Climate and Insurance.org | takefive with Howard Mills

Howard Mills is a director and chief advisor of the Insurance Industry Group of Deloitte & Touche USA LLP. In this role, Mr. Mills offers thought leadership to Deloitte’s global insurance and reinsurance clients in areas ranging from growth and globalization to managing the complexities of regulatory compliance.

Prior to joining Deloitte, Mr. Mills served as Superintendent of the New York State Insurance Department. He was instrumental in winning an extension of the federal Terrorism Risk Insurance Act (TRIA) through the end of 2007 and in forging landmark settlement agreements with the world’s largest insurers and U.S. insurance brokers. He also led the transition to a risk-based examination process and created a corporate practices unit within the Office of General Counsel.

A former New York State Assemblyman, Mr. Mills served as the Deputy Minority Leader, sitting on the Banking, Housing, Insurance and Ways and Means Committees and was a member of the Armed Forces Legislative Caucus. He served as a Major in the New York Guard, 56th Brigade. In the wake of the September 11, 2001 terrorist attacks, then-Assemblyman Mills was briefly called to active duty and later awarded the New York State Defense of Liberty Medal. Mills was the Republican nominee for the U. S. Senate in 2004 and did not seek re-election to a fourth term in the state legislature.

Mr. Mills earned a bachelor’s degree in political science from Marist College, and spent one year as a visiting student of politics, philosophy, and economics at Mansfield College, Oxford University. He has a master’s degree in government and public affairs from The American University.

Takefive:
Mr. Mills, in a presentation you made late last year, you said “global climate change presents a significant risk for insurers and reinsurers.” Can you elaborate on what you meant by that statement?

Howard Mills:
Let me start by acknowledging that not everyone is in agreement with the current climate science that foresees increasing weather-related catastrophe losses on the horizon.

Insurance is all about taking an historical view of risk and making the best possible prediction of future loss based upon past experience. I’m not sure today’s climate science can uniformly deliver data that’s strong enough to take to the bank – or for insurers to use in their risk assessments.

That being said, the numbers do seem to point to a trend in global warming. Consider that the years 1995 to 2006 rank among the 12 warmest years on record for global surface temperature. Sea levels have risen dramatically, ice caps are rapidly disappearing and extreme weather has become commonplace. But even if you don’t believe climate change is to blame for any of that, it’s important from a business perspective to recognize that the public has largely accepted global warming as fact and is looking to government and business to respond.

Aside from the obvious risk of increased insured losses, the greatest peril comes in adopting the view that relegates climate change to a public relations and environmental issue that’s best dealt with by delaying action, rather than taking the view of climate changes as a true business opportunity that demands action now.

Takefive:
In that same presentation last fall, you also noted that “smart companies are beginning to see the value of viewing climate change as an opportunity.” Can you provide some examples to support that statement?

Howard Mills:
For some insurance and reinsurance companies, the notion of climate change is not new. From collaborating with universities and research institutions to developing products and services that adapt to climate change – such as insurance-linked securities and carbon trading exchanges – some insurers have been active on this front for decades. Today, there is an emergence of dozens of new insurer activities, such as premium credits for “being green” and incentives for investing in renewable energy.

We’re also seeing the creation of dozens of new products, primarily those that reward so-called green behavior, such as smart building construction and gasoline-saving driving habits. These initiatives are serving to attract a growing number of environmentally conscious customers who are shown to be more responsible and more thoughtful about their actions – and a lower risk for insurers. The demand for these products is certainly there.

Between 2006 and 2007, we’ve seen insurers more than double the climate change related products and services they offer, and that number keeps climbing. Meanwhile, back at home, companies are getting smarter about reducing reputational risk by offsetting their own carbon footprints and by offering employees incentives to do the same.

Meanwhile, here at Deloitte, we’ve been busy with our own initiatives, undertaking more than 1,000 greening projects that run the gamut from reducing the paper usage – we’ve cut it by 11 percent so far – to switching lights off, powering down computers, unplugging electronic devices from outlets and encouraging the use of coffee mugs in place of disposable cups.

We’ve also had internal campaigns aimed at raising awareness at home and while on the road. With about 140,000 employees in 100 countries, we’re hoping to make an impact.

