Government rules that require organizations to publicly disclose certain information sometimes serve political ends. A case in point is the enthusiasm among global warming activists for mandatory climate risk disclosure—rules requiring insurers to answer questions concerning their greenhouse gas (GHG) emissions and commitments to an anti-warming agenda in their business operations, the political arena and the public square. While proposals for government-mandated disclosure typically have focused on industries associated with high GHG emission levels, some low emitting industries, such as insurance, also have been targeted.
Last March, Ceres, a self-described "national network of investors, environmental organizations and other public interest groups working with companies and investors to address sustainability challenges such as global climate change," persuaded the National Assn. of Insurance Commissioners (NAIC) to require all U.S.-domiciled insurers with annual premium of more than $300 million to respond to a climate risk disclosure survey. This article evaluates the insurer climate risk disclosure mandate against the backdrop of traditional rationales for mandatory disclosure, and analyzes the NAIC survey’s potential impact on insurers, their policyholders, and public policy.
The insurer climate risk disclosure survey
Insurers are required to submit the completed survey to the insurance department of the state in which they are domiciled on an annual basis. It consists of the following questions:
1 Does the company have a plan to assess, reduce or mitigate its emissions in its operations or organizations? If yes, please summarize.
2 Does the company have a climate change policy with respect to risk management and investment management? If yes, please summarize. If no, how do you account for climate change in your risk management?
3 Describe your company’s process for identifying climate change-related risks and assessing the degree that they could affect your business, including financial implications.
4 Summarize the current or anticipated risks that climate change poses to your company. Explain the ways that these risks could affect your business. Include identification of the geographical areas affected by these risks.
5 Has the company considered the impact of climate change on its investment portfolio? Has it altered its investment strategy in response to these considerations? If so, please summarize steps you have taken.
6 Summarize steps the company has taken to encourage policyholders to reduce the losses caused by climate change-influenced events.
7 Discuss steps, if any, the company has taken to engage key constituencies on the topic of climate change.
8 Describe actions your company is taking to manage the risks climate change poses to your business, including, in general terms, the use of computer modeling.
These questions raise concerns. Questions 3, 4, 6 and 8 refer to "climate change-related risks," "risks that climate change poses to your company," "losses caused by climate change-influenced events" and "the risks climate change poses to your business." Such word choices presume that climate change is a discrete risk, and that insurers can predict future loss costs caused by climate change-influenced events. Insurers do this routinely for weather-related risks by using historical hurricane loss data, or computer models that analyze cyclical trends in hurricane activity during several decades to predict future frequency and severity. However, this is very different from attempting to predict how gradual, minute changes in the Earth’s climate will affect the business of a particular insurer. The state of climate science makes it impossible to predict when, where and how climate change will influence weather-related events.
The most reliable peer-reviewed research on the relationship between climate change and hurricane activity is anything but conclusive. Kerry Emanuel of MIT, a leading climate scientist who once predicted that global warming would increase the frequency and severity of global hurricanes, published an article based on new research in March 2008 that concluded "global warming should reduce the global frequency of hurricanes, though their intensity may increase in some locations." A May 2008 study by Thomas Knutson and a team from the National Oceanic and Atmospheric Administration assessed large-scale changes in climate that are projected to occur by the end of the 21st century. Its conclusion: "Atlantic hurricane and tropical storm frequencies are reduced [by global warming]... Our results do not support the notion of large increasing trends in either tropical storm or hurricane frequency driven by increases in atmospheric greenhouse-gas concentrations." Commenting on these discrepancies, Bill Read, director of the National Hurricane Center, told the Associated Press that the purported link between global warming and hurricanes carries "so much emotional baggage" that it can be "really hard to sift out the science."
Given the difficulty insurers face in trying to assess the impact of global warming on their business operations, they are in no position to "encourage policyholders to reduce the losses caused by climate change-influenced events," as in Question 6. Insurers know what steps property owners can take to mitigate the risk of losses due to windstorms (install storm shutters), wildfires (clear underbrush from land surrounding the insured structure), and other natural hazards. Insurers encourage hazard mitigation by offering lower premiums to policyholders who undertake such efforts, while charging higher premiums or denying coverage for those who don’t. But the survey questions refer specifically to climate change-influenced events, and we have no way of knowing which events will be influenced by climate change, the nature and extent of this influence, and when and where climate change-influenced events will occur.
In theory, a company could respond to the survey by pointing this out. But a key element of the survey requires insurance departments and the NAIC to make the responses accessible to the public. Given the emotional baggage involved in public discussions of climate change, global warming activists—or the plaintiffs’ bar—could use these responses to condemn an offending company for its selfish indifference to the Earth and its people.
For clues to the kind of answers likely to be judged correct or acceptable by activists such as Ceres, one need look no further than Ceres’ prescribed "best practices" for insurers, which include exhortations to:
• Use terms and conditions to foster the right decisions by customers. This could range from rewarding risk-minimizing behavior to excluding climate change liabilities for those who make imprudent decisions, either as emitters of greenhouse gases or managers of risks associated with climate change.
• Rebalance investment portfolios to recognize climate-related risks to investments and capitalize on opportunities for emerging industries that will participate in climate change solutions.
• Actively participate in emerging markets for carbon-free energy and carbon trading, both as investor and risk manager.
• Actively engage in public policy discussions about climate-change.
The last item is closely related to Question 7 in the NAIC survey, which asks about the company’s efforts to "engage key constituencies on the topic of climate change." It goes without saying that the messages companies convey in their public policy discourse on climate change should conform to the policy predilections of global warming activists.
Mandatory disclosure
In theory, information conveyed through mandatory disclosure has two salutary effects: first, with pertinent information the consumer, worker or investor can avoid risky products or situations and pursue safer, more reliable alternatives. Second, the market pressure exerted by informed consumers, workers and investors creates incentives for producers to furnish safer, more reliable products and safer, healthier workplaces. Judging from its preamble, the goal of the Insurer Climate Risk Disclosure Survey appears consistent with these objectives:
The goal of the Insurer Climate Risk Disclosure Survey is to provide regulators, shareholders and the public with substantive information about the risks posed by climate change to insurers and the actions insurers are taking in response to their understanding of climate change risks.
There are, however, problems with this goal. First, by demanding that insurers disclose actions they are taking in response to their understanding of "climate change risks," the survey implies that insurers should take concrete action in response to risks they may not fully understand. Even if the insurance risks stemming from global warming were fully understood, it is far from clear which actions available to insurers would actually be effective in combating global warming.
What, then, should an insurer do to give the impression that it is taking the kind of action that will withstand the scrutiny of environmental activists and their allies in the regulatory community? Ceres no doubt hopes that companies will look to its best practices, which might lead an insurer to refuse coverage to "those who make imprudent decisions either as emitters of greenhouse gases or managers of risks associated with climate change"—even if there is no actuarial justification for doing so. They might be tempted to invest policyholder surplus in "emerging industries that will participate in climate change solutions," not because the putative solutions are likely to work or because such investments are likely to generate a greater return than other investments, but because the survey questions imply that this is what insurers ought to do. Similarly, insurers could promote carbon-free energy and engage in "carbon trading" not because evidence exists that such actions will be effective in curtailing global warming, but because this is apparently what global warming activists and insurance regulators expect of them.
Activist groups have every right to persuade businesses to adopt their point of view on issues ranging from environmental protection to social justice. But mandatory disclosure rules, especially when they are unilaterally put in place by administrative agencies such as state insurance departments, should not be used for such political ends. The coercive effect of rules requiring companies to disclose the actions they are taking to address politically sensitive issues that are the subject of considerable debate and uncertainty should not be underestimated.