The NAIC formation of a task force to examine climate change comes on the heels of devastating back-to-back hurricane seasons that caused a record $30 billion in U.S. insured losses in 2004 and as much as $60 billion in insured losses from Hurricane Katrina alone in 2005. Insurance Networking News magazine recently interviewed Tim Wagner, director of the Nebraska Department of Insurance, who is co-leading the task force, to find out what the NAIC hopes to achieve.INN: Who at the NAIC became aware of the issue, and how was it pushed forward on the agenda?
TW: Several commissioners became aware of the issue. I became aware of the issue in January or February of 2005 at the commissioners annual conference when Jacques Dubois, who was then affiliated with Swiss Re, made a presentation. He presented some very interesting material about changes in climate patterns, particularly catastrophe risk as it affected the property/casualty business. Then in March, Evan Mills, a scientist with the U.S. Department of Energy's Lawrence Berkeley National Laboratory, made a similar presentation to the NAIC as part of a consumer-advocate panel. I ended up with the charge to investigate, and I arranged a symposium to take place at the NAIC's meeting in New Orleans. Interestingly, at the time, some of the maps I was seeing showed New Orleans under water.
INN: And this happened all before Hurricane Katrina?
TW: Yes. The NAIC meeting was scheduled to take place in New Orleans the week after Hurricane Katrina hit. So we held the symposium at the NAIC's December meeting (in Chicago). I had arranged for a number of really knowledgeable people on these issues to do the symposium, including Al Gore, Evan Mills, Robert Muir-Woods (research director at Risk Management Solutions Inc.), Joe Boren (president and CEO at AIG Environmental) and Jack Ehnes (CEO at California State Teachers' Retirement System and former Colorado insurance commissioner).
About six or seven insurance commissioners and about 70 others attended, and it was one of those few times when you just sit in your seat and you are riveted by everything that is being said. You could have heard a pin drop. Robert Muir-Woods talked about a hurricane in 1926 that went across the state of Florida and then up the Gulf coast. He said, "If this hurricane hit today, given the changes in population density and property values, it would cause some $120 billion in insured losses. Some of the information indicates that it's not only hurricanes; we're seeing a general change in climate patterns all over. Last year, there were floods in California. Here in Nebraska, we've had drought and very severe hail. In other parts of the country and the world, we're getting some really vicious tornadoes and heat waves.
INN: But there have always been hurricanes, tornadoes and heat waves. Is there evidence that this is really different?
TW: Yes. In insurance we tend to look at the past instead of the future, and when you have a dynamic change taking place, looking at the past doesn't work so well. That's what the catastrophe models are supposed to do-forecast what is going to happen in the future. And Robert Muir-Woods said in the meeting in December, "Brace yourselves; insurance rates are going to increase." No one at the symposium asserted that insurers were not capable of providing the coverage needed, but you have to consider that as we have changing climate patterns, we also have more concentration of values and risk in some of the coastal areas that are affected. So it's a two-part dynamic: One is demographic, and the other is climate change. And the two together create almost infinite risk compared with finite premium.
INN: What is the NAIC task force planning to do, and what is its time frame?
TW: We haven't imposed a time frame for conclusions. In fact, at this point, we don't even know what our end goal is. For me, personally, I want insurers to acknowledge and become involved in managing this change. It's ironic that the European reinsurers have been on this issue, and the U.S. insurance industry has not been as engaged. I'd like to see U.S. insurers become more engaged in some of the traditional ways-such as promoting better building codes, but also in some of the more difficult issues, such as land use. Basically, we need to start thinking about the risk management associated with the change of climate and demographics.
INN: When you say you would like U.S. insurers to become more engaged, what specifically do you want them to do?
TW: I would like to see them use their political muscle. For instance, it's very difficult to make local decisions about land use. The influences and the pressures are tremendous, perhaps even at the state level. But someone should be asking, "What about the risk associated with this development-and can it be financed? You know, 20th century historian Arnold Toynbee analyzed 21 failed civilizations and found two reasons for their failures. The first reason was the concentration of wealth, and the second reason was the inability to adapt to change. I think we need to recognize that things are changing and start planning for that event. Some advocates would say we have to change the financial statement and pay more attention as regulators to how much Cat coverage an insurer has to cover its risks. I don't know what options are really available to us as regulators, but clearly the property/casualty business is going to feel the effects of this change.
INN: What's the next step for the task force?
TW: Right now, we're getting the membership of the task force established. Then, we'll have our first meeting in the NAIC's summer meeting in Washington, D.C. We're working on the charges for the task force-what end product are we charged with coming up with, if any? It just seems we need to plan ahead. The first thing we look at in American business is: Where was the stock today? Then we look at our monthly results. Then, what are we going to put in our 10Q? And then, what's going into our 10K? And no one thinks about what's going to happen five or 10 years from now-and that's really what this is all about.
Editors note: Commissioner Wagner recommends a book titled, "Corporate Survival: The Critical Importance of Sustainability Risk Management," by Dan R. Anderson, the Leslie P. Schultz Professor of Risk Management and Insurance at the University of Wisconsin-Madison School of Business.
