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Hurricane Sandy

What Role Should Climate Risk Play in Insurers’ Business Strategies?

Hurricane SandyInsurers are in the business of managing risk. But does this include risks associated with climate change?

A growing number of insurance companies say yes, according to a new report by sustainability advocacy organization Ceres. But most insurers still give climate change risk minimal attention.

Two years ago insurance regulators in five states — California, Connecticut, Minnesota, New Mexico, New York and Washington — began requiring insurance companies writing in excess of $100 million in premiums to fill out the climate risk survey developed by the National Association of Insurance Commissioners (NAIC).

The Ceres report, Insurer Climate Risk Disclosure Survey Report and Scorecard: 2016 Findings & Recommendations, is based on these disclosures to the NAIC survey and evaluates companies based on five performance areas: governance, climate risk management, the use of catastrophe modeling or other modeling to evaluate and manage risk, greenhouse gas management and stakeholder engagement.

“Since our last report in 2014, the number of insurers receiving high scores has more than doubled — from 9 companies to 22 — and that is welcome news,” said Ceres president Mindy Lubber in a statement. “But too many insurance companies are still ignoring the issue, especially when it comes to engaging on climate policies that would reduce the pollution causing climate change in the first place.”

Ceres ranked the companies “high quality,” “medium quality,” “low quality” and “minimal.” The 22 companies earning the high quality designation included 13 US insurers, up from only two US insurers in 2014. Sixteen of the 22 are property and casualty insurers.

The 22 high-quality insurers are: ACE Ltd. Group, AEGON US Holding Group, Allianz Insurance Companies, American International Group (AIG), AXA Group, Chubb Group of Insurance Companies, FM Global Group, The Hartford Financial Services Group, John Hancock, Liberty Mutual Group, Lincoln National Group, MetLife Group, Munich Re Group, Nationwide Corp., Prudential of America, Swiss Re Group, Sun Life, Tokio Marine Holdings, Travelers Group, WR Berkley, XL America and Zurich Insurance Group.

On the flip-side, 64 percent of the insurance companies evaluated scored in the low quality or minimal disclosure categories with health insurers performing particularly poorly in their climate change initiatives. No health insurers earned a high quality disclosure rating, and only four earned medium quality ratings, while 89 percent of the health insurers offered low quality or minimal disclosure.

The Hartford is one of the 22 high quality companies that earned high marks in all five performance areas. The report cites the property and casualty insurer’s full-page Wall Street Journal ad it bought in advance of COP21 in Paris last December calling for a strong climate deal. It also says The Hartford CEO Christopher Swift is one of two US industry CEOs on the 13-member Insurance Development Forum (IDF) Steering Committee. The IDF, formed by the UN and World Bank, aims to build resilience on risks associated with climate change.

As Jay Bruns, head of environmental stewardship at The Hartford, said in an interview, the company engages corporate leadership and employees on climate issues through its quarterly Environment Committee meetings. The eight-year-old committee created a Hartford Environmental Action Team (HEAT), which is “now at least 500 people strong and it does a lot more than one employee engagement activity per quarter,” he said. Some of the initiatives to come out of the committee and HEAT include the alternative commute challenge, which rewards employees for not driving cars to and from work, electronics recycling drive and electric vehicle charging stations. “We quadruped the number on The Hartford [campus] this year. We now have the capacity to power up 16 electric cars at once.”

The insurers also has reduced its own GHG emissions by 57 percent, compared to 2007 levels, offers premium discounts to owners of EVs and hybrids and is the sole financier of the US Capital’s energy-efficiency upgrade. Its investment is about $66 million.

The Hartford has earned accolades for its climate leadership, spending the last five years on the Dow Jones Sustainability Index and eight years on the CDP leadership index for climate disclosure. These “green branding” opportunities also help it recruit and retain employees, according to the report.

“Competition in property casualty insurance is intense,” it says. “Companies are constantly looking for ways to differentiate themselves in the marketplace. We believe that companies that themselves demonstrate a strong, comprehensive and sustained approach to environmental stewardship and offer appropriate products at the appropriate price can build a green insurance brand. Also, in the war for talent, companies that can demonstrate a serious commitment to environmental stewardship are better positioned to attract and engage talented employees.”

The Ceres report also includes recommendations for insurance companies, including:

  • Elevate climate risk leadership to the board and C-suite levels;
  • Consider climate and carbon risks in investment portfolios;
  • Integrate climate risk into enterprise risk management frameworks, and;
  • Engage with key policymakers on the benefits of policies that will strengthen climate resiliency and reduce carbon pollution.

California is one of the states that requires insurers to fill out the NAIC survey. The California Department of Insurance website puts the responses online.

Earlier this year, California insurance commissioner Dave Jones called on 1,300 insurers operating in the state to voluntarily divest in thermal coal. “We did this because of the concern that coal will become a stranded assets on the books of insurance companies,” he said in a phone call with reporters.

Jones also announced new requirements for insurers to publicly disclose carbon-based investments annually. The first disclosures were due July 1. In an interview with this reporter Jones said in December he will make public insurers’ financial risks associated with carbon investments.

While most US states don’t require insurers to disclose and address this level of climate-related risks, Jones says the global industry looks to be headed in this direction. Last October Jones testified before the international Financial Stability Board about his work related to climate and carbon risk in insurance regulation. Two months later it formed the Task Force on Climate-Related Financial Disclosures, chaired by Michael Bloomberg.

“While I may be the first financial regulator in the US to ask for divestment and impose disclosure requirements on a sector of the financial sector, it’s very consistent with what ministries of finance and bank regulators are doing,” Jones said.

In other words, it wouldn’t hurt to implement some of Ceres’ recommendations such as considering carbon risks in investment portfolios and integrating climate risk into enterprise risk management. Change — climate and otherwise — is coming.

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