Public Policy Analysis & Opinion

By Kevin P. Hennosy

AN INCONVENIENT TASK FORCE

NAIC forms climate change-related risk and resiliency task force

This summer, the National Association of Insurance Commissioners (NAIC) announced the formation of a new task force on “Climate and Resiliency.” Of course, as with every NAIC initiative, there is a backstory. A little more than 15 years ago, the NAIC prepared to convene for a national meeting in New Orleans. The convention never happened.

Let us be honest, the last days of summer is a stupid time of year to hold a convention in New Orleans. The miserable heat and humidity draw the sweat out of even the healthiest visitor. After a few days of conviviality in local restaurants and dram shops, the perspiration output exceeds the profuse level, except for the unhealthy who cease to perspire before submitting to transport in an ambulance.

Climate change is a problem that heaps increasing loads of risk on insurance mechanisms—public and private. … NAIC leadership might want to wish climate change away, but the risk lingers and lurks.

Not even the classy women who lobbied for life insurance issues—who always gobbled some kind ofherbal prophylactic to avoid perspiration while deliver-ing testimony—could avoid producing a very noticeable “glow,” during late summer in New Orleans.

So why was the NAIC meeting scheduled for when it was in New Orleans? A few years before, the major trade associations for property and casualty insurance carriers screamed bloody murder about the cost of hotel rooms at NAIC conventions. The lobbyists for those trade associations laid down the law: The NAIC had to reduce the hotel rates paid by the lobbying corps to attend the meetings.

Leadership sprang into action! The word went out to hotel chains that the NAIC wanted to meet in off-season locations. Say, look at Boston in winter or New Orleans in the summer. Attendees complained but that only happened a few years down the road.

The agenda of the aborted 2005 New Orleans meeting—cancelled in the aftermath of Hurricane Katrina—featured a presentation on climate change by former U.S. Vice President Al Gore. (The motion picture version of that presentation would carry the title An Inconvenient Truth.) After canceling its meeting, the NAIC never invited Al Gore to reschedule his presentation. The risk of climate change no longer existed for the business of insurance in the United States—especially if the carriers did not want to talk about it.

Nevertheless, as we shall see, a handful of insurance regulators managed to keep climate change alive as an issue of interest at the NAIC.

Weight of risk

As major carriers expressed greater interest in climate change issues, the NAIC revived its attention to those issues.

As noted in this column in September 2019, influential players in the insurance sector now advocate for public policies aimed at mitigating and reversing climate change.

In a 2018 letter to shareholders, Evan G. Greenberg, chairman and chief executive officer of Chubb Limited/Chubb Group, discussed how climate change impacts perils that produce financial losses submitted to the business of insurance as claims.

“Climate change is a reality and its effects can be seen by an increased frequency and severity of natural catastrophes. Climate change is contributing to higher sea surface temperatures, rising sea levels and an increasing trend in extreme weather events, including floods, droughts, winter storms, heat waves, wildfires and hurricane intensity,” observed Mr. Greenberg.

Mr. Greenberg observed in his letter: “Given the long-term threat and the short-term nature of politics, the failure of policymakers to address climate change, including these issues and the costs of living in or near high-risk areas, is an existential threat.”

Survey

Mr. Greenberg is not alone. We know this because of those few insurance regulators who managed to keep climate change on the NAIC’s agenda.

We know something about the insurance sector’s varied approaches to climate change-related risk because of a little-known NAIC survey. In 2009, the association drafted a questionnaire for use by state insurance departments that queried recipient insurers about company approaches to climate change-related risk.

Through the survey of insurers, regulators sought to understand how insurers consider and address climate change and climate risk in their business operations, underwriting and reserves. Who knows how this one snuck through?

When the survey was adopted by the NAIC, the association suggested that every state circulate the eight-question survey to domestically chartered insurance companies that wrote at least $500 million in annual premiums.

In 2010, only about half the states followed through with this suggestion. Participation by states dropped precipitously the next year even after the NAIC lowered the annual premium target to $300 million.

Because the NAIC never made the survey a priority, state participation dwindled; however, “California, New York, New Mexico, Connecticut, Minnesota, and Washington collaborate in administering the survey to insurers” chartered in those jurisdictions.

Bear republic

From the start, the California Department of Insurance required the state’s domestic insurers to annually file the survey. According to a description of the survey drawn from the department’s website, the California effort polls “nearly 1,000 companies that write more than $100 million per year in premiums nationally, capturing more than 70% of the entire U.S. insurance market.”

The California department makes its survey results publicly available, which allows “regulators, insurance companies, investors and consumers the ability to identify trends, vulnerabilities and best practices by the insurance industry with respect to climate change.”

Again, according to the California department’s website, “60% of insurers surveyed stated they are taking action to manage risks climate change poses to their business.” Furthermore, “Roughly two-thirds of insurers surveyed say they have a climate change policy with respect to risk management and investment management.”

Product database

On July 14, 2020, the California Department of Insurance launched a web-based database of “green” insurance products. One goal behind the construction and publication of the database is to foster competition-driven innovation in climate-friendly insurance products.

The insurance department constructed the searchable database function in cooperation with Evan Mills, Ph.D., principal of Energy Associates in Berkeley, California. The database is international in scope and not limited to American insurance products.

The Energy Associates website explains, “Since the early 1990s, we have interfaced with the global insurance industry around common interests in understanding and managing the impacts of climate change as well as understanding the risks—and risk-reducing co-benefits of energy-efficient and renewable energy technologies and practices.” This work began under the auspices of the Lawrence Berkeley National Laboratory, funded by federal grants.

Climate issues are a long-standing concern for California’s state insurance commissioner Ricardo Lara. While serving in the California State Senate, Lara sponsored the Super Pollutant Reduction Act of 2016 (Senate Bill 1383). The law restricts black carbon, methane, and fluorocarbons that contribute to climate change. As insurance commissioner, Ricardo Lara has continued to champion issues related to climate change. Commissioner Lara is even active with United Nations- sponsored activities.

Task force

So the NAIC certainly named Commissioner Lara to chair its new task force? No, Virginia, that decision would make too much sense. Commissioner Lara will serve as vice chair of the task force.

The NAIC handed the gavel to the association’s president, South Carolina Department of Insurance director Ray Farmer. The task force chair carefully chooses his words when discussing the task force’s aims: “Our focus on climate-related risk and resiliency issues encompasses years of engagement. The timing is perfect for us to examine, on a micro-level, the various opportunities that managing and mitigating climate risk and resiliency will provide consumers.”

Between you, me and the teacup, Director Farmer’s public record displays no experience in climate change issues. This should inform experienced “NAIC Watchers” that the chair will work to tame any efforts to identify affirmative steps that reduce climate change.

Which brings to mind an observation made by the Nobel Prize-awarded economist Joseph Stiglitz: “After the destruction of New Orleans by Hurricane Katrina in 2005, the shutdown of much of New York City by Sandy in 2012, and now the devastation wrought on Texas by Harvey, the U.S. can and should do better.”

That said, the Grey Lady of Insurance Regulation is not ready to be green.

The author

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.