TODAY’S STUDY: INSURERS FAIL TO PREPARE FOR CLIMATE CHANGE
Insurer Climate Risk Disclosure Survey Report & Scorecard: 2014 Findings & Recommendations
October 2014 (Ceres)
This report summarizes responses from insurance companies to a survey on climate change risks developed by the National Association of Insurance Commissioners (NAIC). In 2013, insurance regulators in California, Connecticut, Minnesota, New York and Washington required insurers writing in excess of $100 million in direct written premiums, and licensed to operate in any of the five 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, insurers, investors and other stakeholders with substantive information about the risks insurers face from climate change and the steps insurers are taking—or are not taking—to respond to those risks. Because virtually every large insurer operates in at least one of the mandatory climate risk disclosure states, this analysis effectively opens a window into the entire industry. The report distills key findings and industry trends, and includes company specific scores based on disclosed actions taken to manage climate risks. It also offers recommendations for insurers and regulators to improve the insurance sectors’ overall management of climate change risks.
The survey generated 330 distinct insurer responses after duplicates were removed, compared to 184 insurer responses in a similar Ceres report issued in 2012. The 330 companies represent about 87 percent of the U.S. insurance market by direct premiums written. Ceres’ analysis assesses insurer responses against five core themes that are aligned with the NAIC’s Climate Risk Disclosure Survey questions: 1) the governance structures companies have in place to address climate risk; 2) the climate risk management programs companies have instituted across their enterprises; 3) how insurers are using computer modeling to manage their climate risks; 4) how insurers are engaging with stakeholders on the topic of climate risk; and 5) how companies are measuring and reducing greenhouse gas (GHG) emissions. Ceres also ranked companies on the overall quality of their responses to the eight survey questions.
In order to provide standardized, useful comparisons between companies, Ceres assigned a point value to each question and sub-question from the survey. To simplify our report findings, Ceres developed a four-tier rating system. Using a 100-point scale, “Leading” companies received 75 points or higher, “Developing” companies received between 50 to 75 points, “Beginning” companies received between 25 and 50 points, and “Minimal” companies received less than 25 points. Company specific ratings across all six themes can be found in Appendix A.
In general, most of the companies responding to the survey reported a profound lack of preparedness in addressing climate-related risks and opportunities. Only nine insurers, or three percent of the 330 companies overall, earned a Leading rating. The vast majority of insurers (83 percent) earned Beginning or Minimal ratings. On an encouraging note, the report identified a small subset of strong leading practices by insurers in each of the major themes. Given the strong scientific consensus on climate change, the rest of the industry would be well advised to consider adopting these innovative practices. Other major report findings include:
ñ Larger insurers showed stronger climate risk management practices than smaller companies.
ñ Property and Casualty (P&C) insurers demonstrated far more advanced understandings of the risks that climate change poses to their business, and are much further along in developing tools needed to manage climate change risks when compared to the Life & Annuity (L&A) and Health insurance segments.
ñ Despite increased evidence that extreme heat waves and other climate-related impacts will influence morbidity and mortality trends, L&A and health insurers show widespread indifference to climate risk, both in regard to their core business lines and their investment strategies.
ñ Barely 10 percent of the insurers overall—38 of 330 companies—have issued public climate risk management statements articulating the company’s understanding of climate science and its implications for core underwriting and investment portfolios. Given the insurance sector’s key role in addressing societal risks, this near total silence on climate change is deeply troubling and is thwarting constructive public engagement on appropriate responses.
Below are the insurers that earned the top Leading rating for overall performance. All are P&C (re) insurers, with the exception of Prudential, which is a L&A insurer. The Hartford and Prudential are the only US-headquartered insurers to earn Leading ratings.
Key Findings by Industry Segment
Property & Casualty Insurers
P&C insurers are on the veritable ‘front line’ of climate change risks, and there is compelling evidence that those risks are growing. Rising sea levels and more pronounced extreme weather events will mean increasingly damaging storm surges and flooding. Hurricane Sandy caused an unprecedented 14-foot storm surge, eclipsing the 10-foot record set in 1960, and resulted in more than $68 billion in total losses (over $29 billion in insured losses) and 210 deaths. A tremendous amount of property (both insured and uninsured) is increasingly threatened by sea-level rise. CoreLogic, a global property information and analytics provider, identified more than 6.5 million U.S. homes at risk of storm surge damage, with a total reconstruction value of nearly $1.5 trillion in a July 2014 report.
Against this backdrop, the P&C segment’s reaction has frequently been to limit coverages or entirely withdraw from certain catastrophe-prone markets, especially coastal regions such as Long Island, Virginia, Delaware and Florida. In the long run, these coverage retreats transfer growing risks to public institutions and local populations, and reduce the resiliency of communities, which are less able to finance post-disaster recoveries. Climate change will increase the need for insurers and regulators to promote risk-based pricing based on escalating risks. By doing so, they can ensure critical long-term market participation by the private insurance sector.
