This report summarizes responses from insurance companies to a survey on climate risk developed by the National Association of Insurance Commissioners (NAIC). In 2012 insurance regulators in California, New York and Washington required insurers that write in excess of $300 million in direct written premiums, and are licensed to operate in any of the three states, to disclose their climate-related risks using this survey. The aim of the survey and Ceres’ analysis of the responses is to provide regulators with substantive information about the risks to insurers posed by climate change, as well as steps insurers are taking in response to their understanding of climate change risks.
THE ANALYSIS
The survey generated 184 distinct responses (see full list of respondents in Appendix 3) after duplicates were removed. Ceres developed a framework to assess the responses, analyzing four domains: 1) how the companies manage climate change issues; 2) what drivers shape their strategies; 3) what actions they take in their core functions or operations and; 4) how they interact with external stakeholders. These four broad domains were subdivided into a total of 37 indicators, outlined in Appendix 2. To aid in our assessment, Ceres developed a scoring methodology (described in Appendix 2) that enabled comparison between segments of the industry, company size and other characteristics. Company scores will not be made public, but will be provided to regulators and companies upon request.
KEY FINDINGS
In general, almost all companies responding to the survey show significant weakness in their preparedness to address the effects climate change may have on their business. However, a small subset of industry leaders are evolving their business strategies to remain competitive as the impacts of climate change unfold. Given the strong scientific consensus on climate change, the rest of the industry would be well advised to follow the lead of these innovative companies.
While there is significant variability between companies in their approach to identifying and managing climate risks, clear trends emerged from the survey results:
Smaller companies tend to be far less prepared than larger companies.
Property and Casualty (P&C) insurers (including multiline) demonstrate far more advanced understanding of the theoretical risks that climate change poses to their business. P&C insurers also tend to be at a further stage of development in implementing the tools needed to manage climate change risks, when compared to the Life and Annuity and Health segments of the industry, irrespective of the size of the company.
Only 23 companies, mainly large and foreign-owned, have a specific, comprehensive strategy to cope with climate change. At best, most insurers view climate change as a risk that will inherently be captured in their Enterprise Risk Management strategies, and at worst as an environmental issue immaterial to their business.
KEY FINDINGS BY CHAPTER
Climate Change Risk management
Only 23 of the 184 companies have comprehensive climate change strategies1: of those 13 are foreign-owned, and 8 are P&C companies. Yet even among those companies with comprehensive climate strategies, the view of climate science is remarkably diverse. For example, companies such as ACE are funding primary climate change research, Swiss Re and others lend their brand actively to efforts at the Intergovernmental Panel on Climate Change (IPPC, a global cooperative to synthesize the state of climate change science), while companies including Allstate and Travelers express strong ambivalence about the state of the science—specifically, the existence of climate change and what is causing it.
While most insurers in the P&C segment have policies in place to manage climate variability, the annual and decadal variance inherent to the global climate system, few have explicit policies to identify or manage the trends of global climate change. Some insurers do not seem to understand the difference between climate variability and climate change.
Especially within the Health and L&A segments, but even among some P&C insurers, many companies view climate change as an environmental issue immaterial to their business. Most of the remaining companies regard climate change as a risk that will inherently be captured in their Enterprise Risk Management strategies.
Action Drivers on Climate Change
The survey reveals five main motivators of action on climate change, including:
Cost efficiencies, primarily energy savings. The most common action driver (116 of 184 companies) was reducing company energy use to cut costs. Far fewer companies (39 out of 184) cited carbon reduction targets as a motivator.
Security, the exposure of the company’s operations, revenue and profitability, is a motivator for 110 out of 184 companies, although this is primarily due to concern for current extreme weather events, rather than climate change per se. Business continuity and claims processing from extreme events that affect insurers’ own operations are the most-cited exposure nodes (72 out of 184). Companies cite reinsurance, loss modeling and business continuity planning as approaches to managing their own performance, while carrying surplus capital is rarely mentioned. However, risk management approaches are frequently described generally in terms of catastrophe risk management rather than as approaches specifically to address climate change. There is little discussion of the potential for correlation between client risk and asset risk.
Emergent risks from future climate trends—88 out of 184 companies viewed climate change as a potential future loss driver, even though scientific assessments such as the recent IPCC Extreme Events report and draft National Climate Assessment emphasize that climate change is already amplifying extreme events that lead to insured losses. As a far off risk factor, climate change was seen as a potential risk to companies’ underwriting and investment returns, even for insurers in segments such as dental insurance.
