Climate Change and Risk Disclosure

Last Updated 6/13/16

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 found that weather related losses have increased nearly fourfold in the United States since 1980. According to a study by Munich Re, extreme weather events (such as prolonged droughts, hurricanes, floods, and severe storms) led to $560 billion in insured losses from 1980 to 2015. 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 survey is comprised of eight questions that assess insurer strategy and preparedness in the areas of investment, mitigation, financial solvency (risk management), emissions/carbon footprint and engaging consumers. The survey results provide trends, vulnerabilities and best practices related to insurers' response to climate change. The survey was modeled after the CDP (formerly named the Carbon Disclosure Project) voluntary questionnaire and, as such, cross references its questions.

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.

Disclosure Survey Status: For the 2009 reporting year, insurers writing at least $500 million in direct premium on a group basis were surveyed at state discretion. Eighteen states administered the survey, with 90 insurers submitting responses. For the 2010 reporting year, the survey reporting threshold was reduced to $300 million in direct written premium and very few states participated in its administration. Beginning with the 2011 reporting year, the survey was administered on a mandatory and public basis through a multi-state effort led by California. For the 2012 reporting year and beyond, the survey was administered online and reported to a database created by the California Insurance Department. The premium threshold was reduced to $100 million in direct written premium. For reference, a copy of the climate risk survey questions, guidelines and climate change resources is available.

California Department of Insurance serves as the central location for insurers, regulators and members of the public to access survey information from the multi-state initiative. The California Insurance Department developed four simple and intuitive Web applications as part of their online survey tool to administer the survey. The registration process collects contact information, which is for regulator use only, and generates a Web link to the survey. The survey application is a simple one–page design, includes a group filing feature and is in a yes/no response format with expandable response text boxes.

The survey results can be queried by company, line of business, question, yes/no response or customizable report through an interactive database. Individual insurer responses can also be viewed, with surveys being found by company name, group name or NAIC number. Regulator–only reports include insurer contact information, real-time survey results, quick identification of companies that have or have not filed, and automatic result analysis. The survey results can be found by using the California Department of Insurance Climate Risk Search Engine.