Insurance and Climate Change column

Climate Change Easy Bet to Be Hot Topic at Insurance Regulators’ Meeting

By | March 31, 2016

Mark down the Climate Change and Global Warming Working Group as the odds-on favorite committee to produce the most interesting chatter during the National Association of Insurance Commissioners meeting next week in The Big Easy.

Climate change buzz has continued to grow following the Paris meeting of world leaders late last year, when an agreement was hashed out to battle global warming by aggressively reducing carbon emissions.

If coal and carbon investing wasn’t already considered a dirty habit, it certainly is now.

There’s been no shortage of European insurers and reinsurers promising to divest from the dirty energy sector, and it’s a good bet that there will also be no shortage of proposed regulations, guidelines and best practices to get U.S. insurers to follow suit coming out of the NAIC meeting.

Working Group

Any push to get insurers out of carbon-based investments will start in the working group, which is headed by two highly-vocal advocates of the industry being proactive on climate change.

Washington Insurance Commissioner Mike Kreidler, the nation’s longest serving insurance commissioner, chairs the group. California Commissioner Dave Jones is vice chair.

Jones is pushing California insurers to get rid of investments in coal, and Kreidler has for the past few years been calling out the insurance industry for being unprepared for climate change and has said insurers are not taking climate change seriously enough.

Both have stepped up their entreaties for the industry to take action on climate change, and they’ll have the ears of commissioners from several big states sitting on the climate change group, Texas, Pennsylvania, and Ohio among them.

The group’s listed “2016 Charges,” along with their degree of importance, are as follows:

  1. Review the enterprise risk management efforts by carriers and how they may be affected by climate change and global warming.—Essential
  2. Investigate and receive information regarding the use of modeling by carriers and their reinsurers concerning climate change and global warming.—Important
  3. Review the impact of climate change and global warming on insurers through presentations by interested parties.—Important
  4. Investigate sustainability issues and solutions related to the insurance industry.—Important
  5. Review innovative insurer solutions to climate change, including new insurance products through presentations by interested parties.—Important
Washington Insurance Commissioner Mike Kreidler
Washington Insurance Commissioner Mike Kreidler

Kreidler in a conversation with Insurance Journal this week expressed his intent that the working group consider ways to drive insurers out of not just coal but all carbon-based investments.

No official recommendations will come from the committee, which is part of the NAIC Property and Casualty Insurance Committee. Instead any recommendations from the group will likely be forwarded to other committees to consider producing any official NAIC recommendations.

From there state regulators will have to make up their own minds on whether to implement industry guidelines on climate change.

Expect no shortage of strong and potentially industry-changing recommendations to be generated from the climate change group. Plans are for the group to focus on two areas, one of which is property codes and mitigation, while the other is the inherently hot topic of guiding insurer investments.

In Kreidler’s words, taking a hard look at carrier investment strategies is the best way “to make sure that they aren’t setting themselves up for the potential of having stranded assets associated with carbon‑based investments.”

Passive No Longer

Until this year most regulators had been taking a passive approach to this issue, primarily issuing voluntary disclosure forms asking about information on carbon-based investments.

California Insurance Commissioner Dave Jones
California Insurance Commissioner Dave Jones

On Jan. 25, Jones asked all insurance companies doing business in California to voluntarily divest from their investments in thermal coal. Then in April Jones made known his plans to initiate a data call that requires insurance companies to annually disclose their carbon-based investments, which includes investments in oil, gas and coal.

Coal’s ugly downside has prompted investment warnings over potentially falling stocks.

A report from global consulting firm Mercer on how global warming scenarios will impact investment returns shows the average annual returns from the coal sub-sector could fall by between 18 percent and 74 percent over the next 35 years and between 26 percent and 138 percent over the next 10 years based on climate change estimates representing 2, 3 and 4 degrees Celsius warming scenarios.

Zacks Equity Research recently offered a dire outlook for the beleaguered sector.

“Unfortunately, all coal producers have been affected by the drastic fall in demand and consequently its prices, which have taken a toll on their financial health,” a report from the firm stated.

The U.S. Environmental Protection Agency’s Clean Power Plan calls for CO2 reduction of 28 percent by 2025 and 32 percent by 2030 from 2005 levels.

“This plan will certainly ensure the closure of more coal-based power units,” the Zacks report states. “They will either be idled or converted to natural gas based units, affecting the long-term prospect of coal stocks.”

Anti-Carbon Movement

The anti-carbon-investing movement in the insurance industry has its roots in a decision nearly a year ago by French insurer AXA SA, which announced it was planning to shed its holdings in coal companies over concerns about climate change.

Other European insurers followed, and Kreidler thinks it’s imperative that U.S. insurers do the same.

“We want to make sure that insurance companies are doing an appropriate review of their investment strategies, but we also want to make sure that we as regulators are looking at those investment portfolios and making sure there’s a proper assessment for those portfolios so that there isn’t a vulnerability,” he said.

Kreidler and any like-minded regulators may have a bit of battle to get people in the industry on board with their thinking.

One of the industry’s best known and most respected names is on record dismissing the potential impact of climate change on the industry.

Buffett Not Worried

In an annual letter to Berkshire Hathaway shareholders on Feb. 27, Warren Buffett acknowledged it was likely that climate change poses a “major problem for the planet,” but that Berkshire’s insurance units would not face big losses and that climate change should not be on any “list of worries” for Berkshire shareholders.

Kreidler interpreted that as Berkshire Hathaway’s leaders seeing no upside in long-term commitments to communities and their assets. When greater losses occur in areas being impacted by the effects of climate change, it seems the strategy will be to just raise rates or pull out.

“That’s part of the problem,” he said. “My fear is that you could wind up with insurers that are attempting to restrict their underwriting in certain areas to the point where their rates are either prohibitive, or they wind up effectively trying to abandon certain coastal areas because of the risk that they perceive.”

Sandy Example

Look no further back for an example of what he’s talking about than 2012 after Superstorm Sandy struck.

Federal lawmakers in the area hammered insurance companies for not staying in the afflicted areas, or not coming back at the same level of interest in the area. The public relations mess for the carriers that left was a microcosm for the mess across the ravaged Eastern seaboard.

Kreidler foresees similar adverse reactions from insurers as sea levels rise and extreme weather becomes more commonplace, dismantling coastal communities across the nation

“All of a sudden, you can see a major withdrawal,” he said.

Exiting markets comes with great implications, such as a significant long-term impact on a local economy. And when people’s pocketbooks get hit, they’ll clamor for laws, rules and regulations to make things right.

“I can tell you, as a former legislator, when people start getting hurt, and economic activity is being hurt, that’s when you come back and you start telling insurance companies, and they’re telling regulators, this is how you’re going to do it,” he said. “These insurance companies, if they want to do business in our state, they’re going to be involved in those coastal counties too.”

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