Authors: Jay Apfel Ralph Cagnetta Dan Shalmiyev Prasad Gunturi
In this article, we provide an overview of the NAIC's newly finalized climate-adjusted reporting requirement and the potential impacts on the (re)insurance industry. This disclosure takes the form of the RCAT Catastrophe Risk Charge, but requires additional climate-adjusted modeling of material hurricane and/or wildfire probable maximum losses (PMLs). Gallagher Re's analytic teams have already assisted clients with developing an internal view of climate risk for the NAIC's summer pilot program and are poised to help for the 2024YE initial filing due on March 1, 2025.
This disclosure takes the form of the RCAT Catastrophe Risk Charge, but requires additional climate-adjusted modeling of material hurricane and/or wildfire probable maximum losses (PMLs). Gallagher Re's analytic teams have already assisted clients with developing an internal view of climate risk for the NAIC's summer pilot program and are poised to help for the 2024YE initial filing due on March 1, 2025.
The purpose of this new requirement is purely informational — for regulators to get a sense of the climate-related exposures faced by insurers and identify those with the highest amount of risk. The NAIC has no intent in requiring insurers to hold capital to levels suggested through climate change risk modeling. However, domestic state regulators may look to engage in discussion with companies, especially those already in a vulnerable position, regarding the impact of climate change on strategies. All figures reported will be kept confidential and will not be used to publish a new RBC calculation.
Insurers have the option of selecting between one of two time-based approaches or a frequency-based approach. All methods should assume a static in-force book of business at year end (no changes to book of business, reinsurance strategy or TIV inflation over the projected time horizon). The frequency-based approach was added at the request of the industry trade groups who feel the time-based approaches could be too costly and arduous.
- Frequency-based approach
- For wildfire-exposed companies: frequency increases of 10% and 50% for all wildfire events
- For hurricane-exposed companies: frequency increases of 10% and 50% for all major hurricanes
- Catastrophe 3 and higher, wind losses only (no adjustments for any sub perils)
- Own view of climate risk (time-based)
- Insurers can develop an internal view of risk through model assumptions based on scientific best estimates
- Gallagher Re has developed a methodology for own view of risk climate modeling that it has already deployed successfully for the clients in the NAIC pilot program, as well as with others for past climate modeling exercises
- Vendor Climate-Conditioned Catalogs (time-based)
- Clients can access climate-conditioned catalogs, recently developed by commercial model vendors (e.g. RMS and Verisk), from which the appropriate scenarios can be chosen
- For the time-based approaches, insurers should utilize Representative Concentration Pathway (RCP 4.5) projections to assess catastrophic impacts in 2040 and 2050. RCP 4.5 is often used in climate modeling to assess the impact of mitigation efforts and policies around reducing greenhouse gas emissions.
- The new requirement has a three-year sunset (insurers are required to file for 2024, 2025, and 2026 year end), after which the NAIC will decide whether to continue collecting the information. Insurance groups are to file separate reports for each RCAT reporting entity (similar to the standard RCAT filing). The actual data to be submitted is: Direct and Assumed Modeled Losses, Net Modeled Losses, and Ceded Amounts Recoverable, for the Worst Year in 50, 100, 250, 500, and 1000 (for each peril and time period).
- The report itself has four interrogatories which can be found here1. Insurers should populate the four pages consistent with their chosen approach.
Gallagher Re offering
While the climate-adjusted PMLs will not be used in any calculations, state regulators may use the information in their assessment of insurer risk profiles and to review with companies their potentially heightened level of underwriting risk. Gallagher Re will work in partnership with companies to provide an understanding around the climate model capabilities and how to think about climate change, and will collaborate with companies on the analytical approach that makes the most practical sense in meeting this regulatory compliance request.
For more information and to get started on your disclosure, please contact our experts. For additional information on the NAIC's climate and catastrophe modeling efforts, you may visit the Catastrophe Modeling Center of Excellence2.
