This is the last of three parts concerning Ceres’ recently released Climate Risk Disclosures by Insurers: Evaluating Insurer Responses to the NAIC Climate Disclosure Survey. We already have looked at the first two Recommendations to Regulators. Today we finish with number 3: more clarity in disclosure expectations. Id. at 51.
It is always easier to make apples-to-apples comparisons when everyone is speaking the same language. Uniform and detailed disclosure requirements would help achieve that goal. However, the down side of specifying what will be disclosed is that it assumes the specifier knows all that needs to be identified. The scariest part of climate change is that we probably do not yet know how all the changes will interact. Correlated risk is a prime example.
IRMI describes “correlated risk profiles” as those “that move in concert when affected by the same set of stimuli.” Insurers run from correlated risk and the Ceres report rightly poses a troubling concern in that regard: “If … climate change has the potential to introduce correlated risks across previously uncorrelated assets and to drive market values in ways that cannot be predicted from historical trends, the insurance industry may be poorly positioned to meet its investment objectives.” Climate Risk Disclosures at 39. According to the report, few companies recognize the potential for correlated losses across their business. Id. at 43. And the ones that do say no more than that climate change will increase insured losses and may negatively impact the businesses in which insurers invest. Id. We don‘t think that this is news to those who did not specifically mention correlated risks in their submissions.
What we take from all this is that no one yet knows in a meaningful way where the climate change correlated risks lie. Or they are keeping mum (see our first posting on the Ceres report concerning competitive advantage). So the question for a regulator is the following: Is one better off with answers that are less-constrained and potentially more revealing, or is more specificity in the guidance more helpful? If one is a regulator who knows all the questions that should be asked, one should opt for more specificity. But if one does not, then one might support providing unstructured disclosure opportunities.
The Ceres report, of course, is not all about recommendations, but we have gone on for too long to delve further. Before we close, however, we did want to address the need for stronger research.
The Corporate Liability section attracted our particular focus, as climate change liability suits and their insurance have been a central feature of the blog. Those of us following this subject drop the names of the three liability damages suits, Comer, General Motors and Kivalina, and the insurance suit, Steadfast, like they were business cards.
The statement that got our dander up was this: "Since the first suits were filed in 2003, their numbers have rapidly proliferated—more than 120 suits were filed in 2010 alone, nearly two-thirds of them in the U.S." Id. at 11. This is an accurate paraphrase of its source, a sentence in a short article published by the Geneva Association. The problem is that the source, at best, is misleading. While there may have been 120 climate change suits filed in 2010, as demonstrated by the comprehensive set of charts kept by the Climate Change group at Arnold & Porter LLP there were none filed that were seeking damages under common law theories. Those suits continued to be the three: Comer, GM and Kivalina.
We will be the first in line to agree that the insurance industry should be concerned about climate change liability suits. But that concern has not yet had to focus on 120 climate change liability suits, because they have not been filed yet.
That being said, the Ceres report brings to the fore statements by representatives of a multi-trillion dollar industry that is in the eye of the climate change storm. Those statements otherwise might languish in some regulator’s dark bottom drawer. The report is a valuable resource; we look forward to next year’s reprise.