Climate Change

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Climate Change Insurance

• Eric Nordman, CPCU, CIE
• Director of Research
• National Association of Insurance Commissioners

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Agenda

• Background Information
• Consumer Perspective
• Insurer Perspective
• Regulatory Response
• The White Paper
• The Disclosure Proposal

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Tipping Points

• THINGS WE MUST AVOID

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What If Scenario Studies
Sea levels rise 3 feet?
What if
And
Heavy rainfall events stay outside
normal variation?
Forest fires increase 149?
And
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Avoiding dangerous climate change
We must prevent the climate system from passing a
tipping point that leads to irreversible change
Antarctic ice Amazon Rainforest Gulf Stream
failure
Regional Impacts Coral Reefs High-altitude
Glaciers
???Permafrost??
Arctic sea ice
Greenland ice
Current warming
Warming in pipeline
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Dangerous Tipping PointsMelting of the
Permafrost
Zimov et al. 2006
This could lead to large methane emissions and an
increase in atmospheric burden of global warming
pollutants 100 times present amount.
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Dangerous Tipping PointsMelting of the
Greenland Ice Sheet
This would commit the world to a 20 foot increase
in sea level.
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A critical issue for insurers
The insurance industry must start actively
adapting in response to greenhouse gas trends if
it is to survive There could hardly be a debate
of greater importance to the insurance
industry. --Lloyds, Climate Change Adapt or
Bust
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Why should insurers be concerned?

• Climate change has the potential to impact nearly
  every segment of the insurance industry,
  including
• Property, crops and livestock
• Health and life
• Business interruption
• DO
• Pollution liability
• Breakdown in backwards-looking cat models and
  actuarial assumptions
• Invested assets

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While there is disagreement on whether climate
change has impacted recent loss trends, Munich Re
has concluded that the main driver of future
loss developments will be climate
change. According to UNEPFI, The pace of change
in extreme weather events is already fast, and
the scale of losses could reach 1 trillion in a
single year by 2040.
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Total Value of Insured US Coastal Exposure
-AIR Worldwide, 2004 US Billions
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What should insurers do?

• Lead in risk analysis
• Inform public policy making
• Support climate awareness among customers
• Incorporate climate change into investment
  strategies
• Reduce the environmental impact of the insurance
  industry
• Report and be accountable

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What does that mean in practice?

• Analyze potential impacts of climate change on
  your business
• Engage with clients, modelers, policymakers,
  regulators
• Improve loss data collection and analysis
• Fulfill historic role in loss prevention/mitigatio
  n
• Examine impact of climate change on invested
  assets
• Examine potential for new products and
  services -Ceres report From Risk to
  Opportunity
• And disclose what you are doing

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The potential impact of new products is extremely
high

• The industry is well-positioned to
• Preserve insurability by promoting loss
  prevention
• Encourage reduced GHG emissions from transport
  and building use, which together represent 2/3 of
  GHG emissions
• Encourage increased investment in low- and
  no-carbon energy by lowering cost of capital
• Improve efficiency of global carbon markets
• Inform the public policy debate
• all while reducing risk for insurers, growing
  revenue and preserving the long-term viability of
  the insurance mechanism

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U.S. Insurers Lag in Disclosure

• Industry lags in SEC disclosure
• Only 15 of US insurers surveyed discussed
  climate change in 10K filings, compared to 100
  of electric utilities and 78 of oil companies
• Poor response to Carbon Disclosure Project
• Only 30 of US insurers responded, compared to
  70 in Europe, 62 in rest of world

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The Result

• It is very hard to know how well-prepared the
  industry is for the challenges of climate change

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What Consumers are Saying

• Public Policy Goals of Insurance
• Essential Financial Security Tool for Individual
  and Community Economic Development
• Corollary  Availability and Affordability is
  Essential
• Loss Prevention and Loss Mitigation Tools and
  Incentives

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What Consumers are Saying

• It should be clear that Loss Mitigation and Loss
  Prevention is the only viable solution to both
  current marketplace problems and the growing
  threat of climate change and global warming.  It
  is the only way to moderate and reduce the
  incidence and severity of catastrophe events.

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What Insurers are Saying

• Insurance is not a comparatively large source of
  pollution
• Insurers are looking at their business operations
  and carbon footprints, like other companies.
• Insurers are participating in voluntary and SEC
  disclosures.

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What Insurers are Saying

• Insurers support IBHS and other efforts to
  improve buildings and building codes.
• Insurers pricing and underwriting incentivizes
  safe behavior and discourages unsafe behavior.
• Insurers provide insurance to support
  environmentally friendly initiatives by other
  industries, such as green building and more fuel
  efficient vehicles.

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What Insurers are Saying

• Insurers have issued reports and studies.
• Insurers have engaged in public information and
  education on risk, including climate related
  issues.
• Insurers advocate for better land use, better
  building codes and enforcement, alternatives to
  motor vehicle use, such as transit, and more fuel
  efficient vehicles.

