Ceres reports that insurers want to be part of the climate change solution
In April 2009, Ceres published a report entitled “From Risk to Opportunity, Insurer Responses to Climate Change.” The report contains responses and significant information from over 12 insurance companies, as well as several brokers, insurance consultants, insurance associations regarding the climate initiatives being undertaken by the industry, including coverage for green buildings, renewable energy, carbon risk management, and officers’ liability insurance to tackle climate change and rising weather-related losses in the US. The report speaks to the many insurer activities identified in our previous blog post regarding insurance industry climate change strategy and its implications for corporate policy holders, as well as the more recent March 17, 2009 National Association of Insurance Commissioners (NAIC) climate risk disclosure requirement for insurance companies. The insurance industry’s response aims to address more than $200 billion in estimated losses to the global economy attributed to climate change, but critics say the industry’s response is too little, too late.
The Ceres report identifies 643 specific insurance industry climate activities in the areas of:
- Developing “innovative” insurance products;
- Disclosing carbon risk;
- Aligning terms and conditions with risk reducing behavior and promoting loss prevention;
- Promoting understanding and participation in Climate change and public policy;
- Offering carbon risk management and offsets; and
- Investing in and financing climate change solutions and customer improvements.
What does the Ceres Report say about Insurers and Policy Holder Litigation?
Interestingly enough the report states that “liability insurers might willingly assume the responsibility for climate-related litigation costs borne by their policyholders (p.1).” The report goes on to state that losses arising from the causes/impacts of climate change, as well as the emerging responses, will pierce liability lines. Potential triggers for insurer responsibility include:
- Abrupt impacts of extreme events linked to climate change;
- Gradual impacts such as increased mold losses from warmer and wetter climates and flooding (Lavoie 2006);
- Secondary consequences of climate-linked events (e.g. waste spills);
- Failure to adapt quickly or adequately to climate change impacts;
- Demands for compensation for prudent adaption costs;
- Political risks;
- Poor corporate governance and failure to fulfill fiduciary duties in light of climate change risks and opportunities;
- Professional liability associated with implementation of new technologies;
- Contract performance in carbon-offset or energy production/saving projects, and carbon credit nondelivery;
- False advertising (greenwashing);
- Disinformation/fraud;
- Inadequate fiduciary responsibility (investment choices)
- Worsening roadway risks affecting vehicle liability losses.
The report acknowledges that insurers in the past have “assumed certain risks for which they did not collect adequate underwriting information or, premiums, or have adequate surplus.” The report recommends that insurers involving climate-related risks will “need to be attentive to changing standards of care, as new data, methodologies, and technologies emerge.
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.