Sustainability and related reputational benefits. This driver is relevant for all segments, but especially so for health insurers. While only 9 companies include the reputational benefits of acting on climate change, a far higher number highlight correlations between sustainability programs and reputational benefits (77 firms, or over 40% of the survey).
Client exposure to climate change was cited by 72 out of 184 companies, with concerns including clients’ exposure to carbon regulation, extreme weather damage to clients’ physical operations or assets and damage to clients’ investments.
The motivators for climate action differ depending on industry segment. P&C insurers’ top concerns are security, closely followed by cost efficiency. They view climate change as a future but uncertain, emergent risk, rather than one that already affects clients through hazards such as more damaging hurricanes and extreme heat events. Life & Annuity insurers are especially motivated by cost efficiency, followed closely by security. There is less concern over potential or current changes in the climate and minimal concern over hurricanes or other weather extremes. Health insurers’ main driver is sustainability, which they link to concern for the well being of their clients.
Core Functions
By far, the industry segment with the most climate risk management activities underway is property and casualty—unsurprising as weather events are a major driver of losses to these companies. In general, the current view of Life & Annuity companies is an absence of current risk exposure to climate change on their underwriting business, but nearly a quarter describe some active management of invested assets to manage climate change risks. Despite predictions of more pronounced heat waves, expansion of insect-borne disease and poorer air and water quality, few health companies describe climate change as a factor relevant to their risk assessment.
As may be expected, many insurers discuss climate change in terms of specific perils or types of extreme weather events. The most common of those perils, as reflected in the findings of Ceres’ 2010 review of insurer disclosure, is hurricanes (32 of 184 companies, all P&C). As for the scientific community, there is no consensus yet on how hurricane risk will evolve in a warmer climate—while leading experts disagree on whether increasing atmospheric and oceanic temperatures will lead to more or fewer hurricanes developing, there is widespread agreement that those hurricanes that do form will be more intense and destructive, in part due to higher sea levels and resulting higher storm surges.
Other perils, including wildfires (15 out of 184) and convective storms that produce tornadoes, thunderstorms and hailstorms were also highlighted by insurers. The state of science for these weather events is very uneven: more damaging wildfires are demonstrably trending upward as predicted by climatological assessments, yet insurers describe loss experience as departing dramatically from their own historical underwriting experience.
Common strategies for risk management include catastrophe modeling, reinsurance, higher deductibles or broader exclusions in risk-prone areas (particularly coastal zones), and a careful control of aggregate exposure, including rebalancing property with other lines of business. The most frequent challenge to risk management cited by insurers is regulatory pricing controls in which prices are not permitted to rise as quickly to higher risk levels in regulated markets.
This finding, namely that insurers view their investments as minimally susceptible to climate risks, was also reported in Ceres’ 2010 review of insurer disclosures. However, nearly a quarter of life insurers and a number of P&C companies describe strategies for reducing their investment exposure to businesses or regions that are viewed as most vulnerable to climate change impacts. Of great interest is the tendency of insurers across business segments— life and property alike—to prioritize physical risk management over carbon regulation risk management in their investments. While companies recognize the potential for investment losses in carbon-intensive industries under future carbon regulatory regimes, no insurers describe screening out carbon-intensive businesses. Yet several insurers describe screening out securities or real assets from coastal regions (particularly Florida) and arid regions with perceived water scarcity such as the Southwest. Particularly following the spate of destructive storm and drought activity in 2012, these investment screening practices should be noted by real asset owners and bond issuers.
Engagement
Few insurers describe efforts to engage stakeholders such as regulators, policymakers, customers, employees, asset managers or vendors on climate change. The dearth of external engagements limits the potential influence of insurers in shaping a public view of climate change risks and policy actions that are needed to enhance climate resiliency and climate mitigation. Because insurers have uneven resources to assess their own climate risk, the inward-facing approach of much of the industry also suggests that smaller companies may be disproportionately unprepared for climate change.
Smaller insurers rely upon external parties for critical services such as catastrophe modeling, reinsurance strategies and asset management, yet the survey findings suggest that these insurers often do not understand whether their advisors and suppliers are factoring climate change into their decisions.
Many insurers have adopted products designed to support low-carbon activities. About half of large and medium-sized property insurers offer insurance products designed for low-carbon activities such as green buildings or renewable energy projects. Some of the large Life & Annuity companies offer investment products allocated to low-carbon technologies. However, since most product development has been undertaken by multinational companies headquartered overseas, most products tend to be developed for an international market and are of limited relevance in the United States market.