Showdown at the NAIC E Committee Over NAIC RBC Climate Scenario Analysis Proposal

Over the past six months, the National Association of Insurance Commissioners has been debating how to collect data on the impact of a major increase in modeled catastrophe risks for hurricanes and wildfires. The NAIC says that it is proposing to gather this information to give regulators the capacity to discuss climate risk individually with their domiciliary carriers, based on each carrier’s assessment of the risk inherent in its specific book of business, and not to develop a new capital charge. A minority of regulators and industry advocates has expressed concern about the cost of generating this data, especially for small and midsize companies. A combined advocacy group consisting of the National Association of Mutual Insurance Companies, the American Property Casualty Insurance Association and the Reinsurance Association of America (RAA, and with NAMIC and APCIA, the “Association”) has collectively opposed the NAIC proposal, and they have advanced an alternative as more efficient and cost-effective for the NAIC’s stated purpose.

This NAIC latest climate disclosure proposal stems from the work of the NAIC Climate & Resiliency (EX) Task Force work that was part of the NAIC Solvency Workstream projects in 2022 and 2023. The NAIC proposal, known as the RBC Climate Scenario Analysis Proposal (2023-17-CR) (the “NAIC Proposal”) requests that, for year-end 2024, 2025 and 2026, companies calculate the risk-based capital charge for catastrophe risk, using a commercial catastrophe modeler’s “Climate Conditioned Catalog” through 2040 and 2050, considering the insurer’s book of business and reinsurance remain static. The NAIC proposal requires each company to calculate probable maximum losses (PMLs) for one in 50-year, 100-year, 250-year, 500-year and 1000-year levels with the CMLs for the company’s current exposures. Again, the NAIC posits that these disclosures are, for now, informational in nature and not directed to calculate additional RBC charges. The NAIC proposal can be found at https://content.naic.org/sites/default/files/call_materials/Proposal%202023-17-CR.pdf.

The Associations have opposed the NAIC Proposal based primarily on cost. The Associations assert that most companies do not use “climate conditioned catalogs.” More importantly, the Associations assert that the NAIC Proposal would not produce meaningful and necessary data. Despite the staunch opposition by the Associations and some regulators, the NAIC Proposal advanced through the Climate & Resiliency (EX) Task Force and the Catastrophe Risk (E) Subgroup of the Property Casualty Risk-Based Capital (E) Working Group without amendment. On June 12, 2024, the NAIC proposal was presented to the Financial Condition (E) Committee (the “E Committee”) for approval and advancement to the NAIC Executive Committee and Plenary. However, rather than adopting the NAIC Proposal, the E Committee finally agreed to consider an alternative being proposed by the Associations. The Associations Proposal can be found at https://content.naic.org/sites/default/files/inline-files/Proposal%202024-20-CR%20Joint%20Trades%20Proposal_0.pdf.

The Associations’ proposal, now exposed as Proposal 2024-20-CR, the Joint Trades Proposal (the “Associations’ Proposal”), would have insurers use their existing catastrophe model that currently they use to calculate their current risk-based catastrophe charge (RCAT) and increase the results by 50 percent frequency. When calculating the RCAT charge, insurers would estimate a 50 percent increase in hurricanes of a Category 3 or higher level, and a 50 percent increase for all wildfire events. Then, the generated PMLs would be compared to the insurer’s current RCAT PML to the Proposal’s generated PML. The Associations argue that their Proposal would account for a 2-degree centigrade global temperature increase by 2050, would be more efficient than the NAIC Proposal, and would provide meaningful results for regulators to study.

As with other RBC data, both proposals would maintain the insurer-generated data as non-public. Consumer advocates are already requesting that the findings be released publicly. Given the short timeframe for these proposed disclosures, demands for data release will likely continue during the entire reporting period.

The NAIC has asked for comments on the Association’s Proposal by July 30, 2024. This entire matter will likely be debated at the NAIC Summer Meeting of the E Committee.

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