Regulators Push U.S. Insurers on Climate Change Risk

Insurance companies face pressure to consider the potential impact of extreme weather on their policies and investments.


U.S. insurance industry regulators have a clear message for the companies they oversee: Start paying attention to climate change as a risk to clients’ policies and to investments under management. Regulators also offer some related advice to anyone who owns stock in an insurer: If the firm doesn’t heed the call, consider whether it’s still a low-risk investment.

“As the regulator, we have a responsibility to make sure insurers maintain their solvency and that there isn’t a compromise in terms of their ability to fulfill the promises they’ve made to policyholders,” says Myron (“Mike”) Kreidler, insurance commissioner for the State of Washington and chair of the National Association of Insurance Commissioners’ Climate Change and Global Warming Working Group. “I think increasingly we’re going to want to make sure that the insurers have looked at the risks involved with their investments and taken them into account, and not just said, ‘This is what we’ve done historically; we’ll just keep doing business as usual.’”

In the U.S. the insurance industry is regulated by state commissioners who have long imposed rules on how companies invest, with limits on certain types of assets, including equities and corporate bonds. Kansas City, Missouri–based NAIC also wants to protect investors in those firms. “[Insurers] are conservative investments, and we want to make sure they stay conservative,” Kreidler says.

NAIC decided almost a decade ago that it should monitor the risks presented by climate change, given the impact that extreme weather could have on insurer solvency and the price of insurance policies. In 2005 the association hosted a public hearing on the topic; in 2010 it adopted the eight-question Insurer Climate Risk Disclosure Survey, modeled after the voluntary questionnaire distributed by CDP (formerly Carbon Disclosure Project), a London-based nonprofit.

For the 2011 reporting year, response to the questionnaire was mandatory in California, New York and Washington for insurers writing at least $300 million in direct premiums. By 2013, the latest year surveyed, Connecticut and Minnesota had followed suit, and regulators had lowered the premium threshold to $100 million. As a result, 330 insurers responded, representing about 87 percent of the U.S. market based on the total premium value of insurance issued.

In October Ceres, a Boston-based nonprofit sustainability advocacy group, published its third annual Insurer Climate Risk Disclosure Survey Report & Scorecard, which analyzes the newest NAIC survey. The main upshot, the authors write: “Most of the companies responding to the survey reported a profound lack of preparedness in addressing climate-related risks and opportunities.”


Ceres grouped insurers in four categories, depending on where they ranked on a 100-point scale of climate change readiness: leading, developing, beginning or minimal. Just nine firms, or 3 percent of respondents, earned inclusion to the leading category. Most were on the weak side: 83 percent fell into the beginning or minimal classes.

“What we saw this year is not a major improvement overall in terms of the industry’s disclosed information on how they’re managing their climate risks,” says Cynthia McHale, director of Ceres’s insurance program and one of the report’s authors. But Ceres did identify a small group of leaders, she notes: “We’re seeing some movement at the top, and those companies are addressing climate risks and opportunities where we did not see such a group early on.”

Eight of the nine firms deemed leaders are property and casualty insurers, which McHale says would be most likely to suffer a “double hit” as climate change intensifies. Not only might their investment portfolios suffer, especially when it comes to assets like real estate and infrastructure, but insurance payouts for damage to buildings and businesses could spike.

No insurer can ignore the potential impact of climate events, McHale warns. She thinks investors need to start demanding answers. “Shareholders should ask whether an insurer has thought about climate change risks throughout their whole enterprise,” from product design and pricing to risk analysis and investment portfolios, McHale says.

Prudential Financial, the only life insurer and one of just two U.S.-headquartered firms among Ceres’s group of nine leaders, earned top honors in part because it has designated environment and sustainability issues as board-level responsibilities. Christopher Rowe, chief of staff for $918 billion Prudential Investment Management, took his current post five years ago — around the time that Newark, New Jersey–based Prudential joined Ceres’s Investor Network on Climate Risk — to work with its asset managers on incorporating climate change–related factors into their strategies.

Because most of Prudential Investment Management’s assets are managed for third-party institutions and retail clients, not in its own general account, the heightened focus on climate change was largely client-led, Rowe explains. He says the loudest voices were U.S. state pension funds and European institutional clients; in the firm’s general account, portfolio managers are learning about sustainability integration, but real action is limited, he acknowledges.

In the meantime, NAIC keeps pushing insurers. Its 2013 Financial Condition Examiners Handbook includes guidance on the questions insurance company examiners should ask about the blows that climate change could deliver to solvency. Kreidler says his NAIC working group is also encouraging insurers and their trade associations to step up monitoring of clients’ building codes — better resistance to extreme weather could reduce damage payments — and to share climate risk modeling among peers.

In September the U.K.-based International Cooperative and Mutual Insurance Federation and its U.S.-headquartered counterpart, the International Insurance Society, responded at the United Nations Climate Summit in New York. The two associations pledged that the global insurance industry would double its climate-smart investments by the end of 2015 and increase the current total tenfold, to $420 billion, by 2020. Shaun Tarbuck, CEO of the ICMIF, noted during the announcement that the industry manages about $30 trillion — a third of the world’s investment capital.

NAIC aims to sidestep the political polarization that often dogs discussions of how the market should respond to climate change, Kreidler notes. “We’re trying to look at this pragmatically: Here are the numbers and the real results of what is taking place and the potential threat to the insurance industry,” he says. “We’re trying to avoid the politics part of it to the extent that we can.”