Filed Under:Carrier Innovations, Regulation/Legislation

NAIC's Climate Dogma Is Putting Insurers At Risk

As if insurance regulators don't already have enough on their plates, the National Association of Insurance Commissioners has officially waded into the global climate change debate. So far, its most noteworthy contribution is to insist that there is no debate. More on that later; first, some background.

This year, states will begin administering an "Insurer Climate Risk Disclosure Survey" drafted by the NAIC's Climate Change and Global Warming Task Force and unanimously adopted by the full NAIC last March.

Participation is mandatory in 2010 for every U.S.-domiciled insurer group with premium over $500 million. Next year and every year thereafter, insurer groups with premium over $300 million are required to participate.

Survey responses are to be submitted to the domestic regulator of the company within the group that has the largest direct premium volume, and each state will make company responses available to the public, with the companies identified by name.

In addition, the NAIC will collect responses from the states and "coordinate a user-friendly central access point for the survey document and insurer responses."

Predictions of catastrophic anthropogenic global warming are the subject of the greatest scientific debate of our time. Among the questions we are grappling with:

o How rapidly is global warming occurring?

o To what extent is it caused by human activity?

o What is its relationship to natural catastrophes such as hurricanes, droughts and floods?

o What economic trade-offs would be entailed by various actions that might be taken to prevent further warming?

It would no doubt be interesting to know if insurers are weighing these questions in the context of their business operations. An anonymous survey administered on a voluntary basis would provide a useful insight into insurer perspectives on climate change.

Suffice it to say that such a survey bears no resemblance to the one concocted by the NAIC. The Insurer Climate Risk Disclosure Survey consists of eight groups of questions typified by queries such as, "Does the company have a climate change policy with respect to risk management and investment? If yes, please summarize. If no, how do you account for climate change in your risk management?"

In addition: "Has the company considered the impact of climate change on its investment portfolio? Has it altered its investment strategy in response to these considerations?"

Some questions aren't even questions: "Describe your company's process for identifying climate change-related risks and assessing the degree that they could affect your business, including financial implications." And: "Discuss steps, if any, the company has taken to engage key constituencies on the topic of climate change."

The survey assumes that catastrophic anthropogenic warming is an incontrovertible fact--an assumption that was presaged by the task force's declaration in its 2008 white paper that "global warming is occurring....We believe that there is ample evidence in support of this assumption in a variety of other reports and studies, so we have decided not to focus on the scientific aspects of global warming."

With that, the task force summarily disposed of the complex debate over the extent and consequences of anthropogenic global warming. What remains is to determine whether insurers accept the received wisdom about global warming, and whether they are taking appropriate "actions" and "steps" in response to the impending crisis.

As the NAIC explains in a prefatory note, the survey's intent is "to provide regulators, shareholders and the public with substantive information about...the actions insurers are taking in response to their understanding of climate change risks."

The NAIC's decision to ignore the debate in the scientific community over catastrophic anthropogenic global warming could well have the perverse effect of encouraging insurers to overestimate the potential risks associated with climate change, and to underestimate the risk of basing important business decisions on questionable theories and assumptions.

Suppose, for example, that an insurer subscribed to the "consensus" view that during the last century, the Earth's average temperature increased by .7 degrees Celsius, and that this increase was due primarily to human activity. Suppose the insurer also believed, consistent with the consensus view, that warming will continue and accelerate at five-times the previous rate.

That works out to an increase of 3.5 degrees Celsius over the next 100 years--which is .35 degrees Celsius per decade and .035 degrees Celsius per year. Even under this dire scenario, one could question whether it makes sense for an insurance company to have an ongoing "process for identifying climate change-related risks and assessing the degree that they could affect your business."

A more fundamental problem is that by relying on assumptions derived from the "reports and studies" implicitly endorsed by the NAIC white paper, insurers run the risk that their actions in response to climate change will be based on faulty science.

