Industry Issues | ERM & Emerging Risks

California Commissioner to Subject U.S. Insurers to European Climate-Related Stress Test

Climate Change

In a CDI press release, California Insurance Commissioner Dave Jones announced that he will take the unprecedented action to conduct climate-related stress tests on insurance company investments. 

Despite concerns raised by industry, fellow state insurance regulators, state attorneys general and one governor, Commissioner Jones continues his attack on the fossil-fuel industry sector.

"The climate-related financial risk to insurers' investments in thermal coal, other fossil fuels and fossil fuel enterprises should not be ignored," said Commissioner Jones. "As a financial regulator, I want insurers to consider climate-related financial risks, including risks to their investments. In order to make sure they are considering these risks, we have undertaken an analysis of the climate-related risk to insurers' investments."

The CDI announced that it has engaged 2° Investing Initiative, a think tank based in France with ties to European financial regulators, to conduct this analysis for U.S. insurers in California's insurance market with over $100 million in annual premiums. A comprehensive financial stress test will analyze the reported $500 billion in fossil fuel-related securities, issued by power and energy companies, $10.5 billion of which consists of investments in thermal coal enterprises.

According to the press release, individual insurer reports will be made available to all 672 insurance companies with more than $100 million in annual premiums. The top 100 insurance companies (by size of their investment portfolio) operating in California, representing over 80 percent of the assets that were analyzed, will be expected to file a response to the CDI. These reports intend to explain how investment plans align with different climate scenarios, where the individual insurer ranks among its peers, and which securities are driving the climate risk exposure of their investment portfolios. This initiative is intended to get insurance companies to apply the recommendations of the international Financial Stability Board's task force on climate-related financial risks chaired by Michael Bloomberg.

Commissioner Jones states that he is the first financial regulator to ask that a financial sector-in this case insurance companies-divest from thermal coal and to publicly disclose their holdings in oil, gas, coal and utilities, due to potential climate-related risks. In April 2018, a group of financial supervisors and central banks including the central banks of England, France, Germany, the Netherlands, Sweden, Singapore, China and Mexico announced their cooperation to conduct similar climate stress testing on insurance companies and other regulated financial institutions.

Links to Climate Risk Scenario Analysis, Data Survey, and Disclosure Survey Results

Climate Risk Scenario Analysis Results
The goal of the scenario analysis was to assess California insurers' exposure to transition risk, individually and as a whole, based on the evolution of production and assets in the real economy. This analysis compares the currently planned production from physical assets allocated to a portfolio (for example, the projected number of barrels of oil produced by an oil well owned by a company that has issued a security held in an insurer's portfolio) with future production levels defined in a 2°C scenario. To ensure comparability across results, this analysis uses the 'Energy Technology roadmaps' published by the International Energy Agency (IEA).

Climate Risk Data Survey Results
The published database reflects information as it was reported by the insurers, or (where indicated) as reported by an independent consultant which reviewed financial reports from insurers. The database is current as of November 15, 2016 and will be updated as the CDI collects more data from insurers. Under the Reports tab, the database can be queried by company name, premium volume, total investment holdings, percentage of fossil fuel investments, or other categories. Users can generate reports of the top 10, 20, 50 or 100 companies measured by fossil fuel or coal holdings, coal divestment, premium, and other criteria.

Climate Risk Disclosure Survey Results
The CDI announced that the Reporting Year 2017 Climate Risk Disclosure Survey (9th Annual) Notice to Insurers will be sent in July 2018. The e-mail notification will be sent to the insurance company contact which was provided on the most recent NAIC Annual Report (Schedule T).


International Association of Insurance Supervisors (IAIS): Draft Issues Paper on Climate Change Risks to the Insurance Sector
The objectives of this Issues Paper are reportedly to raise awareness for insurers and supervisors of the challenges presented by climate change, including current and contemplated supervisory approaches for addressing these risks. The paper is to provide an overview of how climate change is currently affecting and may affect the insurance sector now and in the future, provide examples of current material risks and impacts across underwriting and investment activities, and describe how these risks and impacts may be of relevance for the supervision and regulation of the sector.

