Insurance companies required to disclose climate change risks - will disclosure facilitate risk mitigation, climate change regulation, or litigation?
Co-authored with John Wyckoff.
On March 17, 2009, the National Association of Insurance Commissioners (NAIC), an organization composed of the chief insurance regulatory officials of the 50 states, the District of Columbia and five US territories, adopted the requirement that insurance companies having in excess of $500 million in premiums disclose to regulators and the public the financial risks they face from climate change, as well as their response actions taken to address these risks, by May 1, 2010. Those companies with premiums in excess of $300 million are required to report a year later and those with lower premiums may voluntarily report at any time. The NAIC believes that insurer disclosures will allow regulators to understand the impact of climate change on insurance (property, casualty, life, and health) including its availability, affordability, and solvency.
The adoption of this requirement by the NAIC confirms the growing interest in financial threats to the business community from climate change liability. As noted on prior blog entries, claims alleging damages from “greenhouse gas” emissions are expected to proliferate in the wake of the United States Supreme Court’s April 2007 ruling in Massachusetts v. US Environmental Protection Agency 127 S.Ct. 1438 (2007), that greenhouse gases are air pollutants under the federal Clean Air Act and states have standing to sue. Indeed, there already are a number of lawsuits being pursued by various State Attorney Generals against power companies and automobile manufacturers, alleging that greenhouse gas emissions from their activities and products contribute to global warming and harm the states’ environment, economies and citizens. See California v. GMC C06-05755 MJJ, 2007 U.S. Dist. LEXIS 68547 (N.D. Cal. Sept. 17, 2007).
What Others Are Saying About the Disclosure Requirements
Following the adoption of this requirement by the NAIC, the Wall Street Journal reported that, “[e]nvironmental activists wanted insurers to have to disclose specific information about how their businesses might be threatened by climate change, said Andrew Logan, director of the insurance program at Ceres, a Boston-based environmental group involved in the talks. The activists believe such disclosures will help them press their case in Washington for a tough federal cap on carbon emissions.”
The same article went on to report that, “[s]ome carriers aren’t happy with the regulators’ decision. David Kodama, director of policy analysis for the Property Casualty Insurers Association of America, which represents more than 1,000 insurance companies, said his group is concerned that insurers that provide climate-risk information could face lawsuits alleging that their information isn’t detailed enough.”
What Are the Disclosure Requirements?
With respect to the particulars of the disclosure, the NAIC developed the Insurer Climate Risk Disclosure Survey to assist regulators in assessing an insurer’s risk assessment and management efforts. The Climate Risk Disclosure Survey requires that insurers answer eight questions in good faith, but that the insurers are not required to provide information that is “immaterial to an assessment of financial soundness,” and they are not required to provide quantitative information, and commercially sensitive, proprietary, or forward looking information. The Survey requests information regarding climate change and the company’s: 1) plans for assessing, reducing or mitigating its emissions; 2) policy for risk and investment management; 3) process for identifying climate change-related risks and business impacts; 4) current and anticipated climate change risks; 5) investment strategy response to climate change impacts; 6) steps to encourage policy holders to reduce losses caused by climate change-influenced events; 7) steps to engage key constituencies on climate change, and 8) action to manage climate change risks including the use of computer modeling. These disclosures should provide good insights to risks insurance companies are insuring as more businesses face liability from environmental events such as floods, tropical storms, and the like.
Looking Forward to More Disclosure
Given that disclosure is “right around the corner” and the intertwined relationship between insurance companies and policyholders, investors, and regulators, it is likely that all of these parties will be evaluating the new disclosure requirements and its impact on risk mitigation, regulation, and litigation.
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