A First Look at How U.S. Insurers Are Adopting Global Climate Reporting Guidelines

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U.S. insurers are adopting numerous strategies to deal with risks from climate change, according to a review out today that gives the first look at how or if insurance companies are adopting the widely used Task Force for Financial Disclosure guidelines.

The review of Climate Risk Disclosure Survey responses, submitted to state regulators each year by insurers operating in 27 member states and jurisdictions, was conducted by climate leadership group Ceres and the California Department of Insurance.

This is the first year in which responses on the survey were aligned with the recommendations of the Task Force for Financial Disclosure (TCFD) guidelines.

TCFD has become a global standard since being introduced in 2017 by the Financial Stability Board, an international body that issues recommendations about the global financial system. The aim of TCFD is to improve reporting of climate-related financial information from companies.

Disclosure recommendations are structured around four pillars (governance, strategy, risk management, and metrics and targets). Within those recommendations are 11 recommended disclosures.

By including TCFD in the survey, it takes the U.S. insurance industry from a place in which no U.S. insurer had completed a TCFD report just four years ago to seemingly abundant TCFD reporting from 500 insurers.

“It gives an enormous amount of information,” said Steven M. Rothstein, managing director, Ceres Accelerator for Sustainable Capital Markets, and one of the report’s authors.

Not all participating insurers fully took to reporting – only 13% reported on all 11 TCFD points – but most provided a hearty trove of information, with 78% providing information on six or more of the 11 TCFD recommended disclosures, the Ceres report shows.

About half of the responses (218) were from property/casualty insurers, 114 were from life insurers, 57 were from health insurers and 11 were from title insurers. The remaining responses were split between groups of insurers covering multiple types.

Reporting insurers described an array of strategies to manage climate risk, with roughly one-fifth of responses mentioning forward-looking climate risk assessments like conducting climate scenario analyses or climate stress testing. Purchasing reinsurance was a primary strategy for managing climate risk, and some reinsurer respondents described how climate risk led them to reprice or reduce offerings, the Ceres report shows.

Responses to risk management and strategy were the strongest in number and detail among the four TCFD pillars. Nearly all insurers included information on those points.

The responses included information on integrating climate risk into enterprise risk management, opportunities for insurance products to support clean energy, insurance products to deal with climate risks associated with extreme weather, and greenhouse gas emissions policies.

The American Property Casualty Insurance Association responded to the report, noting that insurers have considered climate and extreme weather impacts in their core business operations for a long time, that strength of the industry relies on “robust and resilient risk management strategy,” and that insurers provide risk management and mitigation services “that help society manage its transition to a lower carbon future.”

“The report demonstrates what you would expect to see in a competitive insurance market,” Dave Snyder, APCIA’s vice president and counsel said in an email responding to a request for comment on the Ceres report. “Different companies are at different stages on their journeys with regard to their reporting. The (National Association of Insurance Commissioners) NAIC recognizes that companies of different sizes and business models would have different approaches and timelines. The one thing that is common to all insurers is a desire to work with the public to reduce and manage the risk of loss.”

Rothstein’s bottom-line assessment of the report’s findings was also optimistic, though mixed with a call for an even greater breadth of disclosures from more insurers on future surveys.

“What this highlights is there are a lot of insurers doing great work and there is a lot more to be done,” he said.

Ceres also conducted a detailed analysis in its report of 15 companies, eight of which were P/C insurers: Farmers Insurance Group, Liberty Mutual Group, Munich Re, Progressive Group, SiriusPoint, State Farm, Swiss Re and Travelers.

Key findings from that more detailed analysis include:

All but three companies integrate climate risk into their enterprise risk management (ERM) processes.
Thirteen of the 15 companies have existing processes for assessing and identifying climate risks.
Five companies made disclosures under a range of scenarios (less than 2-degrees Celsius scenario, 1.5-degrees Celsius scenario, and over 2 degrees-Celsius scenario).
Four companies have their boards consider climate-related matters at least quarterly, while another five did not quantify board consideration of climate matters. At two companies, management reports to the board at least quarterly. Others report to the board two to three times per year.
All but three companies assigned climate responsibility to a C-suite executive, a president or an executive committee. Three companies also assigned climate responsibilities to another member or members of senior management, either reporting or not reporting to the board.

The detailed analysis contained excerpts of comments from reporting insurers.

Liberty Mutual, for example, addressed the highly recommended scenario analysis tool.

“According to TCFD, climate-related scenario analysis should be used to assess and disclose potential business, strategic and financial implications of climate-related risks and opportunities over a short-, medium- and long-term time horizon,” the excerpt states. “Given the limitations of existing climate-related scenario modeling, we opted to combine a systems-level, top-down stress test and a portfolio-level, bottoms-up stress test to better understand different dimensions of climate-related transition risks.”

The scope of Liberty’s two exercises included: a systems-level climate scenario analysis to examine “macroeconomic, policy and legal, reputational and technological risks (with regional and sector insights) over a five-, 10-, 15-, 20- and 30+ year time horizon;” and a “portfolio-level climate scenario analysis” of investments over a five-, 10- and 15-year timeframe.

An excerpt from Farmers, which in mid-July said it plans to cut back further on its presence in hurricane-prone Florida and that it will limit new homeowners insurance policies in California, indicates the carrier’s largest climate-related risks are related the impact of catastrophes on its portfolio.

“In general, to the extent possible, Farmers manages its climate-related catastrophe risks through actuarially sound pricing, prudent risk eligibility guidelines, judicious use of reinsurance, and statistical modeling of enterprise capital under various stress scenarios,” the excerpt reads.

A Munich Re excerpt outlines its green investing strategy: “No investment in companies with: >15% revenue from thermal coal; >10% revenue from oil sands. Total: -25% to -29% emissions.”

State Farm’s excerpt addressing emissions protocols addressed the company’s goal to reduce greenhouse gas emissions 50% from 2019 out to 2030.

“Our goal includes both direct emissions from owned or controlled sources (Scope 1) and indirect emissions we consume (Scope 2),” the excerpt states. “It is aligned with the Science-Based Targets initiative (SBTi) goal of keeping global temperature rise below 1.5 degrees Celsius by 2050. We measure progress against our targets by building out an annual GHG inventory that has been assured by a third party.”

Rothstein said the “thousands of pages” in the report gives an important and detailed look at actions, governance, and strategy that insurers are employing to deal with climate change.

“This is enormous for the first year,” Rothstein said. “We hope that they use this as a learning year and that they build on that. It is more urgent than ever when we see cities breaking heat records.”

That sense of urgency is hitting home with people in states like Florida and California, where more and more large insurers are curbing their new business, he added.

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