Insurers Must Report Exposure to Climate Change Risk

Insurance and Climate Change

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The people who assess risk for a living are getting worried about climate change.

Today, the National Association of Insurance Commissioners – the chief insurance regulators from the 50 states and U.S. territories – voted to require insurance companies to disclose the financial risks they face related to global warming.

In addition, the commissioners are requiring insurers to explain how they are preparing to deal with changing risks that could threaten their financial stability in the future, and what the companies are doing to educate state and federal lawmakers and their own policyholders about climate change.

“As 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," explained Pennsylvania Insurance Commissioner Joel Ario, chairman of the NAIC Climate Change and Global Warming Task Force.

"This disclosure standard will give regulators the information we need to better understand these risks.”

Insurers rely on intricate risk models when they write insurance policies. Those models, whether addressing risks to property, finances or health, will have to change as global warming influences some important underlying assumptions.

Even scientists whose sole focus is climate say their understanding and concerns about of the speed and severity of climate change have increased substantially in just the past few months.

For example, the U.N.’s Intergovernmental Panel on Climate Change warned two years ago that sea levels were rising, increasing the threat of damaging coastal storm surges and erosion. Last week, climate scientists meeting in Copenhagen said the rate of polar ice melt was raising sea levels twice as quickly as even the IPCC realized, with an average rise of 3 feet now expected by 2100. The impact will be worse in certain areas, such as the U.S. Northeast.

Scientists also warn that climate change will lead to more extreme weather; longer and more severe droughts, which will put pressure on water resources; and hotter summers, which will increase wildfire dangers and the potential for heat-related illnesses.

Insurers – and their policyholders and investors – need to understand those changing risks and find ways to mitigate the dangers.

“One painful lesson of the current economic meltdown is the need for increased attention to corporate risk management,” said Jack Ehnes, who heads the California State Teachers Retirement System, the nation’s second-largest public pension fund, which is major investor in the industry.

“These disclosure requirements will finally create consistent and comparable information for investors to determine the real steps insurers have taken to assess important risks.”

The insurance industry has the potential to play a powerful role in spurring action to combat climate change in the United States. Money is a mighty motivator, and the industry already has a track record of forcing changes, such as toughening building codes to reduce the risks from fires, earthquakes and hurricanes. Large insurers also wield power as corporate investors.

The new disclosure rules will be mandatory starting May 1, 2010. All insurance companies that received $500 million or more in premiums will be required to file an annual disclosure survey. The insurance commissioners plan to release the information for investors and the public on their association web site.

    "Insurance companies and consumers will be among the first to feel the effects of climate change," Wisconsin Insurance Commissioner Sean Dilweg told a U.S. Senate committee last week, "so the evolution of climate science is of keen interest to us as regulators, and is a key tool for the companies we regulate."