assessments and policy pathways.
Lacking are comparative risk-assessments of
climate-change response options to inform
research and development and policy needs
and to determine their insurability.
The insurance sector is a global clearing-
house for climate risks that affect every under-
writing area and investment. Where insurers
recoil in the face of climate change, consum-
ers will encounter acute affordability issues
accompanied by huge holes in this societal
safety net. But insurers’ efforts to date demon-
strate that market-based mechanisms can sup-
port greenhouse-gas emission reductions and
adaptation to otherwise unavoidable impacts.
References and Notes
1. Munich Reinsurance Co., Flood Inundation (Munich Rein-
surance Co., Munich, 1973).
2. J. Leggett, Eur. Environ. 3, 3 (1993).
3. E. Mills, J. Soc. Insur. Res. 1996, 15 (1996).
4. E. Mills, Science 309, 1040 (2005).
5. Lloyd’s, Climate Change: Adapt or Bust (360 Risk Project,
Lloyd’s, London, 2006).
6. Swiss Reinsurance Co., World Insurance in 2011 (Sigma 2,
Swiss Re, Zurich, 2012).
7. W. Kron et al. Nat. Hazards Earth Syst. Sci. 12, 535 (2012).
8. NatCatSERVICE, http://www.munichre.com.
9. E. Mills, Geneva Papers Risk Insur. Iss. 34, 323 (2009).
10. S. Schmidt, C. Kemfert, P. Höppe, Assess. 29, 359 (2009).
11. Swiss Reinsurance Co., A hidden risk of climate change:
More property damage from soil subsidence in Europe
(Swiss Re, Zurich, 2011).
12. J. E. Bordoff, P. J. Noel, Pay-as-You-Drive Auto Insurance
(Brookings Institution, Washington, DC, 2008).
13. L. Patton, Eur. Bus. Rev. 2008, 3005 (2008).
14. E. Mills, Bull. At. Sci. 68, 67 (2012).
15. Lloyd’s, Directors in the Dock (Lloyd’s, London, 2008).
16. ClimateWise, The ClimateWise Principles: The Fourth Inde-
pendent Review (PricewaterhouseCoopers, London, and
University of Cambridge, London, 2011).
17. S. M. Tran, J. Sci. Technol. Law 14, 73 (2008).
18. L. R. Phelan et al., Environ. Policy Gov. 21, 112 (2011).
19. E. Michel-Kerjan, H. Kunreuther, Science 333, 408 (2011).
Acknowledgments: Research supporting this article was spon-
sored by the U.S. Department of Energy, U.S. Environmental
Protection Agency, U.S. Agency for International Development,
and Ceres.
Supplementary Materials
www.sciencemag.org/cgi/content/full/338/6113/1424/DC1
10.1126/science.1229351
0 10 20 30 40 50 60 70 80 90 100
Engagement in given activity, by country (%)
Count
Switzerland
Commitment to comprehensive response
Engaging in climate science and communications
Promoting loss prevention and adaptation
Crafting innovative insurance products
Providing technical services
Offering carbon risk-management or offsets
Financing customer projects
Investing in climate change mitigation
Leading by example: in-house carbon management
Disclosing climate risks
Aligning terms and conditions with risk-reducing behavior
Building awareness and participating in public policy
162
55
88
302
34
55
19
44
155
121
56
57
US UK Japan France Germany Other countries
Global insurance industry engagement in climate change adaptation and mitigation activities. As of late 2012, a total
of 1148 initiatives have emerged (largely in the past decade) from 378 entities in 51 countries, representing $2 trillion (44%)
of industry revenues. Count represents number of activities in each category. Details in SM.
Published by AAAS
on December 13, 2012www.sciencemag.orgDownloaded from
www.sciencemag.org/cgi/content/full/338/6113/1424/DC1
Supplementary Materials for
The Greening of Insurance
Evan Mills*
*To whom correspondence should be addressed. E-mail: emills@lbl.gov
Published 14 December 2012, Science 338, 1424 (2012)
DOI: 10.1126/science.1229351
This PDF file includes
Materials and Methods
Figs. S1 to S5
Tables S1 to S10
Full References
2
Materials and Methods
This analysis groups insurer climate-change activities into 12 broad categories (Fig.
1 and fig. S1, A to C). Figure S2 illustrates climate change adaptation efforts with
mitigation synergisms. Time-trend analysis is possible in some cases, as illustrated here
for carbon risk disclosure (fig. S3), insurer investments in climate change mitigation (fig.
S4), and pursuit of carbon neutrality for internal operations (buildings, business travel,
business operations, etc.) (fig. S5).
The tabulated examples (tables S1 to 10) reflect the breadth of insurer-initiated
approaches to improving disaster resilience and adaptation to climate change, while
further reducing the risks through mitigation strategies such as buildings’ energy
efficiency, low-emissions transportation, carbon emissions trading, and investments in
renewable energy projects. The magnitude of progress or market uptake is quantified
where information is available.
