Regulators and the Business of Climate Change-Related Risk

For more than three years, a handful of insurance regulators and global warming activists have been trying to prod the insurance industry into taking unspecified action to address the “risks” associated with climate change. Their approach has a number of flaws, not the least of which is their persistent failure to specify what constitutes a “climate change-related risk.”

In February, California Insurance Commissioner Dave Jones announced that the insurance departments in California, Washington state and New York will “require insurers to respond to the Climate Risk Survey adopted in 2009 by the National Association of Insurance Commissioners.”

Regulators from the three states intend to administer the NAIC survey to every insurer group in the U.S. with direct written premium above $300 million if the group has a company that is admitted to do business in any of the three states. In a nod to Ceres, the environmental shareholder activist group that has lobbied for public disclosure of survey responses, the states’ representatives affirmed that insurers’ responses will be available for public scrutiny. Numerous insurers have been told they have until May 7 to complete the survey.

Climate Risk Survey

The climate risk survey has had a tortuous history at the NAIC. Originally developed by an executive committee task force, the survey consists of eight questions designed to elicit qualitative information concerning insurers’ opinions and activities in regard to “climate change-related risk.” The questionnaire doesn’t indicate what regulators expect insurers to do about climate change, although there are a number of hints.

For example, one survey question asks, “Has the company considered the impact of climate change on its investment portfolio? Has it altered its investment strategy in response to these considerations? If so, please summarize the steps you have taken.”

Another question instructs respondents to “discuss steps, if any, the company has taken to engage key constituencies on the topic of climate change.”

The full NAIC adopted the survey in March 2009, with implementation by individual states scheduled for the following year. As the deadline for implementation approached, many states had misgivings about the survey, particularly its instruction that insurer participation would be mandatory and responses made publicly available. Consequently, in March 2010, the NAIC membership voted to replace the 2009 survey with a revised version that allowed each state to decide for itself whether to administer the survey and, in the case of states that did choose to administer it, to determine whether insurer participation would be mandatory or voluntary. In addition, the revised survey instructions unequivocally stated that “survey responses are confidential.” (Emphasis in the original.)

The 2010 NAIC survey established an implementation protocol that calls for the survey to be administered to insurer groups by “the domestic regulator of the group’s lead state (i.e., the regulator overseeing the insurer within the group that reports the largest direct written premium volume).” The idea was to acknowledge the primacy of domestic regulators with respect to financial issues.

Regulators Circumvent Process

The 2010 “Insurer Climate Risk Disclosure Survey” remains the official NAIC climate risk survey. Indeed, it is one of the main topics currently being discussed by the organization’s Climate Change and Global Warming Working Group, whose chair and vice-chair are, curiously enough, Washington Commissioner Mike Kreidler and California’s Jones. The working group has formed a special subgroup whose purpose is to “explore altering the Climate Risk Disclosure Survey.”

Against this backdrop, it is all the more strange that California, Washington and New York have decided to circumvent the NAIC process by separately administering an earlier version of the survey in a manner that was explicitly rejected two years ago. The NAIC’s Climate Change and Global Warming Working Group is being led by a pair of regulators who have made clear that they will disregard the process over which they are presiding if the outcome does not please them.

Readers can draw their own conclusions as to what this episode says about the NAIC’s ability to perform its self-proclaimed role as a standard-setting organization that operates on the basis of consensus and cooperation among the states.