Climate and Insurance.org | takefive with Andrew Logan

Andrew Logan is director of Energy and Finance Programs with Ceres, a coalition of public interest groups and institutional investors representing more than $4 trillion in assets. Ceres’ mission is to move businesses, capital, and markets to advance lasting prosperity by valuing the health of the planet and its people.

Logan coordinates Ceres’ work with the oil and insurance sectors, with a focus on the risk that climate change poses for those sectors.

Prior to joining Ceres, Logan worked for Bain & Company, a global business management consultancy. While there, Logan developed high-level strategies for companies in the finance, e-commerce, manufacturing, retail and media sectors.

Takefive:
Mr. Logan, can you start by briefly describing Ceres, its interest in the climate change issue, and why your organization has focused part of its attention on the insurance industry.

Andrew Logan:
Ceres is a $4 trillion network of investors and environmental organizations working with companies to address key sustainability challenges.

Our investors are focused on this industry because of the central role insurance plays in the functioning of the global economy. Our fear is that climate change poses a fundamental threat to the long-term availability and affordability of insurance. This threat has tremendous implications for the economy and this is why we, as investors, are focusing so acutely on this sector.

We aren’t alone in thinking this. European insurers and reinsurers like Swiss Re, Munich Re and Allianz have been warning about the potential consequences of climate change for years. Munich Re has calculated that by 2050, climate change could cost up to $300 billion annually in weather-related damages, industrial and agricultural losses and other associated expenses. In a report that came out last year, Lloyd’s warned that “the insurance industry must start actively adapting in response to greenhouse gas trends if it is to survive.” That is the urgency driving our work.

Takefive:
In the cover letter accompanying your proposal to the NAIC Climate Change and Global Warming (EX) Task Force in May 2007, you and your colleagues lay out three reasons why climate change-related interrogatories are necessary. Can you list the reasons and explain each of them?

Andrew Logan:
The overarching concern driving our request for better disclosure is that the U.S. insurance industry, with a few crucial exceptions, has done a surprisingly poor job so far of addressing the risks and opportunities presented by climate change.

The insurance sector has the worst record on climate disclosure of any industrial sector in the United States. According to a recent survey of SEC filings, only 15 percent of U.S. insurers even mention climate change in their 10Ks, which are supposed to discuss all issues material to a company. Contrast this with the electric utility sector, where there is essentially a 100 percent disclosure rate, or even the oil sector, where nearly 80 percent of companies discuss climate change in the 10K.

There have been other attempts to elicit this information as well. The Carbon Disclosure Project (CDP) writes to the CEOs of the largest global corporations each year, asking a series of questions about how they are preparing to respond to climate change. This year the CDP letter was signed by investors representing an astounding $41 trillion in assets. One would think that a letter signed by such a large group of investors, including companies like Goldman Sachs and Morgan Stanley, would get the attention of U.S. insurers. Yet while more than 70 percent of European insurers responded to the CDP request, only 30 percent of U.S. insurers did, and the U.S. responses tended to be quite superficial.

This is quite worrisome, and underscores the three reasons highlighted in our letter for requiring climate change disclosure in the statutory annual statement.

First, regulators require information about the types of financial exposure insurers face from climate change to meaningfully monitor the financial condition of insurance companies. It will be impossible for regulators to properly assess the implications of climate change for the insurance sector and to decide how best to address the challenges it presents without much better information from the insurers themselves on how they might be impacted and what they are doing about the risks climate change presents.

Second, consumers and investors require information about insurers’ understanding of climate change impacts on the insurers’ business to reasonably evaluate whether to purchase a policy from or to make an investment in a particular insurance company.

Third, mandatory disclosure will lead insurers, in many cases for the first time, to evaluate the impacts of climate change on their business, leading insurers to take steps to address the problems climate change poses.

Takefive:
Part 1 of your proposal relates to a climate change impact assessment. Can you explain what you and your colleagues have in mind with this section?

Andrew Logan:
This first section asks insurers to assess how climate change will impact their business operations, including risk exposure, investments, financial condition, coverages offered and enterprise risk management. The questions ask insurers to look at short-, medium- and long-term impacts of climate change.

Takefive:
Part 2 relates to climate change mitigation activities. What do you want to see insurers report with this section of the interrogatory?

Andrew Logan:
The second part of the disclosure proposal focuses on insurer responses to climate change challenges. There is no insurance system – private, public or public-private – that will be able to pay for more frequent and more severe catastrophic events. The only long-term solution is one that includes aggressive loss prevention and loss mitigation efforts that reduce the loss of life and property from catastrophic events and, over the long term, mitigate the frequency and severity of such events.

The purpose of the mitigation questions is to alert regulators and the public to the status of insurer loss mitigation efforts and to prompt insurers to greater loss mitigation efforts. We are concerned by the insurance industry’s narrow focus in recent years on financial risk management, accomplished chiefly through exclusions, price increases and use of derivatives. This approach does nothing to prevent or mitigate losses, but simply shifts exposure on to consumers, businesses and government. We hope the mitigation disclosure will alert insurers to state-of-the-art mitigation and prevention activities and encourage insurers to take greater action in this area. These questions will also inform regulators, policymakers and investors about the extent of insurer loss mitigation and prevention activities.

Takefive:
Finally, short of interrogatories being required, are there other climate change-related activities that you would like to see the insurance industry undertake?

Andrew Logan:
Disclosure is one part of a comprehensive response to the challenge of climate change on insurance availability and affordability. The purpose of disclosure is to educate regulators, investors, consumers and insurers themselves about the challenges of climate change and to encourage action on these challenges by insurers. These actions include a host of loss prevention and loss mitigation activities, ranging from insurer investment strategies to coverages and rates for emerging technologies to risk classifications that encourage energy conservation and reduction in greenhouse gas emissions to insurers reducing their own carbon footprint.

In the last 12 months or so, the context of the global warming debate has changed completely. The conventional wisdom that taking action on climate change would harm the economy has been turned on its head, as companies and investors now realize that, in fact, it is the lack of action to combat climate change that is the true threat to the economy.

Dozens of companies, including major emitters like ConocoPhillips and General Motors, have endorsed calls for the United States to reduce its carbon emissions by 60-80 percent in the next few decades. Earlier this summer, both the National Petroleum Council (which is chaired by former Exxon CEO Lee Raymond) and the Business Roundtable both called for the United States to take quick action to reduce emissions, which would have been unimaginable a year ago.

The insurance industry has a history of asserting leadership to help society understand risks and to better control them. With core competencies in risk management and finance, insurers are well-positioned to further society’s understanding of climate risk, and advance creative solutions to minimize its impacts. The stakes in this case are high – the issue, as Lloyd’s noted quite pointedly, is whether insurance will continue to play a major role in society going forward, or whether it will be relegated to a small niche. We are calling on the NAIC to take very modest action now on disclosure, in the hopes that the industry will be spurred to act before it is too late.