P&C trades argue states destroying ‘interstate comity’ with climate survey

by R.J. Lehmann on March 1, 2012

A trio of large states that recently banded together to require insurers comply with a climate risk survey process originally developed – but later withdrawn – by the NAIC are acting contrary to the “spirit of interstate comity and collegiality upon which the efficiency of the state based insurance regulatory framework vitally depends,” two of the P&C insurance industry’s largest trade associations wrote in a Feb. 28 letter to NAIC President Kevin McCarty, Florida’s insurance commissioner.

The letter from the National Association of Mutual Insurance Companies and the Property Casualty Insurers Association of America takes aim at the recent decision by insurance regulators in California, New York and Washington state to require any insurance groups that do business in those states, and who have more than $300 million in direct written premium nationally, to respond annually to a climate risk survey based on the NAIC’s own model.  The survey asks that insurers detail the role climate change plays in their risk management and catastrophe-risk modeling decisions, whether they are taking any steps to educate policyholders about climate risks and what role the subject plays in their investment strategies.

The NAIC originally adopted its Climate Risk Disclosure Survey in March 2009, with a plan to administer it to insurance groups with more than $500 million in direct written premium. The survey would be administered by the domestic regulator of the largest member of each group.

However, that plan faced push-back in a number of states, with Indiana Gov. Mitch Daniels among the most vocal in directing his insurance department not to administer the survey. Ultimately, the NAIC amended its plan in 2010 to make the survey voluntary for states to administer, to allow states to choose whether it would be voluntary or mandatory for companies to respond and to make clear that survey responses were confidential.

In their letter, NAMIC and PCI object to states taking action that appears contrary to the NAIC’s precedent of deferring to domestic regulators for most matters of solvency oversight. They also said they were concerned that the filings would be tabulated and analyzed by an “an uncompensated, yet interested third-party investor advocacy group.” Although not named in the letter explicitly, that group would be Ceres, which has led advocacy efforts to prod the NAIC into administering the survey, and which issued a September 2011 report finding insurers’ responses to the climate issue to be “sluggish and uneven.”

NAMIC and PCI write:

An unintended consequence of the actions by these three states is to undermine…primacy (of domestic regulators) by de facto overruling of the decisions and actions of the “lead state” regulator under the NAIC survey process. Such an outcome is hardly the efficient yet effective regulatory process that we mutually seek. Further, the use of interested third parties in what purports to be a solvency evaluation tool opens the system to criticism.

We therefore further ask the NAIC leadership to undertake appropriate action and discussion about the appropriate role of domestic versus “license” states in all matters of principal solvency regulation and examination authority, and to urge the aforementioned states to follow the decisions made in 2010 regarding the use of the NAIC survey.

It should be noted: NAIC decisions are not, and have never been, binding on the states. States have always been free to reject model laws and regulations the group proposes, or to adopt regulations or procedures that the NAIC rejects.

There is even precedent for states to adopt the “work product” that comes out of NAIC deliberations, even when the group as a whole has not (or not yet) lent its endorsement. When life insurers came to the NAIC during the financial crisis of 2008 and insisted they needed immediate relief from a broad range of capital requirements, the group initially rejected the plan, but many individual commissioners (particularly those that were domestic regulators for a large number of life insurers) ended up adopting the changes through a process known as “permitted practices.” Similarly, the State of Florida adopted sweeping changes to its collateral rules for offshore reinsurance several years before the NAIC ultimately consented to similar changes in its own models.

But part of what makes this particular dust-up interesting is the states involved, as well as the trades who are raising objections. Over the years, it would be hard to think of any two states less committed to the NAIC’s mission of promoting uniformity in insurance regulation than New York and California.

New York only became accredited by the NAIC in 2009, after balking at the NAIC’s Financial Regulations Standards and Accreditation Program for the first 19 years of its existence because of the state’s refusal to adopt the NAIC’s risk-based capital regulatory regime.

Meanwhile, California’s notorious reluctance to cede any portion of its own sovereignty has extended not only to its fellow states and the NAIC, but even to the federal government. In the 2003 case Garamendi vs. the American Insurance Association, the Supreme Court struck down a California law requiring a host of disclosures by insurers who did business in Holocaust-era Europe, with the high court finding the state had improperly attempted to conduct its own foreign policy that was contrary to the dictates of the U.S. State Department.

Given the size and importance of these two behemoth insurance markets, a joint decision by New York and California to pursue some particular regulatory course arguably has more force than even supposed “consensus” decisions by the NAIC, where a simple majority of much smaller states can win the day. Indeed, if there’s anything surprising about the recent announcement, it’s that these two states haven’t conspired more often to create what would, in essence, become “national” insurance policy.

What makes the trades’ response interesting is that it comes from two groups, particularly NAMIC, that historically have been staunch defenders of state-based regulation.  Their letter comes as the NAIC’s Climate Change and Global Warming Working Group – which is chaired by Washington Insurance Commissioner Mike Kreidler and also includes California Insurance Commissioner Dave Jones – prepares to meet March 6 in New Orleans and receive a presentation from United Nations Environment Programme Finance Initiative on their own recent survey of insurers’ climate risk programs.

The trades’ objections to the climate survey don’t actually have much to do with the science of climate change. They relate more to the nature of the survey, the compliance burdens it places on companies and uncertainty about how the information ultimately would be used. Insurers have complained that the NAIC’s survey is very vague in its wording and fails to define even what is meant by a “‘climate change-related risk.”

Some have also bristled at the subtext of certain questions, such as the direction to discuss steps “the company has taken to engage key constituencies on the topic of climate change,” which could imply a duty to lobby lawmakers on environmental issues. Other questions focus on insurers’ investment decisions, which has raised questions about whether the implication is that insurers should direct investments toward “green” technologies or away from fossil fuel-related industries, rather than simply searching for those investments that best match the nature and duration of the underwriting risks they support.

Certainly, PCI and NAMIC are right that New York, California and Washington have moved to circumvent the NAIC process, and it arguably sets a dangerous precedent for them to do so. But it’s not clear exactly what, other than offering a forceful “tssk, tssk,” the NAIC could actually do about it.

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