Insurer Climate Risk Disclosure Survey Report & Scorecard: 2014 FInDIngS & ReCommenDatIonS October 2014 ▪ Ceres Insurance Program ABOUT CERES Ceres isanonprofitorganizationadvocatingforsustainabilityleadership.Itmobilizesapowerful networkofinvestors,companiesandpublicinterestgroupstoaccelerateandexpandthe adoptionofsustainablebusinesspracticesandsolutionstobuildahealthyglobaleconomy. CeresalsodirectstheInvestorNetworkonClimateRisk(INCR),anetworkofover100 institutionalinvestorswithcollectiveassetstotaling$13trillion.Formoreinformation,visit www.ceres.org orfollowCereson Twitter:@CeresNews . LEAD AUTHOR Max Messervy with Cynthia McHale Rowan Spivey ACKNOWLEDGEMENTS TheauthorswishtothankthemembersoftheCeresteamwhoprovidedvaluableinsightand contributedtothewritingofthisreportincludingAndrewLogan,NancyIsrael,PeytonFleming , andAndrewBeers.WewouldalsoliketothankTheSkollFoundation,TheKresgeFoundation , andtheHenryPhillipKraftFamilyMemorialFundinTheNewYorkCommunityTrustfortheir ongoingsupportofthiswork. GraphicdesignbyPatriciaRobinsonDesign. EXPERT REVIEWERS Ceresandtheauthorswouldliketoextendtheirdeepappreciationtotheexpertswho generouslysharedtheirtimeandexpertisetoreviewandprovidefeedbackonthisreport. Don Kirshbaum ,OfficeoftheConnecticutStateTreasurer,Retired Barney Schauble ,ManagingPrincipal,NephilaCapital TheopinionsexpressedinthisreportarethoseofCeresanddonotnecessarilyreflectthe viewsofreviewers. ©Copyright2014byCeres. FOR MORE INFORMATION, CONTACT: Max Messervy Manager,InsuranceProgram Ceres [email protected] Cynthia McHale Director,InsuranceProgram Ceres [email protected] 99ChauncyStreet Boston,MA02111 www.ceres.org Contents FOREWORD . 4 EXECUTIVE SUMMARY . 5 CHAPTER 1: A MORE HAZARDOUS OPERATING ENVIRONMENT FOR INSURERS . 11 1.1 HigherPropertyLossesfromExtremeWeather 1.2 GrowingClimateLitigationThreat 1.3 ClimateRiskandInsurers’InvestmentPortfolios 1.4 ClimateRiskDisclosure:WhatRegulatorsandInvestorsNeedtoKnow CHAPTER 2: OVERVIEW OF INSURER CLIMATE RISK SCORING RESULTS . 18 2.1 ReportObjective 2.2 ScoringMethodology 2.3 ProfileofInsurersintheSurvey 2.4 OverallInsurerPerformance CHAPTER 3: PROPERTY & CASUALTY INSURERS SURVEY FINDINGS . 26 3.1 ClimateRiskGovernance 3.2 ClimateRiskManagementStatement 3.3 Enterprise-wideClimateRiskManagement 3.4 ClimateChangeModeling&Analytics 3.5 StakeholderEngagement 3.6 InternalGreenhouseGasManagement 3.7 ClimateRiskDisclosure&Reporting 3.8 Year-Over-YearClimateRiskManagementStatementComparison CHAPTER 4: LIFE & ANNUITY INSURERS SURVEY FINDINGS . 44 4.1 ContextandOverallScores 4.2 ClimateRiskGovernance 4.3 ClimateRiskandInvestments CHAPTER 5: HEALTH INSURERS SURVEY FINDINGS . 48 5.1 ContextandOverallScores 5.2 ClimateRiskGovernance 5.3 ClimateRiskandInvestments 5.4 SupportingResearchandPublicAwareness CHAPTER 6: RECOMMENDATIONS . 51 6.1 RecommendationsforAllU.S.Insurers 6.2 KeyRecommendationsforProperty&CasualtyInsurers 6.3 KeyRecommendationsforHealthInsurers 6.4 KeyRecommendationsforLife&AnnuityInsurers 6.5 KeyRecommendationsforRegulators BIBLIPGRAPHY . 55 APPENDICES . 