The other day, I blogged about calls for insurers to collect and disclose information on the personal characteristics of their clients and prospects, but that wasn't the only controversial data demand issued at the recent NAIC meeting. Indeed, the heat was also placed on carriers to document their climate change exposures. Is this just a lot of hot air by critics on a fishing expedition, or is this a serious search for the truth about how secure the industry is when it comes to global warming?
(For more on this story, click here and here.)
In essence, as reported by our own Dan Hays, the National Association of Insurance Commissioners’ Climate Change Task Force is being asked to acknowledge the exposures to insurer books of business and investment portfolios from climate change--whatever the cause--and to demand greater disclosure from carriers on how they intend to deal with the risk.
Whether you believe in global warming or not, and regardless of whether you feel humanity is any way responsible, or can (or even should) do anything about the problem and its implications, is a moot point, as far as the NAIC is concerned.
Indeed, an NAIC white paper on climate change revealed the regulator group assumes global warming is occurring because there is “ample evidence” to back up that proposition.
In any case, the NAIC said climate-related risk--such as increased frequency and intensity of hurricanes and resulting flooding--creates regulatory concerns about solvency, “especially when considering insurer financial stability is heavily dependent on its investment portfolio. So it is imperative we examine how climate change will impact the investments insurers hold and establish applicable regulatory standards for the investment practices of insurers.”
As reported by Mr. Hays, the paper said "regulators need to know if insurers are adequately including climate in their risk assessment process, and should ask about data collection and computer model use."
Oddly, the industry is very suspicious and resistant to such suggestions--odd for two reasons.
One is that insurers have actually been very progressive when it comes to acknowledging climate change and the impact on their business. (Read our March 10 cover story, "Insurers Brace For Global Warming," if you have doubts. Click here and here for full coverage.)
Second, insurers make their living anticipating risk and quantifying it. Why should climate change exposures be any different?
Yet insurers were in anything but a cooperative mood when the data collection calls were debated at the recent NAIC meeting in Orlando.
Most said the data demands were unreasonable, or even punitive. Frank Nutter, president of the Reinsurance Association of America--and certainly no fear-monger--warned that in seeking such data, regulators should “be careful what you wish for,” because it could have a negative impact on insurance availability and affordability for coastal areas. I assume Mr. Nutter was alerting regulators to the risk that insurers, if forced, would err on the side of caution and perhaps overestimate their exposure, but it did sound like a threat of sorts.
Andrew Logan, director of Ceres--a coalition of investors and environmentalists--said insurers had a poor record of disclosing climate impact information to the Securities and Exchange Commission and others who sought the data. He said voluntary measures simply won't work. I would tend to agree, especially with publicly-held carriers sensitive to stock market reaction to their potential exposures.
I found the questions raised very reasonable and pertinent to insurer financial health, actually. Check out the following queries, and tell me which ones are unreasonable and why?
• Are insurers adequately including climate in their risk assessment process?
• How are computer models used to assess insurer climate risks?
• Do insurers offer incentives for policyholders to deal with their climate exposures?
• Are carriers informing their board members about climate risk?
• What might the impact of climate change be on an insurer’s investment portfolio, especially if real estate holdings are involved in exposed regions?
• What steps are insurers taking to mitigate their own risks?
Why are insurers being so defensive about this? Shouldn't any responsible board member of an insurance carrier be asking the same questions of their CEOs?
You tell me.
Comments (2)
Sam, I think your last question misses an important point.
Whether insurance company board members should bombard their CEOs with climate risk disclosure interrogatories is for them to decide. The NAIC proposal, on the other hand, would require public disclosure based on flawed interrogatories drafted largely by advocacy groups.
The following are excerpts from a letter NAMIC sent to the Climate Change and Global Warming Task Force, commenting on its Climate Risk Disclosure Proposal:
Purportedly based on something called the “Global Framework for Climate Risk Disclosure,” the Task Force’s Disclosure Proposal appears to be derived entirely from two sources. The first is a report prepared for Ceres by David Gardiner & Associates (DGA), a for-profit consulting firm whose website advertises its ability to “create strategic advantages for its clients by helping them understand climate and energy issues and by providing advice, analysis, and strategies tailored to their needs.”
A footnote in the Disclosure Proposal informs readers that “this proposal leans heavily on” the DGA report.
The second source upon which the Disclosure Proposal relies is a document titled, “Proposed Statutory Annual Statement Interrogatories: Insurer Assessment and Response to Impacts of Climate Change,” that was presented to the Task Force by Ceres, the National Resources Defense Council and the Center for Economic Justice on May 29, 2007.
A comparison of the Task Force’s Disclosure Proposal with the Ceres-financed DGA paper and the May 29 Ceres/NRDC/CEJ proposal leads to the inescapable conclusion that, in developing its “own” Climate Risk Disclosure Proposal, the Task Force has done little more than rubber-stamp the policy agenda of these advocacy groups.
