Climate Change & Insurance

1. Climate Change& Insurance Eric Nordman, CPCU, CIE Director of Research National Association of Insurance Commissioners

2. Agenda • Background Information • Consumer Perspective • Insurer Perspective • Regulatory Response • The White Paper • The Disclosure Proposal

3. States With Significant Risk of: Sources: U.S. Geological Survey, Uniform Building Codes, Council of State Governments EARTHQUAKE

4. States With Significant Risk of: Sources: U.S. Geological Survey, Uniform Building Codes, Council of State Governments HURRICANE

5. States With Significant Risk of: Sources: U.S. Geological Survey, Uniform Building Codes, Council of State Governments EARTHQUAKE HURRICANE BOTH

6. Tipping Points • THINGS WE MUST AVOID

7. “What If” Scenario Studies Sea levels rise 3 feet? What if… And Heavy rainfall events stay “outside normal variation”? Forest fires increase 149%? And

8. Avoiding dangerous climate change We must prevent the climate system from passing a “tipping point” that leads to irreversible change Antarctic ice Amazon Rainforest Gulf Stream failure Regional Impacts Coral Reefs High-altitude Glaciers ???Permafrost?? Arctic sea ice Greenland ice Current warming Warming in “pipeline”

9. Dangerous Tipping Points:Melting of the Permafrost Zimov et al. 2006 This could lead to large methane emissions and an increase in atmospheric burden of global warming pollutants 100 times present amount.

10. Dangerous Tipping Points:Melting of the Greenland Ice Sheet This would commit the world to a 20 foot increase in sea level.

12. A critical issue for insurers “The insurance industry must start actively adapting in response to greenhouse gas trends if it is to survive… There could hardly be a debate of greater importance to the insurance industry.” --Lloyd’s, Climate Change: Adapt or Bust

13. Why should insurers be concerned? Climate change has the potential to impact nearly every segment of the insurance industry, including: • Property, crops and livestock • Health and life • Business interruption • D&O • Pollution liability • Breakdown in backwards-looking cat models and actuarial assumptions • Invested assets

14. While there is disagreement on whether climate change has impacted recent loss trends, Munich Re has concluded that “the main driver of future loss developments will be climate change.” According to UNEPFI, “The pace of change in extreme weather events is already fast, and the scale of losses could reach $1 trillion in a single year by 2040.”

15. Total Value of Insured US Coastal Exposure -AIR Worldwide, 2004 US $ Billions

17. What should insurers do? • Lead in risk analysis • Inform public policy making • Support climate awareness among customers • Incorporate climate change into investment strategies • Reduce the environmental impact of the insurance industry • Report and be accountable

18. What does that mean in practice? • Analyzepotential impacts of climate change on your business • Engagewith clients, modelers, policymakers, regulators • Improveloss datacollection and analysis • Fulfill historic role inloss prevention/mitigation • Examine impact of climate change oninvested assets • Examine potential fornew productsand services -Ceres report “From Risk to Opportunity” • Anddisclosewhat you are doing

19. The potential impact of new products is extremely high The industry is well-positioned to: • Preserve insurability by promoting loss prevention • Encourage reduced GHG emissions from transport and building use, which together represent 2/3 of GHG emissions • Encourage increased investment in low- and no-carbon energy by lowering cost of capital • Improve efficiency of global carbon markets • Inform the public policy debate …all while reducing risk for insurers, growing revenue and preserving the long-term viability of the insurance mechanism

20. U.S. Insurers Lag in Disclosure • Industry lags in SEC disclosure • Only 15% of US insurers surveyed discussed climate change in 10K filings, compared to 100% of electric utilities and 78% of oil companies • Poor response to Carbon Disclosure Project • Only 30% of US insurers responded, compared to 70% in Europe, 62% in rest of world

21. The Result • It is very hard to know how well-prepared the industry is for the challenges of climate change

22. What Consumers are Saying Public Policy Goals of Insurance • Essential Financial Security Tool for Individual and Community Economic Development • Corollary:  Availability and Affordability is Essential • Loss Prevention and Loss Mitigation Tools and Incentives

23. What Consumers are Saying • It should be clear that Loss Mitigation and Loss Prevention is the only viable solution to both current marketplace problems and the growing threat of climate change and global warming.  It is the only way to moderate and reduce the incidence and severity of catastrophe events.

24. What Insurers are Saying • Insurance is not a comparatively large source of pollution • Insurers are looking at their business operations and carbon footprints, like other companies. • Insurers are participating in voluntary and SEC disclosures.

25. What Insurers are Saying • Insurers support IBHS and other efforts to improve buildings and building codes. • Insurers’ pricing and underwriting incentivizes safe behavior and discourages unsafe behavior. • Insurers provide insurance to support environmentally friendly initiatives by other industries, such as green building and more fuel efficient vehicles.

