A tempest rages among insurers and regulators over climate risks
Posted on July 21st, 2008By Evan Lehmann
Climatewire: MADISON, Wis. — Insurers argued strenuously against revealing their internal efforts to address climate change last week, saying the science is too vague, criticizing regulators for overstepping their role and claiming that the plan is powered by environmentalist crusaders.
The backlash came as a core group of regulators coalesced around a draft of nine disclosures that appears to be heading for adoption in September by the National Association of Insurance Commissioners. It would mark the first time U.S. insurers would face mandatory requirements to reveal their plans for potentially stronger hurricanes, more floods and frequent wildfires.
Industry representatives are wary of the plan, saying it could reveal business strategies to competitors and spur lawsuits when insurers miscalculate storm damage. One critic accused regulators of abetting environmental groups, which he said are pursuing a political campaign to “coerce” what is believed to be the world’s largest industry into advancing the notion of human-induced climate change.
“This is really all about trying to enlist insurers in a kind of political campaign,” asserted Robert Detlefsen, vice president of the National Association of Mutual Insurance Companies. “I don’t think it’s appropriate for them to be allying themselves with regulators, who then as official regulators do their bidding for them.”
Wisconsin’s insurance commissioner, Sean Dilweg, chairman of the national task force on climate change that is pursuing the disclosures, responded that he and his colleagues are making their “own decisions.” The disclosure plan, he added, is meant to ensure that insurance companies are able to pay rising claims related to violent weather, and to protect consumers from being overcharged at a time when insurers might use climate change as a reason to raise rates.
Industry representatives have fought fiercely to delay or disband the plan for months. But as the plan accelerates toward approval, Dilweg and other commissioners seemed to agree that the time for discussion is nearly over. “We are ready to go,” said Risa Salat-Kolm, who represents California’s Department of Insurance at the talks.
Will transparency over computer model use trigger lawsuits?
Insurers are generally willing to support four of the nine disclosures. The answers to those questions are already publicized by some companies, which embrace the existence of climate change, promote their efforts at reducing carbon footprints and offer discounts to customers who, for example, drive hybrid cars — main themes in the less-controversial disclosures.
But other questions provoke vivid opposition. Probes about how insurers use catastrophe computer models to set rates and whether a company plans to retreat from high-risk coastal markets are among the thorniest questions. Computer models used to predict oncoming Hurricane Katrina were wrong about the damage it would do, said Raul Allegue of Travelers Insurance, a leader on climate change. If disclosures had been in place, they could have provided ammunition in lawsuits against insurers that try their best to gauge storm risk, but are hampered by the fickleness of Mother Nature.
“We underestimated,” he told regulators. “What kind of liabilities would our management team have assumed by having models that were off sixfold?” Then he added: “The litigation risk is a bigger risk today than climate change. I’m not trying to downplay the importance of dealing with climate risk.”
American International Group Inc., another industry leader that has publicized its efforts to address climate risk, argued that too little is known about how climate change could affect its business. The uncertainty surrounding the frequency and severity of storms and whether warming seas are caused by natural variations in the atmosphere or the growing presence of greenhouse gases makes it almost impossible to answer detailed questions about how a business should adjust, insurers said. “For each of us to respond to a generic set of questions like this, a lot of the answers would be useless,” said Paul Brown of AIG.
Do business strategies provide financial buffers for climate-related risks?
But disclosure supporters say certainty about the science is not needed. Regulators argue they need to make sure insurers are aware of the emerging risks associated with rising seas, stronger winds and other climate factors. If they are not, distressed investors might pull their money from insurance giants, claims may go unpaid and rates might be artificially inflated, supporters warn.
“This is not one risk among many, but really the pre-eminent risk facing the industry,” said Andrew Logan of Ceres, a group of investors with $6 trillion in assets. “By making loss events less predictable and more extreme,” climate change “threatens the financial underpinning of the industry.”
It is unclear how many insurance companies consider the warming world a risk. If they do not, that might be one reason for the opposition to disclosure. They could feel vulnerable to lawsuits claiming insurers have done too little to protect their customers. “They’re afraid of saying they’re doing nothing,” said Belinda Miller, deputy commissioner of Florida’s Office of Insurance Regulation.
The two sides met here for perhaps the last time before the NAIC votes on imposing the disclosures in September. Over the last several months, Dilweg has trimmed his proposal to make it more acceptable for insurers. He has made the questions less precise to avoid revealing competitive strategies. He is also open to allowing some of the answers to be submitted to regulators confidentially.
But Dilweg has also drawn some lines. He has resisted calls to delay the process, and he dismissed pointed assertions from life and health insurers this week that climate change won’t affect their businesses.
Some insurers don’t expect increased risks, despite dire science warnings
“It’ll have very little impact on mortality in the U.S.,” Andrew Melnyk, managing director of research for the American Council of Life Insurers, said of climatic changes. Randi Reichel of America’s Health Insurance Plans, another industry group, said the task force’s disclosure plan is “exceedingly premature.” “There is climate change, but the effect on human health, at least in North America, there are as many folks out there who say it will get better as there are who say it will get worse,” she said, noting that deaths from cold snaps are projected to drop.
The Intergovernmental Panel on Climate Change predicts that as temperatures rise around the world, more people might die from heat waves, floods and droughts. Other health effects could include wider malnutrition and growing incidents of heart and infectious disease. By the time temperatures rise by about 7 degrees Fahrenheit, the IPCC predicts there could be a “substantial burden on health services.”
U.S. EPA also warns of rising death rates in a report released last week. Death and illness from cold weather are likely to drop, but scientists emphasize the dangerous effects of heat on the elderly. “Without increased investments in countermeasures, hot temperatures and extreme weather are likely to cause increased adverse health impacts from heat-related mortality, pollution, storm-related fatalities and injuries, and infectious disease,” says EPA’s “Technical Support Document for Endangerment Analysis for Greenhouse Gas Emissions under the Clean Air Act.”
The report warns that Los Angeles could see a four- to eightfold increase in days over 90 degrees Fahrenheit by 2080. That could lead to a corresponding death toll: In the 1990s, 319 people died annually from hot weather; that number could be as high as 1,182 people in seven decades.