NAIC 2021 Insurance Summit Part 2: Kansas City

Part two of the NAIC 2021 Insurance Summit, this time a hybrid conference in Kansas City, was four days of stirring the pot on financial and risk modeling, dishing on contracts, and flaunting the spicy side of the insurance industry’s news and regulations.

Catastrophe and risk dominated the discussions Sept. 13 – 17, with multiple series covering climate change and other present concerns.

The NAIC opened the conference with a statement from Andrew Beal, NAIC chief operating officer, reflecting on the NAIC’s 150th anniversary. Much like the first half of the summit this summer, which was entirely remote (and somewhat more pandemic-focused), it was a moment to take stock of the times.

Emphasizing the consequences of a changing climate

The bulk of the four-day conference was spent exploring various factors of climate change and insurance risks. Although there were no explicitly climate-change-related topics until Day 2, there was no shortage of avenues to explore once they opened climate topics.

Primarily, the subsequent “Climate Stress Testing/Scenario Analysis” seminars covered:

• Transition risks
• Physical risks
• Liability risks 

Generally, since many topics include global data to provide a comprehensive picture of the extent to which we know – or don’t know – about climate change, there was a conspicuous amount of Europeans involved in presenting. 

Transition risk

Insurer transition risks were covered from a large-scale perspective by those involved in the International Association of Insurance Supervisors, whose representative members showed their methodology for identifying which insurer investments were directly affected by climate. From a more local perspective, the second part of the transition risk analysis was covered by Yue Chen, the first-ever director of sustainability and climate initiatives at the New York State Department of Financial Services. Chen’s research zeroed in on New York domestic insurers’ transition risks.

Physical risk 

Part 1 of the physical risk discussion of climate change focused on the models we use to calculate risk, largely for P&C insurers. Joss Matthewman, senior director for Risk Management Solutions, and Brendan Flaherty, manager at AIR’s consulting and client services group, led the way in presenting differing models for assessing risk with Jeff Czajkowski, director of the Center for Insurance Policy and Research at NAIC, moderating.

Flaherty and Matthewman agreed that the current industry approach of stress testing is inadequate, which Matthewman offered was in part because it’s difficult to predict a worst-case scenario, and we don’t know how different levels of government may change and adapt, lessening the risk.

Yet, Matthewman included a cautionary note that we should be revisiting models every year or so to make incremental changes: “If you wait until you can see it [climate change] out your window, it’s going to be too late.”

Liability risk

There were a few sessions on liability risks of climate change for the industry, and while flood insurance and the sustainability of the National Flood Insurance Program is always a hot topic, Melissa Boudrea, senior vice president at Praedicat, dove into many of the more secondary effects of climate change, reminding the audience that, while current focus is on outsized weather events, things like mycotoxins, urban heat waves, and increasing chances of pandemics from contact with wild animals are also things to keep in mind. 

Boudrea also pointed to research that linked increased carbon to specific companies, positing, whether there might one day be data to pose a class action suit against corporations for specific damages of climate-linked events. 

While few presenters posed many concrete solutions to the questions raised by climate change, one certainty is this topic isn’t going away.

Solvency failures and protections

You can’t have a conversation about insurance without touching on solvency, and the NAIC summit didn’t disappoint. 

On Day 1, Sherry Flippo, a senior policy advisor at NAIC, opened sessions with the results of the organization’s research into the root causes of company failures. Traditional methods of attributing cause to company failures have many drawbacks, as Flippo covered. Differing terminology and definitions amongst various reporting agencies made it difficult to compare actual results, so several NAIC members took a few years’ worth of data to analyze and compare in a deeper way. 

While the limited sample sizes mean the research is more qualitative than quantitative, Flippo’s presentation of conclusions were both novel and somehow unsurprising, to wit:

• The straw that breaks the camel’s back isn’t the “root cause” of failure
• Usually, it’s a confluence of events and not one singular happening
• The root of the root most often lies in poor underwriting practices that overleverage the company

One triumph of the project will be that the team can better track metrics moving forward, so while today’s data is a comparatively small sample, the information will build over time. 

Other solvency-adjacent topics for the week included updates to risk-based capital assessment formulas, statutory accounting principles regarding areas of the industry with increased solvency risks, changes to the Financial Analysis Handbook, principle-based reserving for life products, and the capital framework for carriers selling variable annuities.

Other topics of note

Diversity, equity, and inclusion: Stuart Heckman, a professor at Kansas State University, explored data in-depth concerning racial disparities in insurance needs and acquisition, and panelists Bruce Ferguson, Nikki Lewis Simon, Clinton Shane Bradley, and Selena Smith explored strategies for closing the wealth gap among different populations. 

Global risks: The risks of expanding Chinese Communist Party influence and fallout from the U.S. withdrawal from Afghanistan were heavy on the docket of John Sitilides, a diplomacy consultant from Washington, D.C.

Health risks: While conversations increase about mental health, the risk to insurers from fluctuating government policies both at a state and local level was an honorable mention in several sessions.

Surfside condo collapse: Anne Cope, chief engineer at the Insurance Institute for Business and Home Safety, dove in deep on the condo collapse that has dominated the headlines, providing insights about how public infrastructure choices – such as having or not having a standard building code – interplay with public safety and insurance.

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