Ceres released last week the first analysis of the insurer climate change disclosures submitted to state regulators pursuant to the National Association of Insurance Commissioners rule. The report is eye-opening. The authors have combed through the disclosures of 88 insurance companies and offer thoughtful insights on, for example, investment practices, management structure and modeling. Those seeking to advance their bottom line will find nuggets of information directly related to competitive advantage. In this post, we outline the report and discuss its first recommendation regarding mandatory and public disclosures. In subsequent posts we will address Ceres’ second and third recommendations.
The report’s title is dry and daunting: Climate Risk Disclosures by Insurers: Evaluating Insurer Responses to the NAIC Climate Disclosure Survey. Fortunately, it does not live up to the ominous desiccation foretold by the title. We know from the get-go where this is going: "This report documents this powerful industry's sluggish and uneven response to the ever-increasing ripples from global climate change, which could undermine both its own financial viability and the stability of the larger global economy." Id. at 3.
For those to whom Ceres and NAIC are unfamiliar, the former is a non-governmental organization composed of a coalition of investors, environmental organizations and other public interest groups, whose mission is to “integrat[e] sustainability into day-to-day business practices for the health of the planet and its people.” The latter is the National Association of Insurance Commissioners, which in 2009 approved mandatory requirements for climate change disclosures for insurance companies, because "[a]s regulators, we are concerned about how climate change will impact the financial health of the insurance sector and the availability and affordability of insurance for consumers. This disclosure standard will give regulators the information we need to better understand these risks." NAIC later revised its requirements to make disclosure voluntary.
Ceres's work is based on the 2010 disclosures of 88 US insurers filed in six states (mandatory: New York, California, Pennsylvania; voluntary: New Jersey, Oregon, Washington). The report is set up in three parts. Part 1 describes climate change risk and the need for disclosure. "The changing climate will profoundly alter insurers' business landscape, affecting the industry's ability to price physical perils, creating potentially vast new liabilities and threatening the performance of insurers' vast investment portfolios." Climate Risk Disclosures at 9.
Part 2 is the meaty analysis of the report and addresses the following topics:
Risk Perception and Management Structure
Risk Exposure and Management
Financial EffectsLoss Modelin
Its goal is to set out “risk perceptions and management practices for handling climate change across the American insurance industry.” Id. at 17. While often couched in possibilities, the analysis raises numerous interesting issues.
Part 3 is the Recommendations to Regulators. There are three and we focus there. First, Ceres recommends “implement[ing] mandatory disclosure annually, and mak[ing] survey responses publicly available." Id. at 50. We take no position on whether NAIC should require climate change disclosures and would be interested to read NAIC’s own evaluation of the disclosures and how they advance the goals of insurance regulators. As for public disclosure, while we are perhaps more interested than most in these types of things, we are acutely sensitive to the issue of competitive advantage. There will be winners and losers in the insurance industry as a result of climate change. The winners will be those who, among other things, recognize correlated risks first, have more accurate models, and innovate better. Requiring companies to give away their proprietary information may lead them not to generate it in the first place.
And items leading to competitive advantage are all over the NAIC submissions.
Harleysville Insurance Company reports that “over time the Company has witnessed the traditional tornado alley expand causing increased losses further east and toward the southeastern states." Id. at 24.
"[A] handful of insurers discuss the ways their approach to establishing reserves, reinsurance coverage or capital market transfers have been adapted to reflect changing risk statistics or future scenarios where historic statistics do not illuminate future risk." Id. at 32.
Allianz is “developing products and services geared to address climate change, ... leveraging climate change research, and contributing to related public policy development." Id. at 19.
There are a lot of things that make a business succeed. Intellectual capital is one of them. Just as we would not expect businesses to give out greenbacks to passersby, why should their green ideas be treated differently?
Tomorrow we will look at Ceres’ second recommendation concerning shared resources.