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NAIC to prioritize climate risk in 2020 as catastrophes grow

Climate risk and resilience with an emphasis on developing the private flood market is set to top the list of priorities for the incoming president of the National Association of Insurance Commissioners.

South Carolina Insurance Director Ray Farmer, who will begin his tenure as president of the NAIC at the start of the new year, wants to focus on better resilience for all types of catastrophes such as wildfires, hailstorms, tornadoes, earthquakes and hurricanes.

Farmer said the NAIC is looking to do anything it can to attract the private market into covering flood in 2020 and has already filed a bill in its legislative package for next year that should encourage insurers to jump into the private flood market.

The organization is also prioritizing work on addressing the nationwide long-term care problem, climate-related issues and cybersecurity, among other things.

Long-term care uniformity

Long-term care troubles are top of mind for life insurers across the country; Farmer called it the "biggest issue" his state faces. He plans to carry on the work that Maine Insurance Superintendent Eric Cioppa started in that area.

Cioppa, NAIC's president for 2019, was responsible for leading the creation of the newly formed Long-Term Care Executive Task Force. The task force brings discussions between states to the commissioner level as the NAIC looks to increase uniformity between states by potentially implementing a model law that would address cross-state subsidization and standardize rate review practices.

Virginia Insurance Commissioner Scott White, who chairs the task force, recently suggested that the group may also discuss abandoning the level premium approach for long-term care insurance to something like an annual re-rating, which might allow for adjustments to occur earlier in the process.

Farmer said he believes that moving away from level premiums would mean making sure that consumers are more educated about the details of their policy.

"Insurance companies cannot deal with uncertainty and neither can consumers," he said.

Divesting from fossil fuels

When Farmer was asked at an NAIC meeting whether the group plans to look at insurance business practices that could exacerbate changes in climate such as investing in and insuring fossil fuels, a spokesperson said she did not know if the group was "comfortable saying either way at this point."

"Usually, you know, we're free market," Farmer said. "Some companies have done that and some companies haven't. I don't know at the NAIC we have taken a position on that just yet."

Activists have increased pressure on insurance companies to move away from the coal industry over the past several years as worries around climate change rise. Although a recent report showed the numbers of insurers withdrawing coverage for the coal sector doubled in 2019, an S&P Global Market Intelligence analysis of U.S. regulatory data shows that many insurers hold significant investments in companies that depend on coal as a source of revenue.

Washington Insurance Commissioner Mike Kreidler said in an interview that some of the "large polluting industries" are showing more interest and capacity in dealing with fossil fuels than the insurance industry is.

"You're seeing some companies move that way, but by and large, it's not one where you've really seen the massive shift that needs to take place if you're going to mitigate against the kind of risk and exposure that we have," Kreidler said.

Kreidler, who also chairs the NAIC's Climate Risk and Resilience Working Group, sees the potential for the NAIC to move toward adopting some sort of model law or philosophy on climate change next year. However, Farmer did not give a clear answer on his thoughts when asked.

Expanding cybersecurity

Farmer expressed a desire to focus on expanding the implementation of cybersecurity laws next year and cited the importance of the work that the NAIC has already accomplished. The NAIC adopted the Data Security Model Act following a large breach that compromised some health insurers' systems, and some states have passed statutes that require breaches to be reported to insurance commissioners to ensure protection of consumer information going forward.

A notable cyberattack on Anthem Inc. took place in 2015; in early 2019, it was discovered that data breaches may have exposed the personal information that belonged to Ameritas and First American Financial Corp. customers.

Annuity suitability

The NAIC is also reviewing a proposal that would create a best interest rule related to annuity sales, similar to the one implemented in New York.

New York's rule requires insurance agents and brokers to take consumers' best interests into account when advising them on life insurance products and annuities. The NAIC is still sorting out the language of its own version.

"It's an issue that we need to agree on and move on," Farmer said. "It's in the best interest to use the phrase for the NAIC, for companies and more importantly for consumers to identify what our act is and move on."