Environment: key issues and products

1) Impacts of climate change for insurance

The development and increase in risks caused by climatic change and, more specifically, the phenomenon of global warming, represent a major challenge for all human activities and particularly insurance.

Global warming, notably modeled on forecasts by the Intergovernmental Panel on Climate Change (IPCC), is now proven beyond doubt, although experts disagree on its scale, causes and pace. Greenhouse gas emissions, and more specifically CO2 (fossil fuels, deforestation, ground use changes), are the principal human cause. Natural long-term changes in the climate are being accelerated by these emissions linked to human activities. These climate changes are notably translating into:

• A general (but unequal) increase in temperatures around the world, with more frequent heatwaves
• Rising sea levels due to the thermal expansion of the oceans and the melting of the ice caps
• Changes in rainfall cycles, with increased flooding in certain regions, as well as potentially greater droughts elsewhere
• An increase in violent cyclonic events

These phenomena can already be seen and could worsen, to varying degrees, across the planet. This is what the IPCC is forecasting, although it is still difficult to estimate the local impact of climate change due to the high number of local geographical factors (sea currents, relief, clouds) to be taken into account, as well as the consequences on extreme events (heatwaves, droughts and flooding, cyclones and heavy rain) that concern the insurance industry in particular.

In addition to the immediate destruction caused primarily by flooding (and to a lesser extent drought) climate change will have significant consequences for most human activities and therefore potentially for insurance, which protects them (notably agriculture, timber production, health and water-related activities).

In this way, the insurance sector faces a number of major challenges over the years to come in light of an increase in property and casualty claims, the emergence of new liability claims and growing uncertainties over the size of maximum possible losses, which have become harder to assess and predict based on past events. Furthermore, certain key economic sectors, which are clients for the insurance sector, are set to undergo radical changes, owing notably to constraints relating to greenhouse gas emissions laid down in the Kyoto Protocol, which came into force on February 16, 2005.

2) The climate risk: AXA's response

An AXA task force (called Climate Core Group) dedicated to the subject of Climate Change has been created. It is led by a Group Senior Vice President in charge of Emerging Risks and Sustainable Development within Group Risk Management. This task force interacts with AXA's Catastrophe Actuaries and Reinsurance Climate Team and also with worldwide industry practice leaders (CRO Forum Emerging Risks Initiative, Geneva Association) and focuses its research on the leading climate change assumptions. It aims at anticipating the consequences of the climate change, promoting preventive actions, and protecting AXA and its stakeholders from the potential consequences of extreme weather events.

As far as the Group's clients are concerned, AXA is working to accurately assess the risks of exposure to major disasters due to the growing impact of climate change on client activities, looking to maintain a flexible and resistant risk transfer mechanism to support human activities. Nevertheless, by adapting their pricing and by auditing risks, insurers can actively help their clients anticipate the impacts of climate change and reduce, by adapting their behavior, their contribution to this phenomenon.

In this way, by working to develop these solutions and being actively involved in global initiatives such as the Carbon Disclosure Project, the UNEP FI, the CFO Forum, the European insurance federation (CEA) and national industry federations, the AXA Group aims, with other key market players, to help ensure that the risks resulting from global warming are taken into consideration and anticipated more effectively.

3) Specific products and services

Against this backdrop, the Group and more specifically its Property and Casualty Division (business and retail markets) is offering a range of different products and services based on a "responsible" underwriting policy, as well as risk prevention services tailored to this new situation. Indeed, the Group and its companies are actively working on the following strategies or projects:

• Underwriting and the prevention of major industrial risks
• Environmental risk prevention for small and medium-sized businesses
• Insuring renewable energy production facilities
• Motor insurance with an environmental focus
• Offsetting CO2 emissions

3.1.1) Responsible underwriting policy: accompanying the client

• Auditing and large risk prevention: alongside its role as an insurer, AXA CS is able to offer risk analysis and prevention services. This expertise makes it possible to reduce the total loss experience through stronger prevention, set out in specifications that clients undertake to comply with. In 2007, 1,875 site visits were carried out. The AXA CS underwriting manual incorporates its clients' sustainable development policies, with audits also taking in security aspects, safety or human rights in the workplace. As the client implements preventative measures, AXA CS will increase its cover and/or reduce its premiums accordingly.
• Specialized markets - marine: at AXA CS, it is company policy to deny insurance cover for any vessels that are unable to prove that they are fully compliant with the regulations and standards in force or whose conditions for implementation are in doubt. The underwriting of any fleet with oil tankers over 15 years old - all of which are single-hull vessels - is subject to a full preliminary review by a committee of technical experts. At this stage, systematically excluding single-hull vessels from coverage does not appear to be an option because fleets are generally made up of both single and double-hull boats, and everything depends on the actual quality of these vessels.