The paper is also to explore potential and contemplated supervisory responses, and review observed practices in different jurisdictions. In doing so, it is intended to identify gaps and emerging areas which need to be resolved to allow for "effective supervision." Finally, the paper is expected to offer preliminary insights from practice, and initial conclusions relating to the supervision of climate change risks to the insurance sector.

UN Environment's Principles for Sustainable Insurance: Global guidance to manage ESG risks in non-life insurance underwriting
A major, multi-year PSI initiative is to develop global guidance to manage ESG risks in insurance underwriting-the core process of evaluating, defining and pricing insurance risks-with an initial focus on non-life business (also known as property & casualty business). Such global guidance currently does not exist.

This initiative goes to the heart of implementing Principle 1 of the PSI: "We will embed in our decision-making environmental, social and governance issues relevant to our insurance business". It builds on studies since 2007 on the relevance of ESG issues to the insurance business that led to the development of the PSI, and subsequent studies and activities after the PSI was launched in 2012.

This initiative was one of the main outputs of the international PSI market event, "Insuring for sustainable development: Making it happen", which was held at the Allianz headquarters in Munich in October 2016.

UN Environment Finance Initiative: "Extending our horizons: Assessing credit risk and opportunity in a changing climate"
The report published by Oliver Wyman sets forth a methodology to assess climate risk and help banks implement the recommendations of the Financial Stability Board's (FSB) Task Force on Climate-related Financial Disclosures (TCFD).

The report drills into the implementation of the TCFD recommendations for the banking industry, though many of the elements are considered relevant to asset owners, asset managers, insurers, and corporates in general.

This report is the result of a collaboration of sixteen of the world's leading banks under the UN Environment Finance Initiative (UNEP FI) to pilot the TCFD. Through this collaboration, these banks set out to develop and test a scenario-based approach for assessing the potential impact of climate transition risk on their corporate lending portfolios as recommended by the TCFD. As an inaugural exercise, the output of this process is intended to provide a first step in a longer process of responding to the TCFD recommendations. The TCFD recommendations urge companies to use scenario analysis to assess and disclose the "actual and potential impacts" of climate-related risks and opportunities on their business as well as how they manage them. 

CERES: "TURNING POINT: Corporate Progress on The Ceres Roadmap for Sustainability." 
The investor network advocate reports that overall the U.S. insurance sector lags behind other industries across the globe in several areas addressing climate change. The published study found that only 38 percent of the insurance sector holds senior executives accountable for environmental and social performance, but that is up from 17 percent in 2014. Other findings include 16 percent of insurers are training employees on sustainability topics, compared with 38 percent across all sectors; 38 percent hold senior-level executives accountable for sustainability performance, compared with 65 percent for all sectors; and none link executive compensation to sustainability performance metrics, compared with 24 percent for all sectors.

Swiss Re: Global Disasters Caused Record $144 Billion Insured Losses in 2017
According to the Swiss Re Institute's latest sigma study, the biggest losses came from hurricanes Harvey, Irma, and Maria, which struck the United States and the Caribbean and resulted in combined insured losses of $92 billion. The report indicates that Harvey caused $30 billion in insured losses, Irma another $30 billion, and Maria $32 billion. In addition, major wildfires across the globe resulted in record combined insurance losses of $14 billion, with the Tubbs fire in California's Sonoma and Napa counties becoming the world's costliest wildfire ever in terms of insured losses at $7.7 billion. Overall, total global economic losses from natural and man-made disasters in 2017 were $337 billion, nearly double that of 2016 and marking the second-highest figure on record.

Core Logic: Hurricanes, Wildfires, and Floods: Oh, My! - Natural Disasters of All Types on the Rise in 2017
Summary presentation of the CoreLogic's 2017 Natural Hazard Risk Report, detailing the numerous weather and climate disaster events that occurred in 2017 including Hurricanes Harvey and Irma and the northern California Tubbs Fire, among others.