Climate Change Seminar Reviews Insurance Industry Impact

The Regulatory and Legislative Section of Chartered Property Casualty Underwriters and the Great Lakes Chapter of the Association of Insurance Compliance Professionals hosted a seminar on global warming and the insurance industry.  Investor, consumer and industry perspectives as to how climate change affects the insurance industry were presented.

Insurance Commissioner Mike Kreidler, Washington, served as moderator and provided opening remarks.  Commissioner Kreidler is co-chair of the National Association of Insurance Commissioners (“NAIC”) Climate Change and Global Warming Task Force.  In Commissioner Kreidler’s opinion, insurance companies try to avoid certain risks by increasing prices and abandoning markets.  Regulators must therefore play an active role in the insurance market and in education.  Commissioner Kreidler further opined that he sees a need for Congress to ultimately establish a National Commission on Green House Gases, establishing limits and propagating national standards.  Commissioner Kreidler also called for the development of a broader national “all perils” insurance policy.

Andrew Logan, CERES Director of Oil and Insurance Programs, provided the investor perspective and a comparison to the manner in which other nations evaluate climate change.  Climate change has been a long term threat to both the affordability and availability of insurance.  It is predicted that by the year 2050, weather damages and related costs will surpass $300 billion.  It is difficult to spread these risks around, as risk models are based upon history.  Climate change not only affects coastal areas, but brings increased risks in mudslides, fires, blizzards, heat waves, and other events. Currently, winter storms and firestorms aggregate to more damage than mega catastrophes.  It is predicted that there will be an increase of over 100% in winter storms in Europe, and a 150% increase in acres burned in the western United States.

Mr. Logan called for insurers to take a more proactive approach with consumers and the government to reduce and limit risks.  He proposed that insurance companies commit to a six step plan of action:

• Analyze how climate change is likely to impact the business;
• Engage with regulators and the public to look at climate change;
• Get involved with the data;
• Fulfill historical roles, such as staying involved with building codes, zoning, prevention, and public policy;
• Analyze the impact on investor assets; and
• Create and offer new products.

(see http://www.ceres.org to review new products and services)

Finally, Mr. Logan encouraged insurers to provide better disclosures with respect to addressing how companies deal with the risks and opportunities presented by climate change.  CERES is also encouraging the NAIC to mandate better disclosures.  Insurance companies and investors must realize that lack of action is a threat to the economy.

Birny Birnbaum, Executive Director of The Center for Economic Justice, provided the consumer prospective.  Mr. Birnbaum was a former insurance regulator in Texas.  He sees two public policy goals for insurance companies: a financial security tool by providing universal access to insurance at an individual and community level; and loss prevention and loss mitigation.   Insurance companies have reacted poorly to catastrophes and the threat of climate change, by not becoming aggressively engaged in risk management and focusing instead on financial management.  This pushes exposure on to consumers and the taxpayers.

No insurance system is able to pay for increasing catastrophic events, both sudden and long term.  Mr. Birnbaum sees two possible responses from the insurance companies.  First, the companies may respond to these events with more of the same approach resulting in more catastrophe funds and consolidation of risks, basically socializing risks while privatizing profits.  The other alternative would be that insurance companies take a more aggressive approach to loss mitigation and prevention, which appears to be the only viable solution to both current and potential future losses.  Some of the steps in implementing this aggressive approach would require companies to provide climate change impact analysis and disclosure to the NAIC, creation of an “all perils” policy that insurers would be required to offer and consumers required to purchase, and the establishment of a federal tax-free catastrophe reserve for insurance companies. 

Lastly, the industry perspective was presented by a trade association representative who indicated that the role of insurers is threefold:  to maintain financial solvency by pricing according to the risk and by being responsible corporate citizens; to perform loss mitigation including scientific research, pricing and incentives, and supporting initiatives of other industries; and to promote public education and advocacy.  The representative disagreed with the notion that insurers only deal with events at a financial level and shun risk.  He cautioned that companies may not be willing to voluntarily disclose their plans relating to dealing with risks and opportunities, absent some grant of privilege.
 

The above information is intended to be a general summary of the discussions that took place during the seminar.  It is neither intended to provide specific analysis nor should it be relied upon in making individual business decisions, specific in nature.

Should you have any questions or comments regarding this information, please feel free to contact this office.