59 A. InsuranceCompanyScorecards B. InsurerClimateRiskDisclosureSurveyQuestions C. ListingofInsurerRespondentsto2012ClimateSurvey 3 | INSURER CLIMATE RISK DISCLOSURE SURVEY REPORT & SCORECARD: 2014 Findings & Recommendations Foreword By Mike Kreidler Washington Insurance Commissioner Chair, National Association of Insurance Commissioners’ (NAIC) Climate Change and Global Warming Working Group Theinsurancesector,bynecessity,isaconservativeandpragmaticindustry.Itswhole purposecanbesummarizedintwocoregoals: ñ Toserveakeyfinancialneedbyconsumersandbusinessesforasafetynetagainstrisks. ñ Tomakesufficientmoneyintheprocess,aftercoveringclaims,toprovideareasonable returntoinvestors. Asstatecommissionerswhorespecttheneedforahealthyinsuranceindustrythatmeets thesegoals,weareencouragedtoseethelargestresponseevertothe Climate Risk Disclosure Survey ,anearly80percentincreaseininsurerresponsescomparedto2011.The330 companyresponsesinthisCeresreportrepresent87percentofthetotalpremiumvalueof insuranceissuedintheUnitedStates.Weareespeciallypleasedwiththeleadershippractices thatkeypropertyandcasualtycompanies,includingTheHartford,Catlin,Hanover,theXL GroupandSwissRe,areusinginassessingandprotectingthemselvesandtheirclientsfrom climatechangerisks. However,muchoftheinsuranceindustryisstilllaggingonthisimportantissue,particularly thoseintheLifeandAnnuityandHealthsectors—andtheycannotaffordto.If97percentof ouractuariesconcludedtherewasgoingtobeadeclineinpublichealthduetoamedically identifiedepidemic,wewouldexpectthefirmsweregulatetoadjusttheirforecasts,premiums andpoliciesaccordingly.Failingtodosowouldbeimprudent.Withclimatechange,97percent ofscientistsinthefieldagreethatitisarealityandaremorefocusedonthetimingand magnitudeofchangesandrelateddamagewecanexpect.Thisindustryshouldbefocused lessonwhatiscausingclimatechangeandmoreonhowwerespondtoandmitigateit. Askeyregulatorsofthissector,westronglyencourageinsuranceindustryleadersand investorswhoownthesecompaniestotakethischallengefarmoreseriously.Thereisno doubtthatanearlyefforttoadjustpolicies,premiumsandinsuranceinvestmentswillresult inlessdramaticimpactslateron,thusavoidingandreducinglossesthatwecanalready anticipate.Theinsuranceindustry,bybeingresponsibleandforward-looking,canleadthe waytobetterpublicandprivateinvestmentsaswellasmorerobustresearchandpolicy engagementtoidentify,quantifyandmitigatethekeyclimaterisksweallface.Asthis valuablereportpointsout,theresultwillbeaninsuranceindustrywhosemarketsexpand ratherthancontractinthefaceofgrowingclimatechangerisks. 4 | INSURER CLIMATE RISK DISCLOSURE SURVEY REPORT & SCORECARD: 2014 Findings & Recommendations Executive Summary the objeCtIve Thisreportsummarizesresponsesfrominsurancecompaniestoasurveyonclimatechange risksdevelopedbytheNationalAssociationofInsuranceCommissioners(NAIC).In2013, insuranceregulatorsinCalifornia,Connecticut,Minnesota,NewYorkandWashingtonrequired insurerswritinginexcessof$100millionindirectwrittenpremiums,andlicensedtooperate inanyofthefivestates,todisclosetheirclimate-relatedrisksusingthissurvey. Theaimofthesurvey,andCeres’analysisoftheresponses,istoprovideregulators,insurers, investorsandotherstakeholderswithsubstantiveinformationabouttherisksinsurersface fromclimatechangeandthestepsinsurersaretaking—orarenottaking—torespondtothose risks.Becausevirtuallyeverylargeinsureroperatesinatleastoneofthemandatoryclimate