That agenda would compel every U.S.-domiciled insurance company to provide answers to a set of highly tendentious questions whose ultimate purpose is to coerce insurers into accepting the groups’ questionable theories about the nature and effects of global warming, and altering their behavior to conform to the groups’ preferences.
The Disclosure Proposal mimics the DGA report by drawing upon a climate risk disclosure framework consisting of four components: “Emissions Disclosure”; “Strategic Analysis of Climate Risk and Emissions Management”; “Regulatory Risk”; and “Physical Risks.”
With respect to the first component, the Disclosure Proposal explains that because “total greenhouse gas emissions by insurers are low … this is an area that does not yet rise to the level of regulatory concern.”
The Disclosure Proposal nonetheless offers a several “regulatory questions” to assist companies that “may wish to voluntarily report this information….”
In contrast to the voluntary disclosure questions in the Emissions Disclosure component, the regulatory questions that appear in each of the framework’s three remaining components address “areas of required disclosure”—meaning that companies would be forced to provide answers to these questions.
It is here that we encounter the wholesale appropriation of the disclosure interrogatories contained in the May 29 Ceres/NRDC/CEJ proposal. Indeed, all but two of the 14 questions included within the framework’s three mandatory components are copied verbatim from the Ceres/NRDC/CEJ proposal.
The Task Force’s Disclosure Proposal further mirrors the Ceres/NRDC/CEJ proposal in declaring that “these disclosures are to be submitted as a mandated supplement with the Annual Statement….”
As for the questions themselves, most are risibly tendentious. Consider, for example, the first two questions in the “Strategic Analysis of Climate Risk” component:
“What actions have you taken to assess the impact of climate risk and global warming on your operations?
“What are the results of your assessments of the impact of climate change risk and global warming?”
Taken together, the two questions strongly imply that a company should take “actions” related to climate risk. A company is left to wonder what regulatory and legal consequences would ensue if it answered “none” to Question 1 and “see answer above” to Question 2.
The same problem arises with respect to Question 1 (which is actually two questions) in the “Regulatory Risks” component:
“What analysis have you conducted of the impact of climate change and global warming on your investment portfolio? What are the results off your assessment?”
Again, there is a clear implication that a company should analyze the impact of climate change on its investment portfolio, and that it would be remiss if it did not.
If the Task Force believes that the NAIC should require companies to take “actions” of the sort contemplated in these questions, it should specify precisely what actions it wants companies to take and draft a model law to that effect.
Other questions, in addition to being tendentious, assume that insurers have knowledge of things that are in fact unknowable. For example, a question in the “Strategic Analysis of Climate Risk” component asks:
“Are there any known trends, events, demands, commitments, and uncertainties stemming from climate change that have had, or are reasonably likely to have, a material effect on your financial condition or operating performance?”
The truthful answer is “We don’t know,” because while many companies face uncertainties due to the risk posed by large-scale natural disasters, no company can truthfully say that there are “known trends … and uncertainties stemming from climate change” per se.
But given the obvious thrust of the question, the truthful answer is not the correct answer.
The concept of imposing mandatory climate risk disclosure interrogatories on insurance companies has been presented by the Task Force as a fait accompli, despite the expressed opposition of numerous interested parties, and well before the completion of the final draft of the white paper that is supposed to discuss, among other topics, the feasibility and desirability of mandatory climate risk disclosure interrogatories.
The interrogatories contained in the Task Force’s Climate Risk Disclosure Proposal were appropriated in wholesale fashion from interrogatories submitted to the Task Force by a small coalition of partisan interest groups.
And finally, the Proposal fails to offer any rationale for believing that its inquisitorial method will yield significant benefits for insurance consumers. Lacking this rationale, the Proposal has no legitimate basis as an insurance regulatory initiative.
Posted by Bob Detlefsen | April 14, 2008 12:43 PM
Posted on April 14, 2008 12:43
I can see why insurers might not have a positive reaction to supporting vague inquiries such as, "Are insurers adequately including climate in their risk assessment process?"
"Adequate" to one analyst could be defined as totally inadequate to another. If the responder answers "yes," they open the company up to lawsuit, if indeed the insurer is not adequately assessing the exposure (in the estimation of others in the enviable position of hindsight).
A "no" answer would be nothing but doomsday that would be fodder to the media.
It is legitimate to be concerned about insurer solvency. However, such analysis questions that might be posed need to allow for the variety of potential exposures to climate change (beyond the mansion on the beach) such as sinkhole collapse from excessive dry season, levy breaches in the Midwest, off-season tornadoes, catastrophic firestorms in the West, Avian bird flu, etc.
The questions need to be more specific than the above imprecise question of "adequacy" to elicit data that is worth the effort of gathering it.
Posted by Joan | April 17, 2008 10:57 AM
Posted on April 17, 2008 10:57