Investors Turn Up Heat on Insurers to Disclose Risk from Climate Change

Citing the risks that they say insurance companies face from losses and financial risks associated with climate change, 20 U.S. investors led by several state treasurers urged 30 of the largest publicly-held insurance companies in North America to disclose their financial exposure from climate change and steps they are taking to reduce those financial impacts.

The investors, who collectively control more than $800 billion in assets, co-signed letters sent requesting that the climate risk reports be completed and shared with investors by August 2006. The reports should address the multiple types of risk and opportunity that insurers face in regard to climate change, including physical loss, legal and investment risks, as well as opportunities for new markets and products in a changing economic environment, according to the group.

The investor request comes on the heels of devastating back-to-back hurricane seasons in the U.S. that caused a record $30 billion in insured losses in 2004 and as much as $60 billion in insured losses from Hurricane Katrina alone in 2005.

According to a recent study by the Ceres investor coalition, U.S. insurers have seen a 15-fold increase in insured losses from catastrophic weather events in the past three decades – increases that have far out-stripped growth in premiums, population and inflation over the same time period. The study, Availability and Affordability of Insurance Under Climate Change: A Growing Challenge for the U.S., warns of larger financial losses in the years ahead if climate change trends continue and no actions are taken to face the challenge.

“While more insurance companies are acknowledging the seriousness of climate change, few if any companies have examined the broad financial risks and opportunities from this issue and the potential impacts on shareholder value,” said the 20 investors, in the two-page letter to insurance company CEOs. “The challenge now is taking concrete action. We are calling on insurers to undertake a comprehensive analysis of the business implications of climate change for their companies and to share the results with shareholders.”

The letter was sent by state treasurers and controllers from California, Connecticut, Kentucky, Maryland, New York, North Carolina, Oregon and Vermont, as well as two of nation’s largest public pension funds, CalPERS and CalSTRS. the New York City Comptroller, the Illinois State Board of Investment, socially responsible investment funds, faith-based investors, labor pension funds and a leading foundation. All of the investors are part of the Investor Network on Climate Risk (INCR), a leading U.S.-based investor coalition working on climate risk issues.

In addition to the risk of direct losses due to physical weather-related events, the letter asks insurers to look strategically at climate change and how it could affect the long-term value of the investments that enable them to pay claims and remain profitable.

The letter to insurers was sent as the National Association of Insurance Commissioners prepared for a panel discussion on the climate change issue at its winter meeting December 3 in Chicago. The climate change panel was originally planned for NAIC’s fall meeting in New Orleans, but was postponed due to Hurricane Katrina.

“Insurers could face a double whammy or a one-two punch from climate change. In addition to driving up claims, it can affect the value of the stocks and bonds in insurers’ investment portfolios,” said Connecticut Treasurer Denise Nappier, whose $21 billion pension fund has more than $500 million invested in property-casualty and reinsurance stocks.

Still, as the letter notes, none of the country’s largest insurance companies have undertaken a comprehensive evaluation of the issue. Last fall, for example, New York City Comptroller William C. Thompson Jr. surveyed 13 insurance companies that the city’s pension funds were invested in to better assess how the companies were addressing climate change. According to survey results announced by Thompson’s office, eight of the companies responded, and not one provided any assurance that climate change was seriously being assessed or considered.

In announcing his support of the letter, Comptroller Thompson said: “As the investment officer of the city’s five pension funds, I am particularly concerned that the failure of these companies to fully consider potential climate change risks in their underwriting process could adversely affect the financial performance of these companies and the pension funds’ investment interests.”

“Investors are increasingly more concerned about the financial risks posed by climate change and our interest is especially strong for the insurance industry which is so directly exposed to the physical impacts of global warming,” said Jack Ehnes, chief executive officer of the California State Teachers’ Retirement System (CalSTRS), one of the country’s largest public pension funds.

“Any insurance company that is not focusing on climate change and related possible damage is not being realistic in looking at their future profitability,” said North Carolina State Treasurer Richard Moore. “As an investor, a lack of disclosure always troubles me.”

“U.S. insurers are facing a perfect storm of rising weather losses, rising global temperatures and more Americans than ever living in harm’s way,” said Mindy S. Lubber, president of Ceres. “Insurers and regulators have failed to adequately plan for these escalating weather events that will have major long-term ramifications on insurance companies and their shareholders.”

“Hurricane Katrina reminded all Americans of the destructive power of natural disasters,” said California State Treasurer Phil Angelides, a board member at the California Public Employees’ Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS), the nation’s largest and third largest public pension funds with over $300 billion in assets. “Insurance companies simply can’t afford to ignore climate change. As shareholders, we must hold the companies we own accountable and demand they adopt strategies that will enable them to survive in a changing world.”

The 30 publicly-traded companies receiving the letter are the largest in the life, health, property/casualty and reinsurance sectors.

Source: Ceres