Web Exclusive: The Storm Before the Storm--NAIC Requirements to Report Climate Change Risks
By RODNEY J. TAYLOR, managing director, Aon Environmental Services
The National Association of Insurance Commissioners (NAIC) voted on March 17, 2009, to require insurers to submit annual climate risk reports to state insurance regulators starting in May 2010. The goal of this new program is to provide regulators, shareholders and the public with substantive information about risks posed by climate change and the actions insurers are taking in response to their understanding of climate change risks.
The state insurance officials took this extraordinary action after concluding that climate change threatened the future availability of insurance, as well as the viability of individual insurers, by increasing risks of insured losses due to weather-related events while negatively impacting the value of assets held by insurance companies.
REACTIONS TO THE REQUIREMENTS
Insurers have responded to the new NAIC requirements primarily through statements of their associations, rather than individual reactions. On the positive side, the American Insurance Association offered its support after a requirement for certification of the disclosure reports by officers of the insurance companies was removed. The AIA favors the uniform requirements of the NAIC disclosure program over individual state requirements that might have been enacted in the absence of industrywide action.
The American Council of Life Insurers also supports the survey.
The National Association of Mutual Insurance Companies is opposed to the disclosure requirements on the grounds they ask for information on issues that are highly speculative and may expose insurers to criticism from environmental activists and legal actions for failing to provide adequate incentives for insureds to reduce carbon footprints.
NAMIC also criticized the requirement for risk management measures because the current state of climate change science makes accurate predictions of weather-related events impossible.
The Property Casualty Insurers Association of America is also opposed to the disclosure requirements, suggesting it is premature and inappropriate at this time to seek substantive information from insurers on climate change.
There are also concerns that the disclosure requirements may lead to additional withdrawals from risky markets that are already underserved by commercial insurance products. It is expected to be easier to withdraw from markets rather than working to lower exposed values or strengthen insured structures that remain.
It is also not clear how the climate change risk reports will address indirect exposures of insurers that are involved in high-risk markets through state-operated programs in Florida, Mississippi, Louisiana and other coastal areas. The costs of a large storm may be imposed on insurers as well as insureds and citizens of the affected states. States are also involved in reinsurance programs for windstorm losses that may have unexpected negative consequences for insurers.
Another area that was not addressed in the materials released by the NAIC is the possible liability of insurers for climate change losses incurred under historic commercial general liability and excess liability policies insuring industrial and commercial accounts on occurrence forms.
These policies do not provide affirmative coverage for global warming claims, but they also have no exclusions for claims arising out of weather-related or other climate change events.
In a similar vein, insurers will have to re-evaluate their potential liability arising out of climate change scenarios under directors' and officers' liability policies written on claims-made forms. This liability may arise earlier than that associated with CGL risks because proof of causation and allocation of losses may not be required.
THE REQUESTED INFORMATION
The information required in the reports will consist of responses to a series of inquiries developed by NAIC committees in conjunction with a number of climate change organizations. The eight groups of questions ask insurers for information in the following areas:
1. Summarize plans to assess, reduce or mitigate emissions in their operations.
2. Summarize their climate change policies with respect to risk management and investment management.
3. Describe their companies' processes for identifying and assessing the potential magnitude of climate change risks.
4. Summarize current or anticipated climate change risks and explain the ways that these risks could affect their businesses.
5. Describe alterations in their investment strategies to address the impacts of climate change.
6. Summarize steps they have taken to encourage policyholders to reduce the losses caused by climate change events.
7. Discuss steps their companies have taken to engage key constituencies on the topic of climate change.
8. Describe actions their companies are taking to manage the risks climate change poses to their businesses, including the use of computer modeling.
OTHER IMPACTS OF THE INITIATIVE
The NAIC announcement also noted the upside of climate change, including new investment opportunities in low-carbon industries and improved quality of life through the adoption of green building techniques and alternative fuel sources for automobiles and industrial power requirements. The commissioners observed that the loss of investment value of old power technologies will eventually be offset by emerging opportunities in alternative power and green technologies.
Insurers are also expected to develop new products that meet the needs of emerging technologies and new practices of their insured accounts.
Insurers are also expected to be involved in political and public-welfare activities aimed at controlling the emissions of greenhouse gases and reducing the impacts of climate change. They should be advocates for better building codes, more intelligent land use, water and resource conservation, and other activities that improve the environment and the quality of life. They should also be involved in climate change education programs aimed at their employees, insured accounts and the general public.
Insurers should begin to prepare now so they are ready for the required climate change disclosure requirements that will become effective in May 2010. Responsibility for the reports should be assigned to appropriate personnel who have the authority to gather necessary information. Adequate resources should be allocated to the task to ensure the reports are accurate and comprehensive and respond to the specific inquiries of the NAIC questionnaire.
The board of directors may also want to review risk management policies and to adopt new practices where necessary to ensure the company's disclosures do not result in additional potential liability from shareholder or policyholder actions.
August 1, 2009
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