3.1.2) Environmental value added products and services for "industrial risks"

• Ground pollution: AXA CS is offering the "XS Depoll" solution in order to encourage businesses to clean up any pollution at their sites, either with a view to setting up infrastructures or further to the direct or indirect impacts of their activities. This insurance policy guarantees the reimbursement of any excess costs linked to certain random aspects such as the complexity of the ground or the limited results that can be achieved with certain depollution techniques.
• Protection against the risk of environmental damage: AXA CS has developed the ECOSPHERE range, which combines civil liability cover, protecting third parties both on and off site, environmental liability cover, and a "damages" section to protect the policyholder's assets. More specifically, this is based on limiting any worsening of environmental damage and on stopping damage from spreading by providing flexible and rapid emergency compensation measures.

Built up around Sustainable Development, this represents a win-win partnership: the prevention actions recommended by AXA enable its clients to carry out their activities while limiting their environmental, social and economic risks. In return, these activities offer a better risk-return ratio for the insurer.

3.2.2) Prevention and insurance for environmental protection costs: G.R.E.EN

AXA France Entreprises is offering a range of innovative cover for environmental damage insurance (civil liability, loss of business, legal protection and support in the event of an environmental crisis). More specifically, the G.R.E.EN policy (Garanties des Risques Environnement de l'Entreprise - Environmental risk coverage for enterprises) includes one area of coverage concerning environmental protection costs for businesses. This notably aims to cover any costs incurred for protecting the environment, such as prevention, repairing damages or decontamination costs.

This makes it possible to prevent the "orphan site" phenomenon, which can occur when an incident has bankrupted the business that owns the site, and it is left as wasteland, posing major long-term pollution problems in some cases such as when toxic products are stored without any surveillance.

3.3) Insuring renewable energy production facilities

Companies bringing new environmental technologies to market often face difficulties securing financing, due to the extensive number of risks involved and/or the extended payback periods. Insurers can facilitate the development of new, sustainable technologies by correctly pricing premiums to reassure investors. Insuring renewable energy production infrastructures, which indirectly contribute to limiting the causes of climate change, is consistent with this approach.

3.3.1) Wind farms insurance

This category of risk benefits from:

• Tax incentives that are driving growth in this sector (15%/year);
• A reliable and now effectively managed technology;
• The existence of ongoing maintenance systems;
• A favorable loss experience (few cases of damages);
• And the possibility for transferring risk over to reinsurers.

Furthermore, AXA has recognized expertise within the Group on both prevention and underwriting, adapted for construction, machine breakage and loss of business.

Nevertheless, to insure wind farms, it is vital to be able to effectively manage the cumulative exposures for wind farms and to factor in the consequences of climate change linked to the increase in wind speeds, which is expected to affect older facilities, the mandatory fitting of lightning protection systems, and greater protection during the setup and test phases, which are the riskiest. In terms of reinsurance, exclusions still apply.

In Germany, 17,574 wind farms were in operation at the end of 2005, producing a combined total of 18,428 megawatts and representing around 5% of all the power consumed in this country. This sector is booming, employing some 60,000 people and generating revenues of close to 4 billion euros a year.

AXA Konzern, the AXA Group's subsidiary in Germany, has accompanied this development in terms of insurance through its comprehensive lines covering the setup phase, machine breakage, loss of business and civil liability, while building up essential expertise on underwriting. Indeed, its underwriting guidelines are being regularly adapted in light of claims trends and technical developments for power plants, ensuring that the annual premium portfolio of 9.5 million euros from wind farm insurance is profitable. In this way, AXA represents one of the leading insurers for wind power facilities (and other renewable energies) in Germany.

AXA aims to play a major role in the development of these markets around the world, including offshore wind farms.

3.4.2) Insuring "clean" vehicles

Through discounted insurance policies, motor insurers can actively encourage drivers to move towards vehicles that consume less fuel, such as "hybrids" or LPGs (liquefied petroleum gas).

On top of an immediate and significant reduction in the level of greenhouse gas emissions per policyholder, this type of policy represents an interesting commercial move for the insurer. Indeed, certain statistical studies show that owners of such vehicles not only have an "environmental" profile, but also drive more responsibly. This reduction in claims, following research and risk management quantification, enable the Group to continue offering such targeted motor policies. Moreover, the market for hybrid or low-consumption vehicles is booming in certain regions around the world.

By the end of 2006, the following Group companies had developed such solutions in light of this situation:

• AXA France: group fleet insurance on Toyota Aygo models, ranked 2^nd in the gasoline category for CO2 emissions.
• AXA Canada: preferential rates for the hybrid Toyota Prius.
• AXA Thailand: since urban pollution represents a key issue in Bangkok, AXA Thailand is offering specific insurance policies for LPG vehicles.
• AXA Ireland: discount "multi-fuel" rates for biofuel vehicles.