California’s incomplete prescription for reducing climate risk
The California Natural Resources Agency has just released its Final Safeguarding California Plan for Reducing Climate Risk. The roughly 350-page plan is designed to provide policymakers with recommendations about how best to craft an “integrated strategy” to address climate change. While it is not entirely clear what that means, it is clear the strategy would touch virtually every California industry in a meaningful way.
Are the recommendations worth anything? In at least one area, likely not.
Inevitable and historic instances of climate change and its various manifestations have impacted the world profoundly. Severe weather, sea-level rise and fall and changes in the frequency and severity of wildfires may all be tied to climate change. What is less clear is whether California’s lengthy plan is sufficiently precise in its particulars to be of any use.
For example, one industry to which the plan directs special attention is insurance. Why? Because, the CNRA believes that insurer solvency is directly threatened by climate change. With regard to its insurance recommendations, the plan leads readers into a maze of narratives replete with brief but equivocating solutions.
Not all of the plan without merit, however. There is an instance of clarity where it asserts that
Efforts to reduce climate risks through hazard mitigation activities, including but not limited to fire hazard reduction, minimizing new development in areas most vulnerable to hazards and improved flood management, will be important to managing risks and supporting sustainable insurance and disaster programs.
This translates to “mitigating risks is a good idea,” which it obviously is.
As for the selectively chosen solutions, the plan is under the thrall of a decision made by the California Department of Insurance to mandate that insurers complete a “climate risk disclosure survey.” It also refers approvingly to a 2008 National Association of Insurance Commissioners report in which the survey idea was presented. Boldly, the plan doubles down on the NAIC report and recommends that insurers should be required to provide even more specific, detailed and potentially proprietary information to the CDI for public display.
While the value of such surveys may be negligible, there is a more serious problem with the plan’s recommendation. For some reason, it ignores less ideological and more relevant tools that were presented alongside the NAIC recommendation to undertake surveys. Among the tools referenced in another NAIC report cited by the plan and by the same author, but omitted from the Plan’s recommendations, is risk-based pricing.
Risk-based pricing is not revelatory. It is the pricing of risk based on probabilities of loss. It is the foundation of insurance, but is endlessly inconvenient to ideology. While not revelatory, the practice of risk-based pricing is increasingly subverted by the policy goals of various regulators.
In California, as in many other states, it is necessary for property/casualty insurers to file for approval with the CDI the rates that they plan to charge. The commissioner has the authority to reject rate changes that he/she deems inappropriate. In some states, spurious rejection has led to rate deficiencies which have forced insurers to limit their exposure to under-priced risk.
By treating reporting as a panacea without mentioning the role of risk-based pricing, the plan cripples the credibility of what are meant to be a set of objective policy recommendations.
An interesting and ironic juxtaposition to the grave concern articulated by the CNRA is the perception of the risks posed by climate change by those within the international insurance industry. An annual study by the Centre for the Study of Financial Innovation found that professionals within the industry ranked climate change as the number 18 risk facing the industry. What was the number one risk the industry felt it faced? Regulation!!