Coastal regions are far from the only areas exposed to climate risks. For example, agriculture impacts are being felt all across the United States, as shown by the record $17 billion in crop losses incurred by the Federal Crop Insurance Program (FCIP) in 2012 caused by devastating heat waves and drought. Climate change will make droughts more frequent in some regions, likely resulting in record-breaking crop losses becoming a more frequent occurrence.
Extreme weather is also exacerbating supply chain risks and causing business interruption losses. One such example was the massive 2011 flooding in Thailand, a production hub for many global businesses that caused $15-20 billion in losses, ultimately impacting the profitability of Cisco, Dell, Ford, Honda, HP, Toyota and many other global firms.
Despite these trends that jeopardize core underwriting results, most P&C insurers are paying inadequate attention to climate risks. P&C insurers are still ahead of L&A and health insurance providers, however. Among the report’s key findings for P&C companies:
ñ While the P&C segment has higher overall scores than the Health or L&A segments, only eight of the 193 companies—four percent—earned the Leading rating and 20 percent earned a Developing rating. Put simply, the vast majority of P&C insurers are not addressing climate risks comprehensively.
ñ Nearly half of P&C insurers have taken positive steps in Climate Change Modeling & Analytics, with 26 percent earning a Leading rating and 21 percent earning a Developing rating. In many instances, insurers are using climate-informed catastrophe models to better quantify climate-related risks from more frequent and intense weather catastrophes.
ñ Only 13 out of 193 P&C insurers—seven percent—earned a Leading rating for their Climate Risk Governance practices, with another 47 earning a Developing rating. Insurers with leading practices, including The Hartford and Catlin, have established standing cross-functional committees that monitor and report to senior management and their boards of directors regarding climate risks and opportunities.
ñ Enterprise-Wide Climate Risk Management evaluates insurer climate risk responses across three aspects of the value chain: products and services, liquidity/capital management and investments. In this theme, 15 of 193 insurers earned Leading ratings (eight percent) and 38 earned Developing ratings (20 percent.) Insurers with leading practices, such as XL Group, track climate-related claims as part of their quarterly reporting. Hanover Insurance uses a shadow carbon price in evaluating possible investments in carbon intensive heavy industries and utilities.
ñ Only five percent of P&C insurers earned a Leading rating on Stakeholder Engagement, with an additional seven percent earning a Developing rating. Insurers have multiple tools at their disposal to promote climate mitigation and adaptation. Swiss Re, for example, is using a Flood Risk App to educate users on the importance of adapting to climate risks, including increased flood risks.
Life & Annuity Insurers
L&A insurers confront different climate risks than P&C insurers. However, a changing climate will still have major implications for this insurance segment, especially concerning its vast investment portfolios. L&A insurers have trillions of dollars in investments—roughly two-third of the U.S. insurance sector’s total cash and invested assets—that may be affected by climate change. If L&A insurers do not manage their investments with this reality in mind, they risk jeopardizing their returns and long-term capacity to meet their liabilities.
L&A insurers also need to conside how global warming will affect human health and mortality, a point made clear by warnings in the 2014 National Climate Assessment 11 of growing air pollution impacts on vulnerable populations, and extreme weather and wildfires.
Despite such concerns, the L&A sector’s overall response to climate risks was materially inadequate. Among the key findings in this regard:
ñ Overall, L&A insurers have taken little or no action to reduce their climate risks. Only one of the 92 L&A companies, Prudential, earned a Leading rating, while 79 percent of L&A companies earned the bottom Minimal rating.
ñ Two companies outlined Climate Risk Governance practices for identifying, monitoring and acting on climate risks at the board and senior management levels. Prudential is unique in designating environment and sustainability issues as board-level responsibilities, and for creating an Environmental Task Force to monitor climate change related issues, led by the Vice President of Environment and Sustainability.
ñ Only one L&A insurer earned a Leading rating for Investment Management, and another three earned the Developing rating. Insurers with strong practices such as Boston Mutual noted that its investment guidelines restrict it from investing a large portion of its portfolio in carbon-heavy industries. Lincoln National stated that it screens real estate investments for climate impacts across operational, market, liability, policy and regulatory risks.
Despite growing concerns about climate related impacts on public health—temperature extremes, decreased air quality, and increased waterborne and vector-borne diseases, 12 among those -- survey responses showed that most Health insurers are not preparing. With access to large sets of detailed claims data, health insurers are uniquely positioned to advance climate- and health-related research in partnership with academics or other outside researchers. Among the report’s key findings for Health insurers:
ñ Overall, none of the participating health insurers earned a Leading rating, and only one insurer earned the Developing rating, while 89 percent of the 45 companies earned the bottom rating.
ñ Health insurers fared quite poorly on Climate Risk Governance, with no insurers earning a top rating and only one insurer earning a Developing rating. None of the insurers indicated a comprehensive response on climate risk governance or a formalized process for identifying, evaluating and integrating new climate science data that could inform their climate risk assessments.
