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Anne Obersteadt
Senior Researcher, CIPR

NAIC Center for Insurance Policy and Research (CIPR)

CIPR Homepage

Climate Change

Last Updated 1/16/2019

Issue: Climate change could pose significant risks to insurers and the consumers they insure. Global temperatures have risen rapidly in recent decades. National Oceanic and Atmospheric Administration (NOAA) research shows the 10 hottest years on record have occurred since 1998. Rising global temperatures have been linked to changes in the frequency and severity of weather events. According to Munich Re, weather related losses have increased nearly fourfold in the United States since 1980. Weather events include droughts, wildfires, flooding, heatwaves, hurricanes, storm surge, tornadoes, blizzards, ice storms and tropical storms. Insurers must identify climate-related factors and evaluate how they will impact their business and the exposures they indemnify.

Background: The issue of climate change began to surface in the 1970's, largely aided by discussions from scientific circles. The issue was elevated in the 1980's and 1990's, when the insurance industry faced record catastrophic losses from weather events such as Hurricanes Andrew (1992) and Hugo (1985). However, political pressures and scientific uncertainty during this time also led to climate change becoming a controversial issue in the United States. In contrast, the issue was not as controversial in Europe, and by the early 2000's global reinsurers were beginning to take climate change into account within their risk management strategies. The implications of climate change on weather-related losses again came to the forefront in the United States in 2005 when the insurance industry faced record losses from hurricanes Rita, Wilson and Katrina.

The National Association of Insurance Commissioners' (NAIC) involvement in climate change began in 2005. It was at this time climate scientists, key global reinsurers, and other experts presented to insurance commissioners about the role the insurance industry should play in managing climate change related risks and opportunities. In late 2005, the NAIC Property and Casualty Insurance (C) Committee hosted a public hearing addressing the implications of climate change on insurers and insurance consumers. In 2006, the NAIC officially moved the issue of climate change into its committee structure.

Global temperatures are closely correlated to greenhouse gases (GHG), such as carbon dioxide (CO2). GHGs, largely from carbon emissions, have risen 40% since the industrial revolution. Higher levels of GHGs trap the sun's heat in the atmosphere, which has a global warming effect. By the end of the century, the Intergovernmental Panel on Climate Change (IPCC) predicts global temperatures will rise 2.5 to 10 degrees Fahrenheit. The IPCC is the United Nations body for assessing the science related to climate change.

The IPCC expects climate change to have beneficial and harmful effects. Depending on each individual region's specifics, temperatures and precipitation could decrease or increase. The intricacy of so many variables and outcomes in predicting climate change complicates insurers ability to quantify related risks. In general, as outlined by the United Kingdom Prudential Regulation Authority (PRA), the insurance sector faces physical, transition and liability risks from climate change. Physical risk stems from direct and indirect losses from weather-related events. Transition risk refers to the financial risk of potential re-pricing of carbon-intensive financial assets as the economy reduces its carbon intensity. Liability risk relates to claims of loss from climate change from third-parties.

Status: The NAIC Climate Change and Global Warming (C) Working Group of the NAIC Property and Casualty (C) Committee serves as a forum for discussing issues related to climate change. The Working Group (then a Task Force) was created in 2006 to examine the impact of climate change on the availability and affordability of insurance products. It released its findings in a 2008 white paper, The Potential Impact of Climate Change on Insurance Regulation. As an outcome of the white paper, the Working Group developed the Insurer Climate Risk Disclosure Survey in 2010. The eight-question survey asks insurers to report on how they incorporate climate risks into their mitigation, risk management, and investment plans. The Working Group then developed revisions to the NAIC Financial Condition Examiner’s Handbook. The revisions, adopted by the NAIC in 2012, provide examiners with needed guidance on what questions to ask insurers regarding any potential impact of climate change on solvency. Currently, the Working Group is exploring innovative resilience financing solutions to reduce insurance risk.