California's Insurance Commissioner Dave Jones has been threatened with US lawsuits for his efforts to act on climate-related risks. Undeterred, he hopes his work can now drive international action, he tells Michael Hurley
Dave Jones has in recent years been on the frontline of a battle to get insurers operating in California to consider climate-related risks.
The California Department of Insurance, which Jones heads, oversees the largest insurance market in the US.
In January 2016, Jones asked that insurers operating in California voluntarily divest from thermal coal and disclose their carbon-based investments, as part of the Department's Climate Risk Carbon Initiative. 18 months later, he revealed he had received legal threats from 12 Republican attorneys general and one governor in relation to the initiative.
"There will be individuals who seek to undermine our work because they are protecting fossil fuel industries – we're not deterred"
Jones said that thermal coal – which is used for heat and power generation, as opposed to metallurgical coal for making iron or steel – "presents long-term financial risks for investors, despite any short-term fluctuations in market price and policy signals".
In January 2017, as part of the same initiative, Jones surveyed insurers with more than $100 million in annual premium operating in the state, and found that they had $521 billion invested in fossil fuel-related securities.
The survey also revealed that the industry had divested more than $4 billion from thermal coal and other fossil fuel investments since the beginning of 2016, and had committed to disposing of an additional $881 million from thermal coal investments.
In May 2018, Jones' office and Paris-based think tank 2° Investing Initiative conducted a state-wide climate risk analysis of insurance companies' investments in fossil-fuels, making it the first US financial regulator to carry out this kind of test. The findings were "consistent with" those conducted as part of the Climate Risk Carbon initiative, Jones said at the time.
As well as publishing figures from the forward-looking scenario analysis on its website, Jones' office supplied reports to each of the 672 insurance companies which explained how their investment plans aligned with different climate scenarios and where the individual insurer ranked among its peers.
Jones tells Environmental Finance he is unwavering in his belief that divestment from thermal coal will help avoid the prospect of insurers' assets becoming 'stranded', and he is undeterred by threats of litigation.
Although voluntary, Jones' recommendation to divest sparked a backlash. In June 2017, 12 Republican state attorneys general and the governor of Kentucky signed a letter which said that legal action against Jones was "a certainty".
He adds that, so far, there is no evidence that any individual insurance company faces so much exposure to thermal coal that it would pose a financial risk to the overall enterprise, and require the Department of Insurance to intervene.
"There have been no lawsuits filed against us and I doubt there will be one, because the work we're doing – that is, making insurers think about potential risks that they might face, either on the underwriting side, or on the reserving side – is consistent with our core responsibilities as a financial regulator," he says.
"Unfortunately there will be individuals who seek to politicise the issue or undermine the work in this area, because they are protecting fossil fuel industries," Jones laments, adding that the increasing politicisation of climate risk in the US has had a detrimental impact.
"There seems to be a strong conservative political movement that is in denial about climate change. Unfortunately, you can see in those [Republican] states less of an interest in considering these issues, not just with regard to financial regulation but across the board, in the face of scientific consensus about climate change.
"Nonetheless, we're continuing ahead – we're not deterred," Jones says.
"Our work [on climate risk] fits squarely within the work that the Financial Stability Board has been doing with regard to these kinds of risks as well," Jones adds, referencing the Europe-based body's Task Force on Climate-related Financial Disclosures (TCFD).
The TCFD recommends that companies should use scenario analysis to assess the risks posed to their business by climate change, and describe the organisation's processes for managing such risks.
"Insurance supervisors internationally are taking up scenario testing"
Jones says the most important thing the US government and the country's various regulatory and supervisory bodies can do is to "continue to underscore that the approach that I and other financial regulators internationally are taking is not based on 'partisanism' or environmentalism, but the potential climate-related financial risk to economic enterprises", Jones says.
"As California's Insurance Commissioner, I'm not alone in [having] concern about those risks and taking steps to address them – there are other state insurance regulators looking at them as well, and also international insurance superintendents," he adds.
Crossing borders
Amid an increasingly hostile political environment in the US, Jones hopes his work with 2° Investing Initiative could be a catalyst for climate action internationally.
