Common Tragedies

Thoughts on Environmental Economics

Like a good neighbor

Posted by Danny Morris on February 24, 2009

Interesting news on the insurance regulation front, courtesy of ClimateWire (subscription req’d):

Insurance companies are facing new rules designed to prod them deeper into the fight against climate change, a remarkable transition that is poised to be set in motion when a group of key regulators casts a preliminary vote today.

Eighteen state insurance commissioners on a climate change task force are on the brink of approving the nation’s first regulations making companies reveal their efforts to spur emission-reducing policies. The rules could affect how members of one of the country’s largest industries make investments, offer products and anticipate losses related to rising seas, stronger storms and wilting drought.

This disclosure plan has been in the works for a while and would represent a pretty big departure from the industry norm. As one might expect, many of the potentially regulated parties are not thrilled and some even see it as a trojan horse to advance various tree hugging elitist-friendly agendas:

Requiring public answers to knotty questions about how stronger hurricanes, for example, could affect investment portfolios, or affect coverage in certain areas probes deeper into their business than some insurers would like.

Some critics see the disclosure plan as the first step toward other “green” regulations, like making companies offer car insurance that rewards reduced driving or provides discounts for hybrid vehicles.

“For the global environment, that may be beneficial, but does that truly benefit the individual insurance company?” said David Kodama, a climate policy expert with the Property Casualty Insurers Association of America, which opposes the plan. “That is a worthy goal, but should that be a prominent goal of the insurance industry?”

I don’t care that much whether or not the insurance industry should be promoting hybrids, but I definitely think it should have more transparency in how it determines and measures climate risks. Adapting to climate change (and doing it well) is going to require that decisionmakers have a pretty good understanding of risk, and nobody understand risk better than insurers. The insurance industry has been described as ‘the canary in the corporate mine‘ of climate change and its models could shine a bright light on areas where climate change is going to hurt the most. Wouldn’t be nice if the canary could say ‘Hey, I can’t breathe’ instead of just dying?

For those w/o a subscription, full article after the jump.

REGULATION: Insurance regulators appear ready to put their muscle behind climate risk awareness (02/24/2009)

Evan Lehmann, E&E reporter

Insurance companies are facing new rules designed to prod them deeper into the fight against climate change, a remarkable transition that is poised to be set in motion when a group of key regulators casts a preliminary vote today.

Eighteen state insurance commissioners on a climate change task force are on the brink of approving the nation’s first regulations making companies reveal their efforts to spur emission-reducing policies. The rules could affect how members of one of the country’s largest industries make investments, offer products and anticipate losses related to rising seas, stronger storms and wilting drought.

The task force has faced fierce opposition from the industry, though it has attracted key supporters in recent months. Some insurance associations are pledging to oppose the plan until the end, saying it represents an environmental activist agenda meant to usher in discounts for “green” decisions, like driving a hybrid, while leveraging the industry’s weight to advance political initiatives around global warming.

The task force itself was buffeted by changing currents as today’s vote drew near. Last year’s chairman, Insurance Commissioner Sean Dilweg of Wisconsin, was removed from his post in a political shakeup after resuscitating the dormant disclosure effort, surprising observers and raising questions about the future direction of the task force.

Despite the change, the “climate risk survey” appears to be on a trajectory that would carry it successfully through the task force vote today and set it on course for a vote by every regulator in the country next month. If successful, that vote would impose the nation’s first mandatory reporting regulations regarding climate change.

“I would assume that it will pass,” Pennsylvania Insurance Commissioner Joel Ario, the new chairman of the task force, said of today’s test. “If anything, the issue has elevated in importance now with the election of [President] Obama and the likelihood that the federal government is going to be taking more, rather than less, action on the climate change issue.”

Some insurers resisting enviro ‘agenda’

At least two industry groups are still working to derail to the plan, according to sources. Those groups say regulators are overreaching their authority, which has traditionally focused on ensuring that insurers remain financially healthy in order to pay claims. Requiring public answers to knotty questions about how stronger hurricanes, for example, could affect investment portfolios, or affect coverage in certain areas probes deeper into their business than some insurers would like.

Some critics see the disclosure plan as the first step toward other “green” regulations, like making companies offer car insurance that rewards reduced driving or provides discounts for hybrid vehicles.

