Issue: Disclosure of climate risk is important because of the potential impact climate change can have on insurer solvency and the availability and affordability of insurance across all major categories. Munich Re estimates weather related losses increased nearly fourfold in the United States since 1980. According to a study by Munich Re, from the period 1980 to 2011, insurers faced losses of $510 billion from extreme weather events such as prolonged droughts, hurricanes, floods, and severe storms. Experts predict climate change will continue to intensify the frequency and severity of these types of weather related events. Given these trends, it is important for insurers to identify climate-related factors and evaluate how they will impact their business and the exposures they indemnify. Recognizing the need to ensure insurers account for any potential effect these risks might have on the marketplace and the availability and affordability of insurance, state insurance regulators and other stakeholders have moved forward to administer a climate risk disclosure tool. Disclosures allow regulators a window into how insurers are incorporating these changing dynamics into their risk management schemes, corporate strategy, and investment plans. Disclosures also benefit insurers, providing them with a benchmark from which to assess their own climate change strategies and strengthening their ability to identify how climate change impacts their business. Furthermore, disclosure allows policymakers to gain an insight into needed public policy changes.
Overview: To address the implications of climate change on insurers and insurance consumers, the NAIC hosted a public hearing in 2005. Subsequently, the NAIC released The Potential Impact of Climate Change on Insurance Regulation white paper in 2008. The white paper examined the effects of climate change on insurance industry investment decisions, disclosures and underwriting practices. The white paper also recommended regulators develop a framework for the collection of information related to the impact of climate change on insurers.
In response to the white paper, the NAIC adopted the Insurer Climate Risk Disclosure Survey (“survey”) in 2010. The eight question survey was designed to be an insurer reporting mechanism that would provide regulators with information on how insurers incorporate climate risks into their mitigation, risk management, and investment plans. Insurers are also asked to identify steps taken to engage key constituencies and policyholders on the topic of climate change.
The survey was modeled after the CDP (formerly named the Carbon Disclosure Project) voluntary questionnaire and, as such, cross references its questions. The CDP questionnaire asks respondents to disclose their greenhouse gas emissions, water management and climate change strategies. Although the CDP holds the largest collection of self-reported climate change data, insurer participation is low. Insurance regulators developed the survey as a way to fill the void of pertinent climate risk information. According to the CDP, insurers typically disclose such things as their carbon footprint reduction efforts, modeling, physical risk assessments, liability concerns, investment strategies, and underwriting policies. Many also report on climate change related innovations and green practices, such as sustainable real estate, catastrophe bonds, renewable energy practices and green reconstruction.
Status: In 2012, the insurance departments of California, Washington, and New York administered the NAIC Insurer Climate Risk Disclosure Survey (“survey”) for the 2011 reporting year as part of a multi-state initiative. The multi-state initiative was designed to bolster participation in the survey by capturing most of the insurance industry. The survey was required for insurers writing more than $300 million in direct premium in these states, covering 85 percent of the U.S. insurer market. Approximately 470 company responses were collected in 2012 and made publicly available on the California Department of Insurance’s website. It should be noted uniform responses were permitted for insurers that are part of a group.
The multi-state initiative was expanded in 2013 to include the insurance departments of Connecticut and Minnesota. Additionally, the required reporting threshold was lowered from $300 million to $100 million in direct written premium and applied mandatorily to all individual companies that write business in one of these states, regardless of where they are domiciled. Assuming full reporting compliance, this change in threshold is expected to double the number of reporting companies and should give insurance regulators, investors and policyholders a better picture of how insurers are responding to climate change.
The California Department of Insurance, which serves as the central filing point and data warehouse, now offers companies the ability to submit their data directly online. The move to online filing will allow submitted data to feed directly into a database sortable by regulators and interested parties, enabling more people to provide analysis.
In recognition of the growing need to ensure that insurers are addressing climate related risks, the NAIC also adopted revisions to the 2013 Financial Condition Examiners Handbook at the end of 2012. These revisions incorporated risk-focused examination questions that provide examiners with needed guidance on what questions to ask insurers regarding any potential impact of climate change on solvency. They were specifically designed to help examiners identify unmitigated risks and to provide a framework for them when examining such risks and their impact on how an insurer invests its assets and prices its products. The updates made changes to the Handbooks’ Exhibit B – Examination Planning Questionnaire, Glossary, Interview of Investment Management, Interview of Chief Risk Officer, Exhibit V – Prospective Risk Assessment, Investment Repository, and Underwriting Repository sections.