If we have learned anything from the release last November of thousands of e-mails containing correspondence among scientists affiliated with the University of East Anglia's Climate Research Unit, it is that insurers, regulators and anyone else with a serious interest in climate change cannot afford the luxury of assuming the validity of a particular body of climate research simply because it is said to represent the reigning scientific consensus.

The East Anglia e-mails show that a close-knit group of the world's most influential climate scientists:

o Actively colluded to subvert the peer-review process (and thereby prevent the publication of research by scientists who disagreed with the group's conclusions about global warming).

o Manufactured predetermined conclusions through the use of contrived analytic techniques.

o Discussed destroying data to avoid government freedom-of-information requests.

Viewed collectively, the e-mails reveal a fractured scientific community in which a group of scientists promoting what has become, through their efforts, the dominant climate-change paradigm are at war with other scientists derisively labeled as "skeptics," "deniers" and "contrarians."

The insularity of this close-knit group--several of whom were key contributors to the influential 2007 report of the United Nations' Intergovernmental Panel on Climate Change--had previously been noted in a 2006 report to Congress prepared by a committee of statisticians led by Dr. Eugene Wegman of George Mason University.

The Wegman Report examined the body of research behind the widely publicized "hockey stick" graph, which purported to show a dramatic and unprecedented increase in average global temperature during the 20th century.

After discrediting the hockey stick graph, the report observed that "authors in the area of paleoclimate studies are closely connected, and thus 'independent studies' may not be as independent as they might appear on the surface."

The report further noted "the isolation of the paleoclimate community," concluding that "even though they rely heavily on statistical methods, they do not seem to be interacting with the statistical community."

When members of the paleoclimate community were asked to explain and defend their work, "the sharing of research materials, data and results was haphazardly and grudgingly done."

The latest shoe to drop was the U.N.'s acknowledgement last week that the 2007 IPCC report greatly exaggerated the rate at which Himalayan glaciers are melting. The errors were discovered by outside experts who were not consulted by the IPCC. The U.N. is reportedly investigating how the bogus claim made its way into the IPCC report.

In light of the legitimate questions that these episodes raise about the integrity of contemporary climate science, one could argue that it would be exceedingly risky for any insurance company to make important business decisions based on an uncritical acceptance of the dominant scientific paradigm on climate change.

Put differently, there would appear to be considerable risk in an approach to assessing "climate risk" that blindly assumes the validity of any particular theory or set of beliefs about anthropogenic global warming.

Regulators could play a constructive role by encouraging open discussion of the climate change debate and its potential impact on insurers and consumers. Instead, the NAIC has chosen to suppress debate through the heavy-handed machinery of mandatory public "disclosure."

The survey's tendentious questions can only serve to promote conformity and inhibit "contrarian" actions and responses. Would any company dare disclose it had "engaged key constituencies of the topic of climate change" by, for example, lobbying Congress to investigate the East Anglia e-mail correspondence for evidence of possible fraud on the part of government-funded climate scientists?

Fortunately, the NAIC cannot compel states to administer its survey. As of this writing, a handful of states have hinted they might decline to do so. Should that happen, Pennsylvania Commissioner Joel Ario, who chairs the climate change task force, has prepared a remedy.

The task force recently announced on its Web site that if a state declines to administer the survey, insurer groups domiciled in that state would be required to comply should any other state in which the group does business require the filing of the survey.

This edict comes nine months after the NAIC voted to approve a jurisdictional protocol that confined authority for administering the survey to the domestic regulator of the insurer within the group that reports the largest premium volume.

The new protocol amounts to an abrogation of the original understanding that was approved by the NAIC, and provides an opening for regulators who may be having second thoughts about the votes they cast to adopt the survey. There's no better time to jettison an ill-conceived regulatory initiative than before it takes effect.

Robert Detlefsen, Ph.D., is vice president of Public Policy at the National Association of Mutual Insurance Companies. He may be reached at

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