March 18, 2009 16:42
by J. Wylie Donald
Yesterday, the National Association of Insurance Commissioners voted to require all insurers collecting more than $500 million in premium to make certain disclosures regarding the effect of climate change on their businesses. Some of you might be saying, "Finally." Others may be critical that not enough is being said. Beyond dispute, however, is that climate change disclosure is now in the mainstream. The NAIC joins, among others, environmental groups such as CERES and Friends of the Earth, investor groups such as the Investor Network on Climate Risk, state attorneys general and state treasurers, all of whom have called for more disclosure.
The lack of disclosure by insurance companies has been publicly criticized for a number of years. One of the first groups to do so was Friends of the Earth, who published an assessment of the climate change disclosures being made by the utility, automobile, energy, petrochemical and insurance industries. Insurance companies were dead last in making disclosures.
A group that has been pursuing and posting disclosures from companies throughout the world, including insurance companies, is the Carbon Disclosure Project (CDP). http://www.cdproject.net/aboutus.asp A search of their database through 2008 shows paltry few American insurers feel it is important to make climate change disclosures. The NAIC, apparently, was acutely aware of this and thus pursued its new rules. (You should also note that many of the disclosures the NAIC now requires can be met by the same disclosures made to the CDP. See 12/8/08 draft disclosure questions at http://www.naic.org/committees_ex_climate.htm). In connection with other issues I have reviewed a large number of CDP responses; the quality of responses varies widely.
The Wall Street Journal reported on the NAIC's decision and stated that two risks were driving the Commissioners. First, the risk of extreme weather events would boost claims. Second, caps on carbon emissions threaten the profitability of industries (such as coal utilities) in which insurers invest. I would add that climate change lawsuits could also be of significant interest to the insurance industry. See Nov. 4, 2008 blog post.
The disclosure rule requires insurers' first good faith qualitative responses on May 1, 2010. All responses will be posted by the NAIC. The goal of the disclosures is to give state regulators more information to understand the financial health of the insurance sector and the availability and affordability of insurance. It remains to be seen whether the goals can be met absent standards by which to measure the disclosures. Just as the CDP's responses have wide variability, absent standards the insurers' disclosures are likely to be equally as varied. Such variation is unlikely to help the Commissioners meet their goals.
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