Insurance companies take in a plethora of information before they make any decision in regards to setting rates, writing policies or expanding to new markets. With data ranging from area demographics to complex weather models, insurers invest billions of dollars to ensure that they are fully taking into account the risks they write every year. Climate change and the catastrophe models that insurers use has become a hot political issue in recent years. Some insurance regulators have argued that these models either overstate or understate windstorm or flood risk based on climate change.
In an effort to guarantee that regulators and the industry are aware of how insurers are using climate change information in their models, three states will now require insurers to disclose how they will respond to the risk of climate change. Felicity Barringer wrote in the New York Times about how insurers and regulators feel about the new disclosure survey.
From the New York Times:
Insurance commissioners in California, New York and Washington State will require that companies disclose how they intend to respond to the risks their businesses and customers face from increasingly severe storms and wildfires, rising sea levels and other consequences of climate change, California’s commissioner said Wednesday.
Up until this point, those states required about a third of larger insurers to turn over the information in a survey; for all others it was voluntary.
“Our experience and other states’ experience as regulators is you get a far better response rate if you require response to be provided than if you just allow companies to decide when and how they will respond,” said Dave Jones, the California commissioner. “Our goal is to have the most complete, best and accurate information possible for investors, the insurance industry, regulators and the broader public.”
Insurance regulators in the three states, New York, California and Washington, have argued that more information about how climate change effects insurance rates and policy is necessary for the industry to adapt to the new data coming from climate change models. The New York Times article commented on the difficultly the insurance industry has had adapting to the new data, given its reliance on historical models which have not taken these factors into account.
The creators of the disclosure survey, a non-profit group associated with several environmental organizations criticized the insurance industry for not disclosing this information on climate change on its own.
“Global warming presents unique risks, and it is vital that our insurance industry adequately account for the impacts of climate change,” Benjamin M. Lawsky, superintendent of New York’s Department of Financial Services, whose portfolio includes insurers, said in a statement. “We look forward to working with the industry to address these important and growing risks.”
The disclosure survey will be mandatory for companies writing policies worth more than $300 million nationwide. It was created by Ceres, a Boston-based nonprofit group that leads a coalition of investors and environmental groups in gathering information about business responses to climate change, and prods them to do more.
Andrew Logan, the director of Ceres’s insurance program, said Wednesday that the insurance industry “is distinguished by poor disclosure on this issue.” He added, “To me it is a continuing surprise that an industry that is so obviously affected by this talks so little about it.”
The response from the insurance industry was swift. Robert Hartwig of the Insurance Information Institute argued that the insurance industry discloses more information then most about its business practices.
Robert Hartwig, president and economist at the Insurance Information Institute, an industry trade group, sharply disputed this [Logan’s] point. “No industry discloses more about the impact of climate on its earnings and its ability to operate,” he said. “Look at any quarterly earnings report and you’ll see it’s full of the impact of weather on earnings.”
He added, “If insurers have shown anything over the course of the centuries in which they have oared it is that they are capable of managing changes in the weather on both the micro and the macro scale.”
Insurers and reinsurers are on the front lines of investigating the impact of both climate and weather. Since there remain great uncertainties about how, precisely, these issues will impact claims in the future, any new rules adopted by state or federal regulators need to be careful to avoid burdensome reporting requirements that would stifle the ability of insurers to respond and adapt to risk.
Regulators also need to be cautious of politicizing what should be market processes. Regulations should not lead to situations where insurers are pressured to alter their investment decisions based on what are fundamentally political considerations.
Felicity Barringer’s article, “Three States to Require Insurers to Disclose Climate-Change Response Plans,” is available online at: http://www.nytimes.com/2012/02/02/business/energy-environment/three-states-tell-insurers-to-disclose-responses-to-climate-change.html.