Next ShareOwner Proposal Hot Topic: Climate Change Risk Assessments at Insurance Companies

Only 11 of 88 major insurers surveyed recently have formal policies in place to deal with growing climate change risks, according to a major new report issued today by Ceres.  The report was to have been delivered at a conference of the National Association of Insurance Commissioners (NAIC) that was cancelled due to Hurricane Irene.

The new report, Climate Risk Disclosure by Insurers: Evaluating Insurer Responses to the NAIC Climate Disclosure Survey, analyzes what 88 leading U.S. insurers are saying about climate change in public filings with state insurance commissioners – and the extent to which they’re factoring it into their business models. The report is the first attempt to analyze responses by insurers to a mandatory 2010 survey. The disclosures were filed with insurance regulators in six states: New York, New Jersey, California, Oregon, Pennsylvania and Washington. According to Ceres President Mindy Lubber.

The findings are both illuminating and disillusioning. While the survey revealed a broad consensus among insurers that climate change will have an effect on extreme weather events, few insurers were able to articulate a coherent plan to manage the risks and opportunities associated with climate change.

“I am pleased that California played a key role in the development and implementation of the Climate Risk Disclosure Survey,” said California Insurance Commissioner Dave Jones, who co-chairs the NAIC’s climate change task force.

Climate change is an obvious physical threat to us all, but increasingly it also poses a serious financial threat to the insurance industry, with the very real potential of negatively impacting consumers’ ability to purchase affordable insurance. This survey is a solid first step toward evaluating how prepared the insurance industry is to confront the impacts of climate change.

Jack Ehnes, chief executive officer of CalSTRS and a former Colorado Insurance Commissioner, said the lack of disclosure the report documents

means that investors – and regulators – have been flying blind, without a solid sense for whether the industry is taking the steps necessary to understand and respond to this profound risk. Our fear is that climate change poses a fundamental threat to the long-term availability and affordability of insurance. This has tremendous implications for the economy and that is why we, as investors, are focusing so acutely on this sector.

Some of the largest players in the industry – particularly in property and reinsurance – are in fact investing considerable resources in understanding the risks and developing strategies that may drive more climate-resilient underwriting practices and capital decisions. But the survey revealed that the smaller players that represent a large percentage of the industry are doing little. Of particular concern to regulators, the most vulnerable companies tend to be within the market segments that are closest to consumers.

As the report points out, climate change is altering the industry’s global business landscape and threatens to undercut the risk models on which it depends. Impacts that threaten the industry’s financial underpinnings include rising losses in the US and globally from a wide range of perils – including wildfires, floods, prolonged droughts and hurricanes; growing financial exposure in the health and life insurance segments from longer, more frequent heat waves and expansion of disease vectors like mosquitoes and ticks; and ever-increasing liability claims, including more than 120 lawsuits in 2010 alone, most of them in the US.

While the survey reveals that most insurers are focused on the coastal impacts of climate change, this year’s events have revealed that climate risks extend far inland. According to the National Weather Service, before a single hurricane made landfall this year the United States had already tied its yearly record for billion-dollar weather disasters and the cumulative tab from floods, tornadoes and heat waves has eclipsed $35 billion.

These trends have implications far beyond the industry’s financial viability. If insurers don’t respond in a timely way to the business impacts of climate change, the report warns, insurance availability and pricing could be affected – and with it the ability of consumers, businesses and government to productively employ capital. Beyond that, the performance of the industry’s vast $23 trillion global investment portfolio could be compromised as well, which in turn re-amplifies the macro-economic threat. Said Sharlene Leurig, a senior manager of Ceres’ insurance program who authored the report,

These developments clearly point to a business model that must change. The report paints a picture of an industry that, outside of a handful of the largest insurers, is taking only marginal steps to address an issue that poses clear threats to the industry’s financial health, as well as to the availability and affordability of insurance for consumers.

Key findings:

  • There is broad consensus among insurers that climate change will have an effect on extreme weather events.
  • Despite widespread recognition of the effects climate change will likely have on extreme events, few insurers were able to articulate a coherent plan to manage the risks and opportunities associated with climate change.
  • U.S. insurers’ perceptions about and responses to climate change vary significantly by segment and size, suggesting the potential for significant market dislocations and potential contraction as insurers with less capacity to identify and manage climate risks experience excessive capital losses.
  • The industry is focusing most of its attention on a narrow set of risks, especially coastal impacts and hurricanes, while ignoring issues like non-coastal extreme weather and climate liability that are already generating higher exposure and losses.
  • The majority of insurers that report using catastrophe models describe them in terms that suggest their company does not have a clear understanding of how the models can or cannot be used to anticipate changing risk.
  • While climate change poses significant financial risk for the industry, few insurers provided meaningful information on the potential financial impacts of more volatile weather losses.

To the extent that a relatively small number of companies are paying attention to climate change their efforts were almost exclusively focused on catastrophic coastal impacts and hurricanes. Yet recent years have demonstrated that climate change may be driving up aggregated losses from smaller, non-modeled events – perils such as floods, droughts, snowstorms, hailstorms and tornadoes – in ways that severely cut into insurer profitability.

In addition, legal developments related to climate change are driving up liability claims for many insurers in the U.S.

The report offers specific recommendations for addressing disclosure and insurer response shortcomings. It recommends that insurance regulators:

  •  Implement mandatory disclosure annually and make all survey responses public. The current approach, with some states requiring responses to the survey and others making participation voluntary and non-public, has resulted in a patchwork quilt of disclosure that doesn’t provide a full sense of how the US industry is being affected by and managing the impacts of climate change.
  • Clarify disclosure expectations. The lack of specificity in the current NAIC disclosure survey has led to responses that are frequently vague and unhelpful, with little consistency in how insurers address major trends including pricing, modeling and governance. Regulators should consider providing more detailed guidance documents in planning future survey responses.
  • Create more shared resources to help insurers analyze and respond to climate trends. Relatively few insurers have the ability to produce fundamental research on the ways in which climate change may affect their business. Insurers and regulators would both benefit from more fundamental research in areas such as loss modeling, correlated risk, and health and life loss potential.

My two cents:

The 2012 proxy season may see the number of resolutions at insurance companies on this hot topic rise even faster than insurance rates. Think what the graph would look like if it were updated. Yikes!

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