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Climate Change

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... from two major insurers (State Farm and the Travelers) Public Comments ... State Farm supports the Business Roundtable Climate Change Policy Statement and hopes ... – PowerPoint PPT presentation

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Title: Climate Change


1
Climate Change Insurance
  • Eric Nordman, CPCU, CIE
  • Director of Research
  • National Association of Insurance Commissioners

2
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

7
What If Scenario Studies
Sea levels rise 3 feet?
What if
And
Heavy rainfall events stay outside
normal variation?
Forest fires increase 149?
And
8
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
9
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.
10
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
13
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

14
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.
15
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

18
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

19
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

20
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

21
The Result
  • It is very hard to know how well-prepared the
    industry is for the challenges of climate change

22
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

23
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.

24
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.

25
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.

26
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.

27
Regulatory Response
  • Public hearings
  • Drafting of a White Paper
  • Drafting of a Disclosure Proposal

28
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.

29
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

30
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)

31
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

32
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

33
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

34
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

35
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

36
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

37
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

38
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.

39
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

40
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

41
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

42
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

43
Your Questions
44
Thank You
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