The information is compiled from a variety of primary sources: company Web sites,
corporate social responsibility reports, filings with the Carbon Disclosure Project (CDP),
insurance trade press, academic journals, technical reports, and direct communications
with insurers. Initiatives that aggregate information from member insurers [e.g.,
ClimateWise (16) and the United Nations Environment Programme (UNEP) Finance
Initiative] are also reviewed. Most available information is self-reported by insurers, and
in some cases independently verified (e.g., PricewaterhouseCoopers audits the annual
ClimateWise reports). Many items are readily verifiable, e.g., whether or not a company
responded to the CDP, is a signatory to a particular agreement, offers a particular green
insurance product, or has conducted and published specific research.
Various decision rules are applied before including candidate activities. Multiple
activities of a similar nature are counted only once (e.g., responding to a given annual call
for climate-risk disclosure, multiple efforts at reducing in-house greenhouse gas
emissions, multiple years of corporate social responsibility reporting, or more than one
subsidiary through which products or services are offered). Routine activities, such as
rationalizing pricing, shifting to paperless customer correspondence, holding workshops,
encouraging generic disaster preparedness, offering weather derivatives, or providing
conventional insurance of renewable energy systems (which many insurers have done for
decades), are not tabulated here as they are mainstream or intangible activities, or are not
primarily motivated by responding to climate change risks. Similarly, “passive” activities
such as memberships in organizations (e.g., the U.S. Green Buildings Council) are not
logged. Also excluded are activities (i) with a tenuous “green” value, e.g., insurers
promoting global positioning systems (GPSs) in autos but not accompanying it with –
premiums differentiated by distance driven (12), or (ii) where companies appear to be
bundling or repackaging conventional offerings, rather than truly innovating to fill
coverage gaps or carefully tailoring coverage to the unique features of “green”
technologies. Mandatory and prospective activities are not included.
These tallies are neither a measure of the relative quality nor the impact of the
activities, or of geographical reach. No weighting is applied. Although sampling bias
cannot be ruled out, every effort has been made to gather information from around the
world and from all sizes and types of insurance entities.
3
Fig. S1. As of October 2012, 378 insurance entities based in 51 countries had collectively
initiated 1,148 activities related to managing the risks of human-induced climate change
(9, plus updates). These activities have emerged largely in the past decade, with the
earliest dating to 1973 (1). Most major insurers and all major reinsurers and insurance
brokers have engaged to varying degrees, collectively representing $2 trillion (44%) of
industry revenues and 2.5 million employees. See key to activity types (A), next page.
(B) Countries conducting more than 5% of all activities are shaded individually. (C)
These activities are conducted by several types of entities, including intermediaries and
modelers that provide services to insurance companies.
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Structure'of'Insurer'Climate2change'Risk'Management'Activities'
4
Key to Fig. S1A.
Commitment to a comprehensive response: defined by participation in the ClimateWise group, UNEP
Finance Initiative, and/or Kyoto Statement of the Geneva Association. The terms of the associated
agreements are characterized by a commitment to addressing climate change that stretches across the
insurance enterprise, from products to investment to corporate governance. Participating companies are
listed in table S1. Participation signals a systematic (rather than piecemeal) approach, coupled with a
willingness to make that commitment public. In the case of ClimateWise, participants also agree to
annual reporting and independent audits of compliance.
Engaging in climate science and communications: defined by the funding or conduct of research on
climate change, and the presentation of climate science to stakeholders. Includes analyses of historical
data, forward-looking modeling, field-based research, and integrated assessments.
Promoting loss prevention & adaptation: defined by customer-focused activities or inducements to
advance the state of the art in weather- and climate-related disaster resilience generally, and climate
change adaptation in particular.
Aligning terms & conditions with risk-reducing behavior: defined by activities that simultaneously
reduce the risk of insured losses while contributing to climate change mitigation. A prominent example
is mileage-based insurance, which provides discounted premiums for reduced driving to lower the
probability of roadway accidents as well as emissions of greenhouse gases from vehicles.
Crafting innovative insurance products: defined by insurance contracts and provisions that remove
barriers to adoption of climate change mitigation practices (e.g., energy efficiency or renewable energy)
on the part of insurance customers, often proactively incentivizing better practices (e.g. by
differentiating premiums for hybrid vehicles or green buildings). Includes new products that fill
coverage gaps, e.g., microinsurance for weather-related hazards in developing countries.
Providing technical services: defined by engineering or financial services offered to customers to identify
and manage risks associated with climate change responses or otherwise assist in the implementation of
improved practices. Examples include energy audits, carbon-footprint accounting, and adaptation cost-
benefit assessments.
Offering carbon risk-management or offsets: defined by products that assist customers in managing risks
associated with carbon-reducing projects, including risks of associated financial transactions such as
carbon trading. In some cases, insurers couple emission offsets with their core products, e.g., vehicle
emissions offsets with auto insurance.
Financing customer projects: defined by insurers offering debt financing to customers or other entities for
climate change mitigation or adaptation projects.
Investing in climate change mitigation: defined by direct investment in climate change mitigation
projects, e.g., an equity stake in a wind power development or a company manufacturing an energy-
efficient technology. Also includes investments in funds by using selective environmental screening
processes that incorporate climate-change factors. In some cases, insurers are disinvesting in companies
with risky environmental practices.
