Alert March 31, 2009

National Association of Insurance Commissioners Mandates Climate Change-Related Disclosures

The National Association of Insurance Commissioners (“NAIC”) voted to require large insurers to disclose the strategies they are utilizing to address climate change-related risks.  This decision highlights the increased attention being devoted to climate change issues in the financial services sector and creates a significant new responsibility for insurers.  Further, the reporting requirements appear intended to induce insurance companies to take steps within their power to mitigate climate risks.

The disclosure requirement consists of responding to an eight-part questionnaire.  The questions focus on how insurance companies are assessing and addressing climate change.  Specifically, each covered company must address the following topics by May 1, 2010:

  • How the company assesses and mitigates its own greenhouse gas emissions
  • What risks climate change poses to the company
  • How the company accounts for climate change risks in its risk and investment management strategies and other business decisions, including whether the company engages in computerized climate modeling
  • What steps the company has taken to encourage its policyholders to mitigate climate change
  • What steps the company has taken to “engage key constituencies” on the topic of climate change

These questions are broad, and could potentially reveal the inner workings of proprietary insurance risk models and investment strategies.  To protect against this concern, NAIC placed several limits on the types of information that must be disclosed in response to these questions.  Specifically, insurers are not required to provide any quantitative, commercially sensitive, proprietary, or forward-looking information.  All that is required is a narrative description of company policies.

Further, disclosure is only mandatory for larger insurers.  For fiscal year 2009, only insurance groups with over $500 million in direct written premiums must respond to the questionnaire.  For 2010, the threshold drops to $300 million.  Responses are due annually on May 1, beginning in 2010.  After they are submitted, they will be made publicly available by NAIC.  NAIC will review the questionnaire and responses on an annual basis.

The questionnaire focuses on several aspects of insurer activities – how they manage their own greenhouse gas emissions, how they account for climate change in their investments, how they evaluate climate change when issuing policies, and how they are incentivizing climate change mitigation behavior in the insured.  Although not stated expressly in the rules, a reasonable inference is that NAIC hopes to induce insurance companies to substantively address topics covered by the questionnaire if they have not done so already.  Moreover, in addition to requiring insurers to explicitly address climate change-related risks, the new reporting rules may likewise help insurers focus on business opportunities presented by such risks.  A report completed last year by NAIC entitled The Potential Impact of Climate Change on Insurance Regulation (available through the NAIC website) delves into further detail on how climate change may affect various types of insurance – property, casualty, life, and health – as well as potential investment consequences and climate change-related business opportunities.

A copy of the draft disclosure form can be found at http://www.naic.org/documents/committees_ex_climate_090224_survey.pdf.