The insurance industry seems to be first out of the gate with new rules for disclosure of climate change risks. Insurance companies themselves, however, may be off to a slow start in complying with the new rules.
As Compliance Week previously reported, in March the National Association of Insurance Commissioners adopted a mandatory requirement that large insurance businesses must complete an eight-part “Insurer Climate Risk Disclosure Survey” every year. The initial reporting deadline is May 1, 2010.
The surveys must be submitted in the state where the insurance company is based, at which point the responses will be made publicly available by the NAIC. In this first year of compliance, the rule applies only to insurers with annual premiums of $500 million or more. Starting next year, the threshold drops to $300 million.
Mills
“There are some companies that have really been upfront on climate change for some time, and this is really an opportunity for them to advertise their strengths in this area,” says Howard Mills, director of the insurance industry Group at Deloitte & Touche. Other companies, he diplomatically says, “will be developing their positions as they go along.”
NAIC spokesmen say they hope the new rule will prod insurers to achieve “a heightened appreciation for the risks that climate change poses,” says Joel Ario, insurance commissioner for the state of Pennsylvania and chair of the NAIC climate change task force.
Exactly how insurers will go about measuring their climate change risks will depend on the types of policies they underwrite, Mills says. For example, the property and casualty industry might focus on hurricane modeling and the formulas they use to adjust related losses.
Risks faced by health and life insurers, on the other hand, are not as clear, Mills continues. Health insurers might investigate possible increases in the number of allergy sufferers due to climate change. In an extreme example faced by life insurers, he cites the catastrophic drought and heat wave that hit Europe in 2003, believed to have caused more than 35,000 deaths.
At this early stage, there are no wrong answers about the disclosure survey; the NAIC has not clarified what it defines as acceptable or unacceptable responses. “At this point they’re merely gathering information,” Mills says.
Nor is there any guidance on which person or business department should complete the questionnaire, Mills adds. As long as companies do participate, they shouldn’t get into any trouble with regulators, he says.
Exerting Pressure
Ario is upfront about what the NAIC hopes to achieve: By increasing insurers’ awareness of the risks they face, the group hopes insurers will then be more aggressive in reducing those risks themselves. “The insurers would be looking at ways to mitigate risk,” he says.
“There are some companies that have really been upfront on climate change for some time, and this is really an opportunity for them to advertise their strengths in this area.”
— Howard Mills,
Director, Chief Advisor,
Deloitte & Touche USA
Ario offers an example in which a Pennsylvania-based mutual insurance company recently sought to give discounts to customers who heat their homes via solar or geo-thermal sources. “That causes less potential for disruption in a crisis, and [the insurers] think, therefore, it’s worth it to offer discounts to people who heat their homes in those two ways,” he says.
Ario
In addition to disclosing how they are changing their risk-management styles related to climate change, insurers must also report on what steps they are taking to educate policyholders about the issue. They are already doing a lot in this area, Ario says. Reinsurers in particular—which can lose their shirts in disasters like a bad hurricane season—regularly host conferences to raise awareness of climate change, he says.
The NAIC gives other practical examples in a whitepaper on the rule, such as encouraging consumers to use environmentally friendly building materials or to drive low-emission vehicles (which could carry discounts on insurance premiums, the paper notes).
As part of its new mandate, the NAIC also wants to gauge whether and how insurance companies are changing their investment strategies in response to climate change. “Insurers are a very important source of capital in our economy, so the better they understand new risks and opportunities with investment, the better they can gear their investment to take advantage of the opportunities and to minimize the risk,” Ario says.
Still, not all voices in the insurance industry support the mandate. David Kodama, director of policy analysis for the Property Casualty Insurers Association of America, is quick to note that measuring the risks from climate change is not the same as measuring the benefits of using seatbelts or airbags. “This is a bit more abstract,” he says. The science is still very much evolving.”
CLIMATE QUERIES
Insurer Climate Risk Disclosure Survey Questions
1. Does the company have a plan to assess, reduce, or mitigate its emissions in
its operations or organizations? If yes, please summarize.
2. Does the company have a climate change policy with respect to risk
management and investment management? If yes, please summarize. If no,
how do you account for climate change in your risk management?
3. Describe your company’s process for identifying climate change-related
risks and assessing the degree that they could affect your business,
including financial implications.
4. Summarize the current or anticipated risks that climate change poses to
your company. Explain the ways that these risks could affect your business.
Include identification of the geographical areas affected by these risks.
5. Has the company considered the impact of climate change on its investment
portfolio? Has it altered its investment strategy in response to these
considerations? If so, please summarize steps you have taken.
6. Summarize steps the company has taken to encourage policyholders to
reduce the losses caused by climate change-influenced events.
7. Discuss steps, if any, the company has taken to engage key constituencies
on the topic of climate change.
8. Describe actions your company is taking to manage the risks climate
change poses to your business including, in general terms, the use of
computer modeling.
Source
NAIC Draft Disclosure Survey
(Dec. 12, 2008).
As a result, so too is the information insurers are trying to collect. Insurance companies of all kinds are still “evaluating, assessing and reviewing their underwriting and reviewing their practices,” Kodama says, making it difficult for them to seek substantive information.
The new risk disclosure survey is a compromise developed over a period of several months, and did result in some revisions from the original plan. For one, insurers are not required to provide any quantitative, commercially sensitive, proprietary, or forward-looking information. “The questions are more general than they were originally,” Ario says.
In addition, the NAIC removed another proposal that would have required top executives to attest to the information and file it as part of an insurer’s annual statement—which could expose the company and its executives to litigation. Kodama says that while his group is “happy” that the survey is no longer required as part of the annual statement, the scope of the mandate still goes too far.
Investor advocacy groups like CERES, which have praised the NAIC move, constantly push the Securities and Exchange Commission to require the same sorts of disclosure for all public companies—whereas the NAIC rule applies to all insurance companies public and private, Kodama stresses. “This emphasis on what the larger insurance companies can and cannot do, what investor groups like CERES want public companies to do, is one thing, but to impose it on an entire industry we feel is just inappropriate.”
Still, some say the NAIC mandate represents only the “first step” in a series of climate-related rules and regulations to come. “What the NAIC has done thus far is a lot less onerous than what many people expect to be coming from the federal government in the future,” Mills says. “Eventually the industry is going to be reporting on climate change, whether it’s to the state government, state regulars, or the federal government.”
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