Building awareness and participating in public policy: defined by specific activities to improve
understanding of climate change among policy-makers. Examples include participation in climate-
change negotiations, engagement in efforts to reform land-use planning to proactively anticipate sea-
level rise, or promotion of building codes that improve disaster resilience or energy efficiency.
Leading by example: In-house carbon management: defined by specific activities to reduce the carbon
footprint of insurers’ internal operations (buildings, business travel, computing, and supply chains). For
inclusion, a threshold level of activity is required, beyond highly routine activities such as “using
energy-efficient light bulbs.”
Disclosing climate risks: defined by responding to climate-risk disclosure requests from the CDP, F&C, or
the U.S. Securities and Exchange Commission (SEC).
5
Fig S2.
Tokio Marine & Nichido, Japan’s largest insurer, embarked on a mangrove reforestation
project in 1999. The project scale is approaching its target of just over 8,200 ha (20,265
acres) across seven countries. The company cites carbon sequestration (contributing to its
own carbon neutrality since 2008) and enhanced resilience to storm damages as joint
mitigation-adaptation benefits of the project (table S4, row 1).
Mangrove Reforestation by Tokio Marine & Nichido Insurance Company
6
Fig. S3.
Institutional investors participating in the Carbon Disclosure Project (CDP) seek to
manage financial risks when climate change exposures among the companies in which
they invest are insufficiently disclosed or when lack of care threatens financial or
reputational losses to the company. Claims can trigger Directors and Officers insurance
policies or other classes of liability insurance (15). As of 2011, the CDP represented 655
institutional investor members with $78 trillion in assets. A total of 93 insurers responded
to the CDP over the past decade. Response rates for U.S. firms once lagged far behind
those from other countries, but have recently surpassed non-U.S. response rates at around
70%. See table S8 for company-specific details. Separate from the CDP, insurance
regulators crafted a national disclosure process tailored for U.S. companies, which
subsequently became mandatory in California, New York, Pennsylvania, and
Washington.
7
Fig. S4.
Insurer funding of climate change mitigation includes large direct investments in
emissions-reduction technologies, businesses, and securities as well as financing for
specific projects. The figure aggregates 32 investments by 22 companies for which data
are publicly available (inflation-corrected to 2011 values). Twenty-two additional
investments are known, but the amounts are not published. See table S9 for company-by-
company details. Amounts reflect initial investments and do not include change in value
over time. Although tabulated in the database, this figure does not include $5 billion
invested in diversified “socially-responsible” funds that have an broad environmental
component rather than a climate change specialization, disinvestment in companies that
exacerbate the climate change problem, or investment in reducing insurers’ own carbon
footprint.
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8
Fig. S5.
Insurers engaged in climate-change activities tend to also focus on reducing or offsetting
their own emissions as a form of leadership-by-example. As shown in the figure, 26
companies have pursued this to the point of carbon neutrality. Details and timelines are
listed in table S10, along with indications (where available) of how the reductions were
attained, particularly the degree to which this was accomplished with in-house energy
management versus the acquisition of carbon offsets in the marketplace.
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9
Table S1. Public commitment to comprehensive, enterprise-wide response to climate risk
Table S2. Insurer climate change science and loss data analysis activities
Table S3. Insurer climate change adaptation projects
Table S4. Insurer recognition of emissions-reduction and loss-prevention cobenefits
Table S5. Illustrative climate change–related insurance products, services, and policy
Table S6. Climate engineering: strategies, effectiveness, cost, risks, cobenefits
Table S7. Climate engineering: comparative hazards and vulnerabilities
Table S8. Insurer responses to the CDP surveys: 2003–2011
Table S9. Selected insurer investments in climate change mitigation (cumulative)
Table S10. Carbon-neutral insurers
If links are not active in PDF, all are reachable here:
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10
References and Notes
1. Munich Reinsurance Co, Flood Inundation (Munich Reinsurance Co., Munich, 1973).
2. J. Leggett, Eur. Environ. 3, 3 (1993).
3. E. Mills, J. Soc. Insur. Res. 1996, 15 (Fall 1996).
4. E. Mills, Science 309, 1040 (2005).
5. Lloyd’s, Climate Change: Adapt or Bust (360 Risk Project, Lloyd’s, London, 2006).
6. Swiss Reinsurance Co, World Insurance in 2011 (Sigma 2, Swiss Re, Zurich, 2012).
7. W. Kron, M. Steuer, P. Löw, A. Wirtz, Nat. Hazards Earth Sys. Sci. 12, 535 (2012).
8. NatCatSERVICE, http://www.munichre.com.
9. E. Mills, Geneva Papers Risk Insur. Iss. 34, 323 (2009).
10. S. Schmidt, C. Kemfert, P. Höppe, Environ. Impact. Assess. 29, 359 (2009).
11. Swiss Reinsurance Co, A hidden risk of climate change: More property damage from soil subsidence in
Europe (Swiss Re, Zurich, 2011).
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