“For the global environment, that may be beneficial, but does that truly benefit the individual insurance company?” said David Kodama, a climate policy expert with the Property Casualty Insurers Association of America, which opposes the plan. “That is a worthy goal, but should that be a prominent goal of the insurance industry?”

For some, the movement is meant to put the insurance sector in the middle of the fight on climate change — and being among the globe’s largest industries, it’s a good friend to have in a scrap. Few industries have so much sway over public policy. In the past, insurers pushed through new safety standards to ease fire hazards, and it also applied its clout to implement seatbelt use.

Now, that muscle could be put behind new building standards that can harden homes against whipping gusts, and higher insurance premiums along the coasts that could cool explosive development where storm and environmental damage appear most likely, supporters say.

‘Pray’ Congress doesn’t get involved

Key industry players abandoned their opposition in December, when regulators agreed to remove a requirement in the plan making insurers include their disclosure answers in their annual financial statements, described by one observer as making CEOs sign their names in blood. The eight questions were made more general, quieting critics’ complaints that competitors could plunder the document to glean corporate strategy about where a company plans to expand or reduce policies.

“The industry is probably realistic enough to recognize if they don’t reach some reasonable accommodation, something is going to be shoved down their throats,” said Washington Insurance Commissioner Mike Kreidler, vice-chairman of the task force.

Tougher regulations could come from Congress, he warned, if lawmakers believe insurers were able to significantly dilute the current disclosure plan.

“What Congress wound up doing at a time like this, [insurers] would pray to have this disclosure that we’ve worked out,” Kreidler said.

Even if the plan passes its final test in March, there are still knots that need untying. Regulators, for example, are preparing to draft a “guidance instrument” as an example of how insurers should answer the survey questions. The questions probe companies about their efforts to reduce emissions, how they assess emerging climate risks, how those dangers could affect solvency, and the steps they’re taking to change customer behavior, like driving habits, of millions of people around the country.

Next target: blocking disclosure in the states

The shape of the guidance document is seen as a crucial element of the process. It could chafe insurers by aggressively seeking guarded information or spark a rebellion among consumer advocates and environmentalists by being too weak.

And there’s no guarantee that each state will adopt the survey exactly as it’s adopted by the task force and, later, by the full membership of the National Association of Insurance Commissioners. Insurance is regulated at the state level.

Kodama’s PCI is searching for sympathetic regulators to oppose the measure at the task force level. Another group, whose representative spoke on the condition of anonymity, expects the survey to be approved by the full NAIC membership in March. So it expects to try to block the survey from being implemented in individual states, where it has a high number of insurance company members.

“They could dilute the questions,” the industry representative said of sympathetic states. “Or they could choose not to administer it at all.”

But that possibility cuts both ways: California, for example, could adopt a survey that is more aggressive than the NAIC version. Because it’s a huge state with lots of insurers, it could essentially create a de facto national reporting survey.

New chairman pushing hard for better modeling information

This all comes as political machinations within the association of diffuse commissioners prevented Dilweg, the Wisconsin regulator, from retaining the task force chairmanship. He requested the post, but new leadership in the association gave it to Ario, who did not seek it. Kreidler, the vice chairman, also did not ask for his position as second-in-command.

“I’m disappointed that I lost the chairmanship,” Dilweg said in an interview, noting that his support in commission elections for president at the turn of the year failed to pan out. “I backed other candidates for officer that were not elected. That has its ramifications.”

Dilweg, who revived the disclosure process after a period of inaction, said Ario is a strong believer in climate change. Dilweg was respected for his ability to negotiate with people on both sides of the issue. He has worked for both Republicans and Democrats in Wisconsin.

Ario comes from a different background. As a consumer and environmental advocate for 13 years, he sometimes found himself being the “shrill voice to counteract what I thought were fairly extreme corporate voices,” according to an interview last year with philly.com, a Web site for two Philadelphia newspapers.

He left his role with Ralph Nader’s Public Interest Research Group more than a decade ago so he could facilitate policy, rather than just oppose it or advocate for it, he said.

And he’s hinting that he could aggressively push the industry to reveal coveted secrets related to its catastrophe risk modeling. Industry has said the results of those models are proprietary and off-limits.

Ario disagrees.

“To me, it’s a little like scientists saying … ‘We’ve got a lot of information that would be helpful to you, but we’d rather make money on the information, so we’re not going to share it with you. You’ll have to make policy in the dark,'” Ario said.

“No scientist would say that.”

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