As heat waves spike, wildfires rage, droughts languish, and storms become more severe, the climate crisis has been thrown into stark relief. 1 It is against this backdrop that investors are now pushing insurance companies for more robust climate disclosures, part of a larger environmental, social, and governance (ESG) effort, and regulators are taking action, with a final ruling from the SEC on a pending proposal to require publicly registered insurance companies to provide extra information about direct and indirect greenhouse gas emissions they produce expected at the end of 2022 or in early 2023. The insurance industry's investments in, and insurance policies issued in connection with, fossil fuel assets give the industry a unique position from which to consider adopting more sustainable business practices. For example, in California, the biggest property and casualty insurance market in the country, insurers had almost $540 billion invested in fossil fuel assets in 2019. 2 As climate change and climate disasters drive record losses and amid an increasing sense of social-consciousness in our culture, 3 shareholders are identifying a potential need for a change in the way the industry does business and an interest in ensuring that insurers are not underwriting pollutants (such as coal and tar sands).
Insurance is essential for consumers and businesses, but the industry faces increasing risk in continuing to invest in the fossil fuel and other greenhouse gas emitting industries given those industries' contributions to the quickly warming climate. Those industries are also expected to decline as the country transitions from carbon use to alternative energy sources and those assets could become stranded. 4 Insurers are likewise exposed to additional risk on property and casualty underwriting as they face mounting pressure from extreme weather events intensified by climate change. 5 For example, in 2020, the United States experienced 22 extreme weather and climateexacerbated disasters that each had losses in excess of $1 billion. 6 The push for greater disclosure is thus framed as a means to manage these risks and hold insurers accountable for combatting climate change through their business practices.
Regulator Actions
The push for more information from insurers, and greater accountability for their role in addressing climate change, has followed significant development of current and proposed regulations related to climate risk in the insurance industry.
Leading the way at the state level, California's Insurance Commissioner from 2011 to 2019, Dave Jones, was the first financial regulator to evaluate insurance companies' reserve portfolios for climaterelated risk. 7 As Commissioner, Jones asked insurers to voluntarily divest holdings in thermal coal based on economic indicators that projected its decline. He mandated that insurers within the state of California disclose investments in oil, gas, coal, or utilities that are more than 50 percent derived from those sources. 8 The New York Department of Financial Services (NYDFS) subsequently followed suit, becoming the first insurance regulator to issue climate-related risk guidance for insurers domiciled in New York state. The NYDFS issued guidance on November 15, 2021, on the impact of climate change on financial risk to provide insurers direction for developing a strategic road map to address climate-related risk. The initial steps of the guidance focused on board governance and putting a strong organizational structure in place. Compliance with the initial steps of the guidance was expected by August 15, 2022, with full implementation required within three to five years. 9
At the national level, the National Association of Insurance Commissioners (NAIC) revised its Climate Risk Disclosure Survey (the NAIC Survey) in April 2022 to adopt a new climate risk disclosure standard that aligns with the Task Force on Climate-Related Financial Disclosures' (TCFD) disclosure framework. 10 This bipartisan group of state insurance regulators was led in this effort by current Insurance Commissioners Ricardo Lara of California and David Altmaier of Florida. Insurers with premiums of more than $100 million in 14 states (California, Connecticut, Delaware, Maine, Maryland, Massachusetts, Minnesota, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington) and the District of Columbia are required to complete the NAIC Survey and submit a TCFD-compliant report by November 30, 2022. The new standard is expected to increase the list of insurance companies that provide TCFD-compliant reports to roughly 400 insurers, compared to the 28 TCFD-compliant reports provided by insurers in 2021. 11 The revised NAIC Survey is structured around the four TCFD-focused areas: governance, strategy, risk management, and metrics/targets. Additionally, the NAIC Survey includes voluntary closed-ended questions that individual states can choose to include to support the narrative responses to the four TCFD-focused areas.
Following the NAIC's revisions to the NAIC Survey, the California Insurance Commissioner Ricardo Lara said that "Our global climate crisis affects every state, requiring us to reach across partisan divides to find solutions that protect all people. By holding insurance companies to this global standard for climate disclosure, insurance regulators are showing the power of united leadership in our efforts to address climate change and reduce the negative impacts on insurance consumers." 12
Footnotes
1. See United Nations, Intergovernmental Panel on Climate Change, "Code Red for Humanity," August 2021, https://news.un.org/en/story/2021/08/1097362.
2. 2019 Report, S&P Global for the Cal. Department of Insurance, https://interactive.web.insurance.ca.gov/apex_extprd/cdi_apps/r/260/files/static/v58/Analysis of Insurance Company Investments -CDI-Final-Reportv2.pdf.
3. Hurricane Ida and other major storms, including late-year tornados and windstorms that hit the United States in 2021 resulted in the third-costliest year on record for insurers. Aon 2021 Weather, Climate and Catastrophe Insight Report, https://aon.mediaroom.com/2022-01-25-Aon-343-Billion-inGlobal-Weather-,-Catastrophe-Related-Economic-Losses-Reported-in-2021,-Up-From-297-Billion-in2020.
4. https://rollcall.com/2021/08/19/climate-risk-becomes-urgent-esg-issue-for-insurance-industry/.
7. https://rollcall.com/2021/08/19/climate-risk-becomes-urgent-esg-issue-for-insurance-industry/.
8. https://rollcall.com/2021/08/19/climate-risk-becomes-urgent-esg-issue-for-insurance-industry/.
9. https://www.dfs.ny.gov/industry_guidance/climate_change#insurance-guidance.
10. Seehttps://www.fsb-tcfd.org/recommendations/.
11. Seehttps://www.insurance.ca.gov/0400-news/0100-press-releases/2022/release025-2022.cfm.
12. https://www.insurance.ca.gov/0400-news/0100-press-releases/2022/release025-2022.cfm.
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