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Regulatory Response

• Public hearings
• Drafting of a White Paper
• Drafting of a Disclosure Proposal

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The White Paper

• Discusses investment issues facing insurers and
  notes that some investment opportunities will
  arise
• Encourages insurers to evaluate geographic spread
  of the risks they are insuring
• Encourages insurers to develop contingency plans
• Discusses the importance of greater disclosure.

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The White Paper

• Suggests that new solvency regulatory tools are
  needed
• Encourages insurers to become more involved in
  loss prevention and mitigation
• Encourages insurers to become involved in
  strengthening building codes and advocating for
  sound land-use planning
• Recognizes the impact of demand surge, post-event
  living expense increases, and issues with
  business interruption coverages

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Public Comments

• We received 12 sets of comments with 134 pages of
  text on a 16 page White Paper
• Two NAIC members provided comments (Nebraska and
  New York)
• We heard from the four major property- casualty
  trades (AIA, NAMIC, PCI RAA)
• We heard from two major insurers (State Farm and
  the Travelers)

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Public Comments

• We heard from one catastrophe modeler (Risk
  Management Solutions)
• We heard from one scientist well known for his
  work on climate change (Evan Mills)
• One of the responses was a composite submission
  from several consumer interest groups
• CERES, the NRDC, the CEJ, the CFA, the
  Conservation Law Foundation, the Center for
  Insurance Research, Clean Water Action,
  Chesapeake Climate Action Network, Climate
  Solutions and Southern Alliance for Clean Energy

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Public Comments

• Some of the comments offered suggestions for
  minor improvements and enhancements to the White
  Paper
• Nebraska suggests that the White Paper be
  substantially rewritten with a much narrower
  scope than the current draft
• New York suggests that insurers be required to
  maintain catastrophe reserves

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Public Comments

• A UCLA law professor suggests that a section on
  liability insurance related challenges be added
• Evan Mills suggests that the focus on
  catastrophes deemphasizes the importance of
  smaller or more gradual events such as soil
  subsidence, drought, sea-level rise and that the
  White Paper should be more specific in its
  recommendations to insurers

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Public Comments

• NAMIC suggests that using disclosure requirements
  to pressure insurers into adopting a particular
  agenda for combating global warming is a flawed
  approach and hopes that the papers focus will be
  reoriented to identify specific insurance
  regulatory reforms that would create economic
  incentives for individuals and businesses to
  avoid, prevent and mitigate catastrophe risk in
  hazard-prone areas

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Public Comments

• The consumer groups want the regulators to
  mandate climate risk disclosure, assist insurance
  departments to address climate change, assign
  specific tasks to various NAIC committees, draft
  an NAIC policy statement on GHG emissions and
  work closely with international regulators

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Public Comments

• The AIA opposes mandatory disclosure and suggests
  cooperation between the industry and regulators
  to address climate change issues, the allowance
  of risk-based pricing, and encouragement of
  voluntary efforts to reduce GHG emissions
• The PCI also opposes mandatory disclosure, but
  supports the addition of a simple, additional
  question in the general interrogatories or the
  management discussion and analysis related to
  consideration of climate change

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Public Comments

• State Farm supports the Business Roundtable
  Climate Change Policy Statement and hopes to work
  with us as more specific details are developed
• The Travelers commented on several areas,
  believes that adequate avenues exist for insurers
  to communicate their climate policy, and supports
  voluntary disclosure

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Public Comments

• The RAA does not support the part of the White
  Paper that discusses the all perils concept or
  the conversion of the NFIP to a reinsurer. It
  supports allowing insurers to charge risk-based
  rates and encourages further discussion on the
  disclosure issue.
• RMS provides several pages of helpful discussion
  and analysis and is generally supportive of the
  overall paper, but suggests using the UKs
  ClimateWise as the vehicle for insurer disclosure.

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The Disclosure Proposal

• We are working on a disclosure proposal
• It is based on the Global Framework for Climate
  Risk Disclosure
• Developed by investor, state pension and other
  organizations
• Encourages standardized climate risk disclosure
  to make it easy for companies to provide
  information
• Supports the leading mechanisms for global
  corporate climate risk disclosure, including
  mandatory financial filings with securities
  regulators

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The Disclosure Proposal

• The Framework has four components
• Emissions Disclosure
• Strategic Analysis Of Climate Risk and Emissions
  Management
• Regulatory Risks
• Physical Risks
• Each component has associated questions for
  responders to answer and identifies where it
  might be disclosed

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The Disclosure Proposal

• It is anticipated that disclosure would be phased
  in over time
• Larger insurers would be required to participate
  with voluntary reporting available for those
  below the premium threshold
• Gradually the threshold would be reduced to
  require more insurers to report

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Next Steps

• Comments on the Disclosure Proposal are due April
  15, 2008
• Comments on the updated White Paper are due April
  30, 2008
• The Climate Risk Disclosure Working Group will
  meet by conference call to discuss comments
  received on both

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Your Questions
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Thank You