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Testimony: Climate Change, Catastrophe Modeling and Insurance Ratemaking

For the California Department of Insurance, Workshop on Catastrophe Modeling and Ratemaking

By Carly Fabian

On behalf of Public Citizen, a national public interest advocacy group with more than 500,000 members and supporters, including nearly 100,000 in California, I welcome the opportunity to comment. Within Public Citizen’s Climate Program, our advocacy focuses on encouraging financial institutions and their regulators to act on climate-related risks, including through the use of forward-looking data and tools while also addressing the inherent limits of these tools. As a consumer advocacy organization, we also believe that transparency is essential to ensure that the limits of models are clearly understood and that the benefits of climate data and models are made available to households, small businesses, communities and local governments.

California needs a public catastrophe model.

While climate change is undeniably impacting insurance markets, there are legitimate concerns about relying on proprietary models to shape adaptation. These concerns are not limited to state insurance regulation but are part of a growing national debate about our increasing reliance on the private climate services industry, whose approaches to modeling can leave the public in the dark, despite often relying on data that are collected by public institutions. At the national level, these concerns have been highlighted by the President’s Council of Advisors on Science and Technology and a recent White House memo on the need to develop a more transparent national approach to catastrophe modeling.

While there is pressure to present an immediate solution, adapting to climate change will require sustainable, long-term approaches. While the industry has framed higher premiums or non-renewals as a form of climate risk communication, the reality is that without a transparent understanding of how insurers are evaluating the relevant risks, premium changes and non-renewals are unlikely to provide clear signals to inform consumer decisions. Moreover, one-year premiums inherently provide little informational value to homeowners who have already taken on a 30-year mortgage. We know that climate change will lead to more and more communities facing challenges with their insurance, and demands for transparency from concerned homeowners, media, legislators, and a wider range of advocacy groups will only grow louder and more persistent over time.

We do appreciate that the draft regulations highlight the importance of incorporating science on mitigation. However, while we understand the “pre-application required information determination” (PRID) procedure would create some limited opportunity for public review, we are concerned that this vague and constricted process will be insufficient to provide transparency for insurance policyholders and will ultimately provide no benefit to the broader public for informing long-term climate adaptation decisions. We urge the Department to continue to explore the creation of a public model that could, at a minimum, serve as a comparison tool, but could also be used to provide localized data to inform decision-making on climate adaptation. While we recognize it would take time and resources to develop such a model, California is uniquely positioned to lead on this issue. 

California should require insurers to provide credible transition plans as a matter of sound prudential regulation—and should require any insurer that wishes to use a public or private catastrophe model to formulate a credible transition plan and show meaningful progress toward achieving it.

In the long-run, the only full-proof solution is to reduce the risk. Given the clear impact of climate change on California’s market, it is appalling that insurers continue to greenlight the development of new fossil fuel projects and bet against their policyholders by investing the premiums they collect in the companies driving climate change. The industry continues to claim that it must insure fossil fuel projects to support the energy transition and engage companies on mitigation continues. Yet this claim falls flat as they insure new, unnecessary projects that will inherently exceed any reasonable, science-based climate goals while also demonstrating just how quickly they are willing to drop homeowners, regardless of the impacts on local and regional economies.

A serious approach to forward-looking data and modeling cannot allow insurers to pick and choose only the tools that allow them to raise prices on homeowners now with minimal oversight, while continuing to oppose the use of climate data and models to evaluate the long-term financial risks from fossil fuels. In a similar workshop last year, we urged the Department to address insurer’s own contributions to climate risks by requiring them to use forward-looking assessments to evaluate their transition risks. We appreciate that the department has since worked with Washington and Oregon to publish detailed results of a stress test of insurer’s fossil fuel investments. The results are alarming, however, as they show that unprepared insurers could face billions of dollars in losses if they stay on the current course of investments that contribute to climate change, at a scale exceeding some of the worst wildfires in California’s history.

Regulators cannot allow insurers to lecture consumers that they need to prepare for risks, while insurers fail to do so themselves. While the proliferation of vague climate commitments from insurers suggest they recognize this expectation, it appears unlikely that insurers will follow through without requirements. Public records suggest insurer commitments are riddled with loopholes, the Senate Budget Committee has highlighted the lack of clarity around insurers’ commitments, and high-profile exits from the Net Zero Insurance Alliance suggests that insurers cannot hold each other accountable. As a matter of consumer protection, prudential regulation, and market preservation, the Department should require insurers that have made public climate commitments to develop and execute credible transition plans to fulfill those commitments. Further, it should require any insurer that wishes to use a public or private catastrophe model to formulate a credible transition plan and show meaningful progress toward achieving it.