Takefive:
As you know, the National Association of Insurance Commissioners (NAIC) is currently developing a white paper on climate change and its impact on the insurance industry, and also has proposed that insurers file climate risk disclosures with regulators. As the former Superintendent of the New York Insurance Department, do you have any reaction to these NAIC initiatives?

Howard Mills:
During my time as Superintendent, I visited Long Island frequently to warn property owners of the risk of a future hurricane along the lines of the 1938 Long Island Express, which devastated the area and, if it hit today, would result in billions of dollars in losses for New York.

I’ve always believed in preparedness, both on the homeowner’s part and on the part of industry and government. As a member of the NAIC, one of my areas of focus was natural catastrophe preparedness. I do believe that it is a regulator’s responsibility to monitor areas of risk that have the potential to affect the solvency of an insurance company.

I see the NAIC’s recently adopted white paper as a good first step in offering the regulatory mindset on climate change-driven weather risk. Not many could argue against land use planning, stronger building codes, the creation of contingency plans or the best practices that already underway in the industry. I also appreciate the fact that the document comes after more than one year of vetting with the industry. However, I don’t believe creating climate change-related questions in a supplement to the financial statement is the way to go.

Any time you create a greater regulatory burden for insurers you run the risk of negatively impacting policy holders and/or seeing insurers respond by diminishing capacity.

Sure, consumers are demanding companies to be held accountable and those who oversee insurers should be a part of that process. But I don’t believe the disclosure proposal is what was envisioned by the late Nebraska Insurance Commissioner Tim Wagner, who championed the climate change issue at the NAIC. I took a look back in the A.M. Best archives. Here is what the esteemed Commissioner Wagner had to say on this back in 2005: “When it comes to financial statements, I would be a little reticent to include climate change policy. That doesn't mean there are not other mechanisms or some kind of alternative. My goal is to have insurers recognize that this is happening and to create solutions.”

Takefive:
Looking ahead, what do you see as some of the business and legal risks that insurers may encounter with respect to climate change?

Howard Mills:
I think the focus here has to be on D&O coverage. If directors and officers fail to act appropriately in relation to identifying and mitigating the risks associated with climate change, they leave a company vulnerable to climate change liability claims and expose themselves to being found to be breach of their own fiduciary duties. The possibility of shareholder lawsuits is very real here.

As with D&O liability, if a company were to suffer financially due to climate change exposure, or if it fails to disclose climate change risks to investors, it can expect to face shareholder lawsuits for any losses suffered. We’ve seen numerous lawsuits in recent years brought by shareholders, who, in the wake of huge financial losses, lay the blame on company executives for keeping them in the dark. In the climate change arena, we can expect nothing less.

Takefive:
Finally, what first steps would you advise an insurance client to take if that client wanted to become more engaged in the climate change issue?

Howard Mills:
Start by looking at your own house. At Deloitte we’ve done this not only internally but in the communities where we live and work. For example, we’re creating changes in the design of our new or remodeled offices that allow more ambient light, among other eco-friendly features. We are also working with our vendors to reduce toxic content from equipment and we’re increasing the percentage of recyclable products we buy. Instead of traveling, we’re holding more teleconferences. And when we do have to travel, we work with hotels and convention centers to reduce waste, such as cutting down on plastic water bottles.

For those in the insurance industry who are just getting started in this area, I would give this advice: follow the lead of major insurers who are working to decrease their own carbon footprints, are getting their employees on board and are creating new products and services in answer to growing consumer demand.

Realize, too, that no matter where one stands on climate change, the public perception should far outweigh any temptation to “ride it out.” The time to act is now. Rather than take a defensive stance, be proactive and at the table early when lawmakers and regulators are drafting laws and regulations in relation to climate change. Another area to be aware of is the ratings process.

Financial strength ratings and future earnings potential could become an issue as rating agencies become increasingly interested in the material risk of a carrier’s environmental risk profile. Ratings agencies are also beginning to look for companies to establish more capital in anticipation of rising future costs.

Above all, don’t view climate change as a “soft” environmental issue. It’s a very real issue to consumers, regulators, policymakers, rating agencies and shareholders. Your response will have far reaching impacts on the health of your company and your competitive posture.

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