The National Association of Insurance Commissioners (NAIC) recently announced a model rule that, if adopted by the states, would require insurance companies to annually complete a survey disclosing financial risks they face from climate change, as well as actions they are taking in response to those risks. The NAIC announcement follows New York State Attorney General Andrew Cuomo’s recent action requiring two major public utility companies to disclose risks posed by climate change in their periodic filings with the Securities and Exchange Commission, and some believe it may serve as a basis for federal climate change regulation. Adding to the momentum from the New York settlement agreements, groups such as Ceres1 and the California Public Employees’ Retirement System have called repeatedly upon regulators to address the obligations of publicly traded companies to assess and fully disclose the material economic opportunities and risks from climate change. While 64% of S&P 500 companies disclose climate change-related risks voluntarily through the Carbon Disclosure Project’s annual questionnaire, the NAIC climate risk survey is notable as the first industry-wide climate risk disclosure obligation.

Under the NAIC rule, assuming adoption by the states, all insurance companies with annual premiums of $500 million or more must complete an Insurer Climate Risk Disclosure Survey on an annual basis. All other insurance companies will be encouraged to engage in voluntary disclosure. The surveys must be submitted in the state where the insurance company is domiciled. While most insurance companies have already been assessing the impact of climate change concerns internally, presumably this action will add impetus to insurance companies by requiring or encouraging a variety of insured entities to conduct corporate risk management reviews to fully assess its exposure and opportunities.

Insurer Climate Risk Disclosure Survey

The Insurer Climate Risk Disclosure Survey, modeled on select questions from the Carbon Disclosure Project, presents eight questions that are intended to capture how climate change is impacting the insurance industry. In response to these questions, insurers will need to report on a broad range of issues such as how they are altering their risk-management and catastrophe-risk modeling in light of the challenges posed by climate change, and whether and how they are changing their investment strategies. Insurers will not be required to provide quantitative information or information they believe in good faith is commercially sensitive or proprietary. In a compromise achieved during negotiations, the final draft of the survey removed proposals that would have required top executives to attest to the information made available and file it as part of an insurer’s annual statement.

Specifically, the questions contained in the survey address the following issues:

  • Plans to assess, mitigate or reduce emissions;
  • Climate change policies with respect to risk- and investment-management;
  • Processes for identification of climate change-related risk;
  • Areas of anticipated climate change risk and impact of those risks;
  • Alterations to investment portfolio and strategy as a result of the impact of climate change;
  • Actions to encourage policyholders to reduce losses caused by climate change-influenced events;
  • Steps to engage key constituencies on the topic of climate change; and
  • Actions to manage the risks that climate change poses to business.  

Responses to the Insurer Climate Risk Disclosure Survey

In testimony before Congress, Wisconsin Insurance Commissioner Sean Dilweg declared it “imperative” that regulators examine how climate change affects insurers’ investments. Dilweg also expressed interest in insurers providing incentives to mitigate losses for themselves and policyholders. Ceres called the NAIC vote “a wake-up call about the vast challenges that climate change poses for the insurance industry and the overall economy.” Adding to Ceres’ support, the California State Teachers’ Retirement System (CalSTRS) highlighted the NAIC’s attention to corporate risk management as crucial in allowing investors “to determine the real steps insurers have taken to assess important risks.” The CalSTRS statement pointed to the importance of corporate risk management as a “painful lesson” of the current economic crisis. The American Insurance Association, which represents property/casualty insurers, and the American Council of Life Insurers also expressed support for the NAIC survey.

The National Association of Mutual Insurance Companies (NAMIC) and the Property Casualty Insurers Association of America (PCI) both issued statements opposing the NAIC survey vote and the public nature of the survey results. A statement released by the NAMIC stated that it was “highly inappropriate for insurance regulators to be prying into such areas.” The PCI cited the ambiguities in climate science and modeling capability, stating that it is “premature and inappropriate” to require insurers to publicly answer the survey’s questions.

The life and health industry expressed initial opposition to the survey, believing it to be inapplicable to its companies. However, as noted by Pennsylvania Insurance Commissioner Joel Ario, who chairs the NAIC Climate Change and Global Warming (EX) Task Force, the life and health industry ultimately agreed to the survey’s final version.

How to Prepare

To be best prepared for these reporting requirements, once adopted by the states, insurers will want to begin assessing the risks that climate change poses to their business now. To ensure that policies and practices in place will enable a company to effectively respond to the Insurer Climate Risk Disclosure Survey, its board of directors may want to review their company’s current risk-management policies or adopt new practices to prepare for this new disclosure requirement. For a discussion of effective risk management generally, see “The Risk-Adjusted Board: How Should the Board Manage Risk?” appearing in the March/April 2009 issue of the Corporate Governance Advisor.