September 29, 2005
Insurers Behind the Curve on Addressing and Disclosing Risks of Climate Change
by William Baue
Two reports, one from Ceres and one from Friends of the Earth, concur that climate change is
catching insurance companies, which are particularly impacted by global warming, unawares.
Climate change, severe weather events such as hurricanes, and insurance are three increasingly
interwoven topics since Hurricane Katrina whirled destruction on New Orleans and the Gulf states
late last month. However, insurance companies are way behind the curve on addressing climate
change, according to two new reports.
Friends of the Earth (FoE), an environmental advocacy group, issued a series of reports
earlier this month examining 112 companies' disclosure of climate change risks in their Securities
and Exchange Commission (SEC) filings. Of the
five sectors assessed, property and casualty insurers rank the lowest, with only 15 percent of
companies mentioning climate change risk in their filings. FoE therefore performed a more in-depth
securities filings of 106 insurers traded in the US and Canada, and found only five companies
(representing 4.7 percent of the total) disclose climate change risks at all.
Ceres, a coalition of institutional investors and
environmental organizations addressing sustainability, issued a report the same day
entitled Availability and Affordability of Insurance Under Climate Change: A Growing Challenge
for the US. The report notes the irony that the early September New Orleans meeting of the
National Association of Insurance Commissioners (NAIC), which was slated to examine the implications of climate
change on the industry, had to be canceled due to Katrina.
"Katrina also renews discussion
about the influence of climate change on hurricanes," states the report. "While some have made too
much of the connections, others are all too eager to downplay it."
The Ceres report was
written by Evan Mills, a scientist with the Lawrence
Berkeley National Laboratory, Richard Roth, former chief property and casualty actuary and
assistant commissioner at the California
Department of Insurance, and Eugene Lecomte, a 50-year veteran in the insurance industry and
president emeritus at the Institute for Business and Home Safety (IBHS).
"Recent scientific work has established new
linkages between rising sea-surface temperatures and the power of hurricanes, yet much more work
must be done to understand the details," they continue.
The report notes that losses from
catastrophic weather events--defined as those with over $1 billion in damages--have risen much more
sharply than other financial and demographic indicators.
"Insured and total property
losses ($45 billion and $107 billion in 2004, respectively) are rising faster than premiums,
population, or economic growth both globally and in the US," the report states. "Globally,
inflation-adjusted economic losses from catastrophic events rose by 8-fold between the 1960s and
1990s and insured losses by 17-fold."
"Unless insurers and their regulators take steps to
address the growing challenge of escalating climate change impacts, then companies, governments,
and the public will suffer even greater financial losses in the future," says Andrew Logan, program
manager at Ceres.
The report makes recommendations to insurers, regulators, government,
and consumers. Among these is for companies to "analyze the implications of climate change on
their business and investments and share the results with shareholders."
"The FoE report
shows that insurers, or at least US insurers, aren't paying much attention to the problem as of
yet," Mr. Logan told SocialFunds.com.
The five insurers reporting on climate change risks
in their 2004 annual SEC filings were Allianz (ticker: ALVG), Aspen Insurance (AHL), Chubb (CB), Cincinnati
Financial Corporation (CINF), and Millea (MLEA)--Allstate (ALL) did so in 2003
but did not in 2004. However, Chubb and Cincinnati Financial provided only perfunctory
acknowledgement of climate change, but stop short of identifying global warming as a business risk.
Germany-based Allianz, Aspen Insurance, and Japan-based Millea, in contrast, all acknowledge the
impact of climate change on natural disaster claims.
"Notably, Millea was the only company
to actually suggest that their financial results for the past fiscal year was actually affected by
climate change-related events," writes Michelle Chan-Fishel, coordinator of FoE's Green Investments
Program, who authored the report. "The company states that 'Japan has been hit by more severe
typhoons in the first six months of this current fiscal year than in the same period in the
previous years and therefore our financial position and results of operations for the year ending
March 31, 2005 could be significantly affected.'"
The report notes that European
reinsurers Munich Re (which is not traded in
the US) and Swiss Re (TUKN.SW) lead the way globally on
addressing climate change.
"It is surprising that US property and casualty insurers,
companies one would expect to be most attuned to risks associated with climate change, are not
disclosing how those risks affect their business," says Ms. Chan-Fishel. "After these companies
finish paying out the claims for Hurricane Katrina, their shareholders ought to demand full
disclosure of climate change risks in future SEC reports."
The broader FoE report assesses four
other sectors, and finds their disclosure of climate risks better. The utilities sector fares
best, with 96 percent of companies examined providing disclosure of climate risks, while almost
three-quarters (74 percent) of integrated oil and gas companies are disclosing climate risks. At
just over a quarter of assessed companies reporting on climate risk, the automobile (26 percent)
and petrochemicals (28 percent) sectors fare only slightly better than insurers. The discrepancy
within sectors may flag risks for investors.
"Under Sarbanes-Oxley, corporate directors, especially audit
committees, must guarantee that companies have adequate internal controls to identify, manage and
disclose material risks," says Ms. Chan-Fishel. "Boards that fail to ensure appropriate climate
reporting--particularly when a company's competitors are coming clean--may be in breach of
Sarbanes-Oxley and their fiduciary duty."