riskdisclosurestates,thisanalysiseffectivelyopensawindowintotheentireindustry.The reportdistillskeyfindingsandindustry trends,andincludescompanyspecificscoresbasedon disclosedactionstakentomanageclimaterisks.Italso offersrecommendationsforinsurersand regulatorstoimprovetheinsurancesectors’overallmanagementofclimatechangerisks. CeReS’ analySIS Thesurveygenerated330distinctinsurerresponsesafterduplicateswereremoved,compared to184insurerresponsesinasimilarCeresreportissuedin2012. 1 The330companiesrepresent about87percentoftheU.S.insurancemarketbydirectpremiumswritten.Ceres’analysis assessesinsurerresponsesagainstfivecorethemesthatarealignedwiththeNAIC’sClimate RiskDisclosureSurveyquestions:1)thegovernancestructurescompanieshaveinplaceto addressclimaterisk;2)theclimateriskmanagementprogramscompanieshaveinstituted acrosstheirenterprises;3)howinsurersareusingcomputermodelingtomanagetheirclimate risks;4)howinsurersareengagingwithstakeholdersonthetopicofclimaterisk;and5)how companiesaremeasuringandreducinggreenhousegas(GHG)emissions.Ceresalsoranked companiesontheoverallqualityoftheirresponsestotheeightsurveyquestions. Inordertoprovidestandardized,usefulcomparisonsbetweencompanies,Ceresassigned apointvaluetoeachquestionandsub-questionfromthesurvey. 2 Tosimplifyourreportfindings, Ceresdevelopedafour-tierratingsystem.Usinga100-pointscale, “Leading” companiesreceived 75pointsorhigher, “Developing” companiesreceivedbetween50to75points, “Beginning” companiesreceivedbetween25and50points,and “Minimal” companiesreceivedlessthan 25points.CompanyspecificratingsacrossallsixthemescanbefoundinAppendixA. 1 ThefulllistofsurveyrespondentsislocatedinAppendixC. 2 Forafulllistofquestionsandsub-questionsseeAppendixB. 5 | INSURER CLIMATE RISK DISCLOSURE SURVEY REPORT & SCORECARD: 2014 Findings & Recommendations Key FInDIngS Ingeneral,mostofthecompaniesrespondingtothesurveyreportedaprofoundlack ofpreparednessinaddressingclimate-relatedrisksandopportunities.Onlynineinsurers, orthreepercentofthe330companiesoverall,earnedaLeadingrating.Thevastmajorityof insurers(83percent)earnedBeginningorMinimal ratings.Onanencouragingnote,thereport identifiedasmallsubsetofstrongleadingpractices byinsurersineachofthemajorthemes. Giventhestrongscientificconsensusonclimatechange,therestoftheindustrywouldbewell advisedtoconsideradoptingtheseinnovativepractices.Othermajorreportfindingsinclude: ñ Largerinsurersshowedstrongerclimateriskmanagementpracticesthansmallercompanies. ñ PropertyandCasualty(P&C)insurersdemonstratedfarmoreadvancedunderstandings oftherisksthatclimatechangeposestotheirbusiness,andaremuchfurtheralong indevelopingtoolsneededtomanageclimatechangeriskswhencomparedtotheLife &Annuity(L&A)andHealthinsurancesegments. ñ Despiteincreasedevidencethatextremeheatwavesandotherclimate-relatedimpactswill influencemorbidityandmortalitytrends,L&Aandhealthinsurersshowwidespreadindifference toclimaterisk,bothinregardtotheircorebusinesslinesandtheirinvestmentstrategies. ñ Barely10percentoftheinsurersoverall—38of330companies—haveissuedpublicclimate riskmanagementstatementsarticulatingthecompany’sunderstandingofclimatescienceand itsimplicationsforcoreunderwritingandinvestmentportfolios.Giventheinsurancesector’s