Climate Change Regulations for Insurers Not Out of Realm of Possibility

Some sort of climate change regulation for the insurance industry could be just around the corner. Then again, it might not be.

It’s a tossup in the eyes of Don Reed, a managing director in PricewaterhouseCoopers’ U.S. sustainable business solutions practice.

Reed, who likes to keep his eye on regulators as much as he likes to look at bottom-lines and business practices, thinks regulation on a national level is unlikely, but all bets are off when it comes to regulation at the state level.

If climate change assumes an even bigger role in this year’s agenda for the government and regulators, as many believe it will, Reed sees increasing pressure on regulators to deal with climate change risk – steps that possibly go beyond the current requirements that mandate a number of insurers disclose their exposure to a changing climate.

Lately, he’s been paying attention to the National Association of Insurance Commissioners Climate Change and Global Warming (C) Working Group – the “C” means it’s part of the Property and Casualty Insurance (C) Committee – and the range of topics at which the group has been taking up.

According to an NAIC webpage outlining the group’s goals, its members have a full plate and a great deal of urgency behind tackling these issues:

• Review the enterprise risk management efforts by carriers and how they may be impacted by climate change and global warming.—Essential
• Investigate and receive information regarding the use of modeling by carriers and their reinsurers concerning climate change and global warming.—Important
• Review the impact of climate change and global warming on insurers through presentations by interested parties.—Important
• Investigate sustainability issues and solutions related to the insurance industry.—Important
• Review innovative insurer solutions to climate change, including new insurance products though presentations by interested parties.—Important

Chairing the group is Washington Insurance Commission Mike Kreidler, who has called out the insurance industry for being unprepared for climate change and has said insurers are not taking climate change seriously enough.

Kreidler has said he doesn’t like the idea of placing extra regulations on the industry, but he believes that if the impacts of climate change force rates to rise and insurance products to become scarce that voters will be the ones calling for regulation.

Reed thinks the possibility of regulation combined with increased losses from more frequent severe weather events will have more insurers looking at climate change impacts, and over their shoulders for new rules.

“I think that the underlying fundamentals will drive toward more integration (of the impacts of climate change) in business decision making,” he said. “The working group creates another place for that to happen. Our clients that we talk to in the insurance industry are watching the space closely and have action plans should this heat up either from a regulatory standpoint or a straight risk management standpoint.”

Reed believes it’s unlikely the NAIC working group will come up with regulations per se.

“The pattern for the NAIC is that all that regulation happens at the state level,” Reed said. “What would happen at the NAIC level is more like guidelines rather than regulations.'”

Yet there is nothing stopping state regulators from turning guidelines into regulations in their individual states.

Before any guidelines get handed down Reed envisions the group highlighting “best practices” on climate change among insurers.

Those practices are knowable thanks to an NAIC push to have insurers report on activities and exposures related to climate change, a push that started with its Potential Impact of Climate Change on Insurance Regulation white paper in 2008 and was followed up two years later with the Insurer Climate Risk Disclosure Survey.

The disclosure idea was controversial when it was introduced, and there was pushback, but momentum has built – largely because in 2013 regulators in California, Connecticut, Minnesota, New York and Washington required insurers writing in excess of $100 million in direct written premiums to disclose their climate-related risks using this survey. As of the last survey, it’s estimated roughly 87 percent of the market is reporting on climate change.

To stay ahead of the impacts of climate change and any possible rules or regulations – or guidelines or best practices – Reed said PwC is approaching its insurance clients with questions like: Do you have a good fact based risk assessment? How do you build that assessment into your entire business model? Where are you managing that risk – where are you underwriting and where are you not? What are you doing in your underwriting process to understand that risk?

Such conversations are becoming commonplace between consultants and the companies they serve, but Reed said he’s encouraged they are also becoming more commonplace within companies themselves.

“It’s a more ordinary part of the conversation about how they are managing risk overall,” he said.

The potential for some kind of regulation, too, has increasingly worked its way into conversations.

“I think it’s on everybody’s minds that potential exists,” Reed said.