ñ Overall, 98 percent of health insurers earned the bottom two ratings for Enterprise-Wide Climate Risk Management, and no insurers earned a top rating. Health insurers have an opportunity to work with top experts and outside organizations to better understand and prepare for climate related human health impacts, and to develop improved risk management paradigms to better understand and prepare for climate related human health impacts.
ñ Health insurers also performed poorly on Stakeholder Engagement, including climate risk outreach to policyholders and support for outside climate-related research. The Kaiser Foundation Group was a strong exception, with its KP Research Program on Genes, Environment, and Health (RPGEH) it launched in 2005 “to conduct research to understand genetic and environmental influences—including weather and climate influences—on disease susceptibility, the course of disease, and response to treatment.”
Key Recommendations For All U.S. Insurance Segments
ñ Develop Climate Risk Oversight at the Board and C-Suite Levels Addressing the long-term risks and opportunities of climate change requires a concerted effort by insurance company leadership, especially at the senior executive and board levels. Insurers’ senior-level leadership will need to understand and align company policies with the risks that a warming climate poses.
ñ Issue a Comprehensive, Public Corporate Policy on Climate Risk As risk carriers, risk managers and major investors, every insurer should develop and issue a public climate risk management policy for the benefit of their shareholders, policyholders and employees. Such statements need to articulate the company’s understanding of climate science, GHG reduction goals, consideration of climate risk in underwriting and investment management, and a commitment to public engagement on climate risk issues.
ñ Integrate Climate Risk into ERM Frameworks Insurers must account for climate risks in their ERM and risk assessment methodologies. Incorporating climate change as an emerging risk will help insurers catalyze more effective responses across their enterprises.
ñ Improve Climate Change Scenarios and Impact Assessments Apart from catastrophe modeling, which has remained primarily a property/casualty risk management tool, the proliferation of large-scale climate scenario projection software, when combined with insurer underwriting data, will help in developing loss scenarios that directly feed into insurer product offerings and pricing. All insurers should be seeking out such modeling products, and when none are available, work with leading climate and public health experts to develop appropriate tools.
ñ Evaluate Climate Risks and Opportunities in Investment Portfolios As major institutional investors, insurers are significantly exposed to climate risks, both related to climatic changes and carbon regulation. Insurers will need to understand and account for these exposures. To remain competitive, companies will also need to understand and invest in new opportunities such as green bonds which provide attractive returns and opportunities for diversification.
ñ Engage with Key Stakeholders on Climate Risk Insurers that take action on the recommendations above will find it both prudent and profitable to address climate risk issues with their key stakeholders: policyholders, regulators, investors, brokers/agents, and policymakers. Such efforts include advocating for investments in resilient public infrastructure and climate research, educating policyholders regarding how they can mitigate climate risks in their homes and businesses, and promoting climate-smart insurance products.
ñ Provide Comprehensive Climate Risk Disclosure to Regulators In the interests of transparency and supporting evaluations of each specific insurance company’s management of its climate risks, insurers should make every effort to provide comprehensive information publicly.
ñ Participate in Joint Industry Initiatives on Climate Risk Insurers interested in addressing their climate risks affirmatively have substantial resources available. Insurers can join any number of climate-focused groups, including Ceres’ Investor Network on Climate Risk (INCR), the United Nations Environment Program Finance Initiative’s Principles for Sustainable Insurance (UNEP FI PSI) and ClimateWise.
Key Recommendations For Regulators
ñ Mandate Climate Risk Disclosure In All States State insurance regulators in all 50 states should require insurers to file climate risk disclosure survey responses in order to gain a more complete picture of each insurer’s climate risk management strategies. Regulators will also need to more consistently engage with insurers on the disclosure process and the substance of the survey results so that the value of the survey is fully realized.
ñ Develop an Improved Climate Risk Disclosure Survey While the survey is useful for eliciting insurer responses, there are ways it could be improved in terms of its clarity, comprehensiveness and fairness. For example, the current survey questions do not account for unique climate risks and opportunities facing non-P&C insurers. More nuanced survey questions oriented towards L&A and health insurers would improve their understanding and responses to climate risk.
ñ Advocate for Rating Agency Evaluations of Climate Risk Management Regulators should work with ratings agencies such as A.M. Best to develop formal evaluative measures of insurers’ climate risk management programs. Standard & Poor’s has been evaluating insurers’ ERM frameworks for a number of years, yet their evaluative framework does not include specific criteria on how climate risks are integrated into these frameworks. Regulators should engage with industry ratings agencies to address this oversight.
ñ Provide Insurers with Comprehensive Climate Science Resources The responses from all three insurance segments showed that many insurers are either uninformed or dismissive of climate risks to their businesses. Creating a database of insurance-relevant and peer-reviewed climate science research would provide a useful, scientific basis for further industry action to address climate risks.