Regulators adopt first climate strategy in bid to boost insurance markets

State insurance regulators say they are taking the first steps toward a strategy to address climate impacts in the hopes of stabilizing chaotic insurance markets.

The National Association of Insurance Commissioners executive committee adopted last week the first climate strategy in the organization's long history. Recent decisions by major insurers to pull out of high-risk markets is driving the climate focus, said California Insurance Commissioner Ricardo Lara.

“While state regulators have supervised insurance markets over 150 years, the challenges we face today are unprecedented and national in scope requiring a unified approach,” he said. “In the aftermath of recent wildfires, windstorms, extreme heat and atmospheric rivers, insurance must help improve the lives [of citizens] by aiding in the recovery as quickly as possible.

“But it can only occur if insurance is available and reliable.”

Climate data collection

The NAIC National Climate Resilience Strategy "provides for a unified approach, data collection and utilization, and resiliency actions, including the launch of a comprehensive NAIC Climate Risk Dashboard to measure and evaluate protection gaps,” the NAIC has said. “Among its actions, the NAIC will also seek to create new resilience tools, advocate for pre-disaster mitigation funding, and develop scenario analysis resources for state regulators."

Not every stakeholder is championing the new strategy. Several property and casualty trade associations objected recently to data collection looking out to 2040 and 2050, claiming it will be difficult and costly, with no clear benefit expressed.

Major insurance companies are opting out of offering coverage in high-impact weather states such as Florida and California. Both State Farm and Allstate pulled out of California, while Farmers capped the number of new homeowners policies each month, severely reducing the options for homeowners in high-risk wildfire areas.

Gov. Gavin Newsom recently signed an executive order aimed at stabilizing the California property insurance market and luring insurers back. Florida lawmakers also tried similar strategies with Gov. Ron DeSantis.

Earlier in the NAIC spring meeting in Phoenix, the Climate and Resiliency Task Force heard a presentation from Francis Bouchard, managing director, climate, Marsh McLennan.

He noted that the “protection gap” between actual weather damages and insured weather events continues to grow. One big reason is insurance is at the front of the line when it comes to the initial cost shocks.

"We are at this stage probably the only financial sector actually sending these risks," Bouchard said. "You don't see the banks increasing mortgages. You don't see lending going up. You don't see the credit agencies increasing bonds for exposed communities. So we really are the ones trying to use 12-month policies to send these signals."

A UCLA study found that 52% of homes built between 2000 and 2017 were built in the riskiest areas as identified by the National Risk Index, Bouchard said.

Developments such as that “are rendering the traditional insurance tools of actuarial science, data management, risk modeling and portfolio diversification insufficient in the mid to long term, as it relates to the most acute climate exposures,” Bouchard said.

He left regulators with six recommendations for the insurance sector to “equip communities with tools and knowledge.”

Insurers should get used to regulators treating climate change as a major issue, Lara said.

“This strategy is the first for the NAIC,” he said. “But as we continue to face economic and infrastructure challenges, mitigation, funding gaps and climate-related disasters, it's most certainly not going to be our last.”

The executive committee passed the climate strategy unanimously, with an unexplained abstention by Tennessee.

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.