Last Updated 10/30/2020
Issue: The economic cost of natural disasters has an immense impact on the U.S. economy. Natural catastrophes topped $232 billion in total costs in 2019, with insured losses covering $71 billion. Insured losses in 2019 were significantly lower than the record $157 billion in 2017 and $100 billion in 2018. In terms of insured losses, ten of the nation's costliest catastrophes have occurred in the past two decades. Eight of these were hurricanes. Insurance plays a large part in helping with the economic recovery following catastrophic events. However, according to a 2019 Aon report, the portion of economic losses not covered by insurance (insurance gap) was $161 billion.
Background: Flood damage is a major source of uninsured losses. This is because standard homeowners' policies do not cover flood and many people do not purchase a separate policy. Rising flood risks and the uncertain financial future of the National Flood Insurance Policy (NFIP) underscore the importance of growing the private flood insurance market. The NAIC adopted a best practices document to help facilitate the private flood insurance market. Recent advances in risk mapping and modeling have also helped the nascent private market grow by enabling private insurers to more accurately price risk. The Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) affirmed Congress’s intent that lenders can accept private flood insurance as an alternative to the NFIP. However, the definition and prescriptive conditions present a hindrance to the private market.
The growing frequency and severity of natural catastrophes warrant greater focus on resiliency. For this reason, the NAIC adopted the Insurer Climate Risk Disclosure Survey (survey) in 2010. It is comprised of eight questions that assess insurer strategy and preparedness in the areas of investment, mitigation, financial solvency (risk management), emissions/carbon footprint and engaging consumers. The survey is currently administered on a mandatory and public basis through a multi-state effort led by California. The survey results can be found on the California Department of Insurance Climate Risk Disclosure Survey webpage. Currently, CIPR is assessing the climate data to provide more in-depth information about how insurance companies are responding to climate change. An update on the data findings and analysis process was provided in Sept. 2020 at the NAIC's Virtual Insurance Summit. A full report on the climate data is expected to be released in late Fall 2020. The NAIC also revised the NAIC Financial Condition Examiner’s Handbook to provide examiners with guidance on questions to ask insurers regarding any potential impact of climate change on solvency.
There has also been increased global engagement in the insurance sector on resiliency to climate-related risks. The Financial Stability Board's industry-led Task Force on Climate-related Financial Disclosures (TCFD) released its final recommendation in 2017 for a framework to identify, manage and disclose climate risks and opportunities. In 2018, the European Commission presented its Action Plan on Sustainable Finance, underlining the importance of involving the finance industry in climate change mitigation. Insurance supervisors began examining the impact of climate change through the Sustainability Insurance Forum (SIF) in 2016. In 2017, the SIF released a statement in support of the TCFD recommendations and implemented a survey process for supervisors to share their efforts to address climate risks. In 2018, the SIF and IAIS worked to develop guidance on climate change and insurance supervision.
Status: The rising likelihood of extreme and catastrophic weather events makes monitoring the frequency and impact of natural disasters a critical regulatory function. NAIC members have taken an active role in educating Congress and providing technical feedback on various proposals regarding natural catastrophes. Over the last several years, NAIC members have met with members of Congress and have regularly testified on these important issues, stressing the important role of the states in effectively managing a natural disaster response.
The Property and Casualty Insurance (C) Committee's Catastrophe Insurance Working Group and Climate Risk and Resiliency Working Group oversee the NAIC's efforts in this area. The Catastrophe Insurance Working Group is charged with evaluating potential state, regional and national programs to increase capacity for (re)insurance related catastrophe perils. It is also charged with monitoring and assessing proposals that address disaster insurance issues at the federal and state levels. This includes assessing state efforts to foster private flood insurance and protect consumers, pressing for a long-term NFIP program and partnering with the Federal Emergency Management Agency (FEMA) and others to close the gap. The Climate Risk and Resiliency Working Group is charged with investigating sustainability issues and solutions related to the insurance industry. This includes the feasibility of public-private partnerships, financial mechanisms and mitigation measures to protect infrastructure and reduce exposure to the public. It is also charged with engaging domestically and internationally on climate-related risks and resiliency.
In July 2020, the NAIC announced the development of a Climate and Resiliency (EX) Task Force. The task force has been charged with coordinating all of the NAIC’s domestic and international efforts on climate-related risk and resiliency issues, including dialogue among regulators and with industry, consumers and other stakeholders. In addition, the group will consider appropriate climate risk disclosures; evaluate financial regulatory approaches to climate risk and resiliency; consider innovative solutions to climate risk and resiliency; Identify sustainability, resilience and mitigation issues and solutions related to the insurance industry; as well as take into consideration pre-disaster mitigation and resiliency and the role of insurance regulators in resiliency, as it makes recommendations.
This video shows disasters and response to wildfires in Tennessee, a tornado in Alabama and earthquakes in Oklahoma. It features NAIC President-Elect and Tennessee Insurance Commissioner Julie Mix McPeak.
NAIC members representing South Carolina, California, Texas and Washington discuss devastating floods and fires in 2015.
Arizona Insurance Director Germaine Marks and Oklahoma Insurance Commissioner John Doak discuss disasters impacting insurance consumers in their states and the response coordinated by their departments, fellow regulators and the National Association of Insurance Commissioners (NAIC).
Members of the NAIC discuss the impact of Superstorm Sandy in 2012. They describe efforts of state regulators to address the needs of insurance consumers and the market in the wake of historic losses.
Members of the NAIC discuss the impacts of natural disasters in their states during 2011. They describe efforts of state regulators to address the needs of insurance consumers and the market in the wake of historic losses.
Committees Active on This Topic
Climate Summit 2020 (YouTube videos; Washington State Office of the Insurance Commissioner, Oct. 2020)
Addressing Climate as a Systemic Risk (Ceres, June 2020)
Assessing NAIC Climate Risk Disclosure Data (CIPR presentation, Sept. 10, 2020)
Task Force on Climate-Related Financial Disclosures
June 2019 Report
Translating Resilience Research (Dec. 2019, NAIC Winter National Meeting presentation)
State and Local Policy Instruments for the Promotion of Catastrophe Mitigation
2017, Journal of Insurance Regulation
Natural Catastrophes, Insurance and Alternative Risk Transfer
November 2017, CIPR Newsletter
Catastrophe Risk and the Regulation of Property Insurance Markets
2016, Journal of Insurance Regulation
NAIC Insurer Climate Risk Disclosure Survey (Adopted March 28, 2010)
The Impact of Hurricane Sandy on the Financial Markets
NAIC Capital Markets Special Report (11/16/12)
- Overview of Catastrophic Events
- Emerging Risks: Climate Change
- Climate Extreme Impacts in the U.S.
- Post Catastrophe Insurer Insolvencies
NAIC Levels Up on Climate & Resiliency (July 7, 2020)
NAIC Leads Catastrophe Discussion
Testimony and Speeches
Managing Extremes in 2014 Forum
(2/27/14 – Sen. Ben Nelson)