Title: Climate Change
1Climate Change Insurance
- Eric Nordman, CPCU, CIE
- Director of Research
- National Association of Insurance Commissioners
2Agenda
- Background Information
- Consumer Perspective
- Insurer Perspective
- Regulatory Response
- The White Paper
- The Disclosure Proposal
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6Tipping Points
7What If Scenario Studies
Sea levels rise 3 feet?
What if
And
Heavy rainfall events stay outside
normal variation?
Forest fires increase 149?
And
8Avoiding 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
9Dangerous 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.
10Dangerous Tipping PointsMelting of the
Greenland Ice Sheet
This would commit the world to a 20 foot increase
in sea level.
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12A 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
13Why 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
14While 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.
15Total Value of Insured US Coastal Exposure
-AIR Worldwide, 2004 US Billions
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17What 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
18What 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
19The 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
20U.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
21The Result
- It is very hard to know how well-prepared the
industry is for the challenges of climate change
22What 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
23What 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.
24What 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.
25What 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.
26What 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.
27Regulatory Response
- Public hearings
- Drafting of a White Paper
- Drafting of a Disclosure Proposal
28The 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.
29The 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
30Public 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)
31Public 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
32Public 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
33Public 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
34Public 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
35Public 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
36Public 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
37Public 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
38Public 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.
39The 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
40The 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
41The 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
42Next 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
43Your Questions
44Thank You