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ClimateWire: Regulators to Focus on Climate Threats to Insurers' Investments

By Evan Lehmann
Insurance regulators are refocusing their efforts on climate change to examine the financial risk it might hold for the nation's collage of companies that wield trillions of dollars in the energy sector and other investments.

Insurance regulators are refocusing their efforts on climate change to examine the financial risk it might hold for the nation's collage of companies that wield trillions of dollars in the energy sector and other investments.

It is a narrowed scope in the wake of a bruising process that failed to establish a national rule last year requiring large insurers to disclose their activities to address climate change. The effort was defeated during a surprise rebellion by regulators representing conservative states.

Now, the National Association of Insurance Commissioners is establishing a lower-profile panel to examine the extent to which rising oceans, strengthening hurricanes and more violent thunderstorms might threaten insurers' economic stability.

The new tack appears to largely abandon past efforts to publicize the industry's response to global warming through a mandatory survey. Such proposed disclosures were seen by some opponents as an effort to coerce companies into acting aggressively on global warming to avoid public criticism.

The new panel, which no longer resides in the NAIC's lofty Executive Committee like its predecessor, will try to avoid controversial suggestions in the past that made much of the slow-moving industry recoil in defense.

Trade groups were especially sensitive to inquiries about insurers' efforts to persuade millions of policyholders to reduce their carbon footprints, or to questions about their future business plans in specific regions, like coastal Florida.

"We'll have our fingers crossed. Sometimes you've got to push back and start over again," said Mike Kreidler, the insurance regulator of Washington state and the panel's chairman. "I'm optimistic that we can get to the same point, and maybe do it with more consensus and more buy-in than we did with the initial survey."

Examining fossil fuel investments

The panel will delve into an area rarely scrutinized from a climate perspective. It will focus on the sprawling investments by U.S. insurers, amounting to $3.3 trillion in 2008, and whether they are vulnerable to rising risks associated with climbing greenhouse gases.

That could touch on sensitive topics. The industry, for example, had $139 billion invested in the electricity sector in 2008, according to data compiled by the NAIC.

The potential risk to those investments resulting from a government price on carbon dioxide has passed for the time being. But Kreidler says the panel will approach its examination with a frame of reference that looks far into the future.

"I think what it may force companies to want to take a look at is what's their potential risks if they do have a significant investment in industries that are going to be potentially at risk in the future," Kreidler said. "It would be one of having them identify what the downsides are of having investments ... in fossil fuels compared to perhaps some of the newer technology that's coming down with regard to solar and wind."

The panel, named the Climate Change and Global Warming Working Group, will enjoy less prominence than its predecessor, which held the higher rank of a task force in NAIC nomenclature.

The demotion is disappointing to Andrew Logan, who directs the energy program for Ceres, a coalition of institutional investors promoting environmental issues. But he points to new benefits, too. The working group is a permanent body in the NAIC's framework, not a temporary panel like the task force.

And its focus on financial issues could have broad implications for the industry's treatment of climate change. For example, the panel will discuss including climate-related factors in the framework of financial examinations of insurance companies, a move that could increase the issue's legitimacy in the financial sector.

Insurers could invigorate clean tech

The attention paid to investments could also extend beyond protecting insurers from financial losses. With the industry's largesse, even a moderate shift of its assets toward clean energy could invigorate a burgeoning market that diminishes carbon emissions.

"Insurers are enormous players in the investment world," Logan said. "Insurers have ... been a large source of funding for the fossil fuel industry, and they potentially could serve as a potential source of capital for clean tech."

"So this is a case where I think beginning to examine the issues has really broad implications for the whole conversation around climate change and the energy transition -- at least in theory," he added.

Regulators are avoiding early opposition from trade groups by signaling that the panel's findings could remain confidential -- a key promise sought by the industry during the previous go-around. Trade associations feared then that publicly broadcasting their climate efforts would be used to cajole them into activities to address global warming.

"Maybe that's not the game plan this time around," said Robert Detlefsen, a vice president with the National Association of Mutual Insurance Companies, a vocal critic of the earlier panel.

"Maybe now it's just trying to use good old-fashioned persuasion to convince insurers to 'Hey, you know what, you really ought not be investing in this particular class of assets because of the effect of climate change on the performance of that as an investment,'" he added.

Kreidler indicated, however, that the public is entitled to see some of the panel's findings. The challenge, he added, will be finding a balance that treats insurers and the public fairly.

"We're going to have to find that path that goes far enough so reasonable information is being made available to the public that is important for policymakers to make decisions in the future, and at the same time doesn't threaten the companies," Kreidler said.

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