"We recently completed the reports [for individual insurers] and provided them to the companies – our intention is to use these 2°C scenario analysis reports in the course of our regular financial examinations," he reveals.
Jones is also encouraging sharing and discussion of the scenario analysis reports among supervisory colleges. These supra-national groups of industry supervisors aim to enhance effective and consistent supervision of financial institutions operating across borders.
"We understand other insurance supervisors internationally are taking up [similar] scenario testing," Jones explains.
"It's early days, but we're pleased to be the first insurance regulator – at least in the US – to undertake this kind of analysis and make it available directly to the insurance companies," he adds.
California wildfires
Meanwhile, Jones says climate change is likely to exacerbate the impact of wildfires in the state in coming years, which have already proven costly to insurers.
This year's wildfires include the Mendocino Complex fire west of Sacramento, which has been confirmed as the largest in the state's history – having burned about 335,000 acres – and, further north, the Carr Fire, which has destroyed more than 227,000 acres and more than 1,000 homes. As of mid-August, neither of these fires had been entirely contained.
"Fires in 2017 resulted in $12.6 billion in insured losses in California. We're going to have significant losses out of the 2018 fires as well," Jones warns.
In January, he unveiled legislative proposals to change computer models that home insurance providers rely on for house-by-house predictions of risk, including that the models be required to include wildfire mitigation efforts.
"Currently, the insurers have unfettered discretion in terms of the models used to assign fire risk scores"
"One issue is that many of the models that the insurers are using to assign risk scores to individual homes fail to account for steps these individuals are taking to defend their home from fire, or reduce fire risk," Jones says.
Such steps include clearing brush, or shrubs, and using building materials that are better able to withstand fire.
"One of our recommendations is that the models be filed with the Department of Insurance, which then has the ability to review and approve them. That proposal has not been taken up by the legislature this session, which is unfortunate," he says.
"Currently, the insurers have unfettered discretion in terms of the models used to assign fire risk scores.
"If the legislature doesn't begin to get ahead of this issue, at some point it will become a very big problem for a lot more people in a lot more parts of California," Jones cautions.
A FAIR plan
Currently, about 3.6 million California homes are located in the 'wildland-urban interface', the zone of transition between unoccupied land and human development. More than one million of these homes are identified as being at high or very high fire risk.
He says more insurers are declining to underwrite home insurance because of this perceived risk, which can be seen in the rising number of subscriptions to California's state-mandated Fair Access to Insurance Requirements (FAIR) plan.
This non-profit plan is backed by all insurers authorised to transact basic property insurance in California. It insures those who can't otherwise get coverage because they have been deemed too high-risk.
Between 2015 and 2016, there was a 15.3% increase in non-renewals of insurance of properties in the state's wildland-urban interface, Jones says, while in the last two years the number of complaints his Department has received from consumers unable to find insurance has increased roughly three-fold.
"FAIR is the canary in the coal mine... if we started to see a dramatic increase in policy subscriptions, we would know that people are not able to find insurance on the private market," Jones observes.
He says that of the 33,000 FAIR policy subscriptions in medium-to-high-risk wildfire areas, about 1,000 have been taken out in the past year. He acknowledges the overall figure remains low relative to the number of homes in the wildland-urban interface, but says the upward trend is "a problem".
"We anticipate that more homes will be rated by insurers as high- or very-high risk, and [there will be] more [policies] that insurers will decline to write, and that we'll see an increase in FAIR plan policies," Jones warns.
"Experts tell us that the change in climate, increase in temperatures, drier conditions, those are contributing to the fires that we have been seeing in California. We are going to see temperatures continue to rise in California and globally, and see more frequent, more severe and unpredictable fires. We're going to have to adapt in California a lot faster than is currently the case.
"We need a whole host of changes – not just to address the risk to insurers and their underwriting and reserving, but also in how we make decisions about where new-build business properties and homes are located, systems to alert people about fires, changes in forest management, and investments in prevention.
"It's definitely the new normal for California - it's been coming for some time. It will require some real changes in how we do things here," Jones concludes.
*Dave Jones will be a keynote speaker at Environmental Finance's Insurance & Climate Risk Americas conference in New York on 24 September. Click here for more information and to confirm your attendance.
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