The R Street Institute’s Jerry Theodorou testified last week before the House Financial Services Committee’s Housing and Insurance Subcommittee at a hearing titled “How Mandates Like ESG Distort Markets and Drive Up Costs for Insurance and Housing.” The event was part of a series of hearings on the topic of environmental, social and governance factors (ESG).

For some, the debate over ESG—particularly what it means and how it is deployed—has emerged as one of the latest battlefields in the culture wars between the left and the right. R Street scholars have worked exceptionally hard for several months to turn down the temperature of the debate and inject facts and sober analysis into the discussion. True to form, Theodorou’s testimony steered well clear of the culture war battlefield and instead offered a thoughtful, well-researched perspective.

Theodorou’s principled approach to the subject, combined with the hearing’s narrow focus on the harms of government mandates on the housing and insurance markets, resulted in a hearing that was comparatively muted in tone and that largely steered clear of the heightened ESG rhetoric and hysteria seen elsewhere.

The main thrust of Theodorou’s testimony can be distilled into the following statement he shared with the committee: “The private sector may use ESG considerations … as a [useful] risk management tool, which government should not inhibit. But if government prescribes specific forms of ESG management, it can undermine efficient risk management.”

Ultimately, two main areas of clear agreement emerged between Theodorou and Republican members of the panel: 1) that California serves as a useful example, as Theodorou put it, “of a state where the heavy hand of government regulation has disrupted the insurance market in numerous ways due to regulators intervening heavily in insurance pricing decisions”; and 2) that the Federal Insurance Office (FIO) has engaged in increasing, costly—and in many cases, unwarranted—calls for data from insurance companies in recent years.

On the first point, Theodorou testified that “The California Department of Insurance ties insurers’ hands in three ways. It prohibits insurers from pricing prospectively by taking into account the output of climate models. It prohibits insurers from incorporating the cost of reinsurance into their ratemaking. And finally, it permits public ‘intervenors’ to challenge requests for rate increases greater than 7 percent. As a result of these restrictive regulations, many national insurers have curtailed their California business writing. Even Farmers Insurance, founded and headquartered in California, announced in July 2023 that it would no longer write new homeowners business in California.”

Rep. Blaine Luetkemeyer (R-Mo.) took particular interest in these critiques, asking “Does it make any sense to you that California would deliberately discourage the use of reinsurance at a time when its primary insurers are actively fleeing its homeowners market? How would the … use of global reinsurance and risk sharing help to benefit California insurers?” In his response, Theodorou not only explained how the insurance industry and consumers would benefit from less stringent reinsurance restrictions in California, but he also made the case that “Reinsurers do have the capital, and they’re willing to deploy it if they can make a fair margin … there are people [currently] standing on the sidelines ….”

On the second point, after expressing frustration with the growing size and scope of the FIO, Rep. Scott Fitzgerald (R-Wis.) asked Theodorou to “discuss the FIO’s accumulation of power in recent years.” Theodorou responded by explaining that “There has been more intrusion, requests and data calls—and, I think, duplicative data calls—because most of the large insurers, and especially the publicly traded ones, already make detailed, granular climate disclosures, either in their 10-K or in other publications or disclosures. So to me, it’s disturbing that it’s like the nose of the camel is in the tent and then the rest of the body is going to follow. It strikes me as an agency that’s looking for a purpose. Because monitoring, writing reports, hasn’t helped the industry—as I have seen—in a material way.” Rep. Fitzgerald agreed with Theodorou’s assessment and notably disclosed during the hearing that he and other Financial Services Committee colleagues would soon introduce legislation to repeal the FIO’s subpoena power—an idea that Theodorou supports.

All told, the hearing was one of the more thoughtful explorations and discussions of what has recently proven to be a rather controversial topic. Particularly encouraging was the repeated distinction between actions taken because of government mandates versus actions taken because of market forces. As mentioned above, the former can distort markets and undermine effective risk management, whereas the latter can be a useful tool in risk management. There are reasons to believe that cooler minds may ultimately prevail when it comes to the debate over state and federal ESG policy in the United States. We at R Street will continue to do our part to help encourage it.

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