26. What Insurers are Saying • Insurers have issued reports and studies. • Insurers have engaged in public information and education on risk, including climate related issues. • Insurers advocate for: better land use, better building codes and enforcement, alternatives to motor vehicle use, such as transit, and more fuel efficient vehicles.

27. Regulatory Response • Public hearings • Drafting of a White Paper • Drafting of a Disclosure Proposal

28. The White Paper • Discusses investment issues facing insurers and notes that some investment opportunities will arise • Encourages insurers to evaluate geographic spread of the risks they are insuring • Encourages insurers to develop contingency plans • Discusses the importance of greater disclosure.

29. The White Paper • Suggests that new solvency regulatory tools are needed • Encourages insurers to become more involved in loss prevention and mitigation • Encourages insurers to become involved in strengthening building codes and advocating for sound land-use planning • Recognizes the impact of demand surge, post-event living expense increases, and issues with business interruption coverages

30. Public Comments • We received 12 sets of comments with 134 pages of text on a 16 page White Paper • Two NAIC members provided comments (Nebraska and New York) • We heard from the four major property- casualty trades (AIA, NAMIC, PCI & RAA) • We heard from two major insurers (State Farm and the Travelers)

31. Public Comments • We heard from one catastrophe modeler (Risk Management Solutions) • We heard from one scientist well known for his work on climate change (Evan Mills) • One of the responses was a composite submission from several consumer interest groups • CERES, the NRDC, the CEJ, the CFA, the Conservation Law Foundation, the Center for Insurance Research, Clean Water Action, Chesapeake Climate Action Network, Climate Solutions and Southern Alliance for Clean Energy

32. Public Comments • Some of the comments offered suggestions for minor improvements and enhancements to the White Paper • Nebraska suggests that the White Paper be substantially rewritten with a much narrower scope than the current draft • New York suggests that insurers be required to maintain catastrophe reserves

33. Public Comments • A UCLA law professor suggests that a section on liability insurance related challenges be added • Evan Mills suggests that the focus on catastrophes deemphasizes the importance of smaller or more gradual events such as soil subsidence, drought, sea-level rise and that the White Paper should be more specific in its recommendations to insurers

34. Public Comments • NAMIC suggests that using disclosure requirements to pressure insurers into adopting a particular agenda for combating global warming is a flawed approach and hopes that the paper’s focus will be reoriented to identify specific insurance regulatory reforms that would create economic incentives for individuals and businesses to avoid, prevent and mitigate catastrophe risk in hazard-prone areas

35. Public Comments • The consumer groups want the regulators to mandate climate risk disclosure, assist insurance departments to address climate change, assign specific tasks to various NAIC committees, draft an NAIC policy statement on GHG emissions and work closely with international regulators

36. Public Comments • The AIA opposes mandatory disclosure and suggests cooperation between the industry and regulators to address climate change issues, the allowance of risk-based pricing, and encouragement of voluntary efforts to reduce GHG emissions • The PCI also opposes mandatory disclosure, but supports the addition of a simple, additional question in the general interrogatories or the management discussion and analysis related to consideration of climate change

37. Public Comments • State Farm supports the Business Roundtable Climate Change Policy Statement and hopes to work with us as more specific details are developed • The Travelers commented on several areas, believes that adequate avenues exist for insurers to communicate their climate policy, and supports voluntary disclosure

38. Public Comments • The RAA does not support the part of the White Paper that discusses the “all perils” concept or the conversion of the NFIP to a reinsurer. It supports allowing insurers to charge risk-based rates and encourages further discussion on the disclosure issue. • RMS provides several pages of helpful discussion and analysis and is generally supportive of the overall paper, but suggests using the UK’s ClimateWise as the vehicle for insurer disclosure.

39. The Disclosure Proposal • We are working on a disclosure proposal • It is based on the Global Framework for Climate Risk Disclosure • Developed by investor, state pension and other organizations • Encourages standardized climate risk disclosure to make it easy for companies to provide information • Supports the leading mechanisms for global corporate climate risk disclosure, including mandatory financial filings with securities regulators

40. The Disclosure Proposal • The Framework has four components • Emissions Disclosure • Strategic Analysis Of Climate Risk and Emissions Management • Regulatory Risks • Physical Risks • Each component has associated questions for responders to answer and identifies where it might be disclosed

41. The Disclosure Proposal • It is anticipated that disclosure would be phased in over time • Larger insurers would be required to participate with voluntary reporting available for those below the premium threshold • Gradually the threshold would be reduced to require more insurers to report

42. Next Steps • Comments on the Disclosure Proposal are due April 15, 2008 • Comments on the updated White Paper are due April 30, 2008 • The Climate Risk Disclosure Working Group will meet by conference call to discuss comments received on both

43. Your Questions

44. Thank You