In this episode, host Gwyneth Shaw talks to Dave Jones, director of the Climate Risk Initiative at Berkeley Law’s Center for Law, Energy, & the Environment (CLEE). He’s a national leader and expert on climate risk and financial regulation, having served two two terms as California’s Insurance Commissioner from 2011 to 2018. In that role, he led the Department of Insurance and was responsible for regulating the largest insurance market in the United States: Insurers here collect $310 Billion a year in premiums and have $5.5 trillion in assets under management.
During that same time period, Dave led the implementation of the National Association of Insurance Commissioners (NAIC) Climate Risk Disclosure Survey of insurers,founded and chaired the Sustainable Insurance Forum, an international consortium of insurance regulators developing best practices to deal with climate change, required insurers to disclose their investments in fossil fuels, and was the first to undertake climate risk scenario analysis of insurers investment portfolios. Since joining CLEE he’s been a sought-after expert on the challenges facing the insurance industry and insurance regulators, in California and nationwide, as they deal with the impact of climate change.
Before he was Insurance Commissioner, Dave served in the California State Assembly, as a Sacramento City Councilmember, and as special assistant and then counsel to U.S. Attorney General Janet Reno. He began his legal career providing free legal representation to low income families and individuals with the non-profit Legal Services of Northern California. Dave earned a J.D. from Harvard Law School and an M.P.P. from Harvard’s Kennedy School of Government.
A couple of minor corrections to his remarks: “United Policies Network” is “United Policyholders” and the correct figure for insurer investment in fossil fuels is $536 billion.
To learn more about Jones, the Climate Risk Initiative, and Berkeley Law’s climate and environmental research, check out the websites for the initiative and the CLEE.
About:
“Berkeley Law Voices Carry” is a podcast hosted by Gwyneth Shaw about how the school’s faculty, students, and staff are making an impact — in California, across the country, and around the world — through pathbreaking scholarship, hands-on legal training, and advocacy.
Production by Yellow Armadillo Studios.
Episode Transcript
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GWYNETH SHAW: Hi, listeners. I’m Gwyneth Shaw, and this is Berkeley Lab Voices Carry, a podcast about how our faculty, students, and staff are making an impact through pathbreaking scholarship, hands-on legal training, and advocacy. In this episode, I’m joined by Dave Jones, Director of the Climate Risk Initiative at Berkeley Law’s Center for Law, Energy, and the Environment, better known around here as CLEE.
He’s a national leader and expert on climate risk and financial regulation, having served two terms as California’s insurance commissioner from 2011 to 2018. In that role, he led the Department of Insurance and was responsible for regulating the largest insurance market in the United States. Insurers here collect $310 billion a year in premiums and have $5.5 trillion in assets under management. During that same time period, Dave led the implementation of the National Association of Insurance Commissioners Climate Risk Disclosure Survey of Insurers, founded and chaired the Sustainable Insurance Forum, an international consortium of insurance regulators developing best practices to deal with climate change, required insurers to disclose their investments in fossil fuels, and was the first to undertake climate risk scenario analysis of insurers investment portfolios.
Since joining CLEE, he’s been a sought-after expert on the challenges facing the insurance industry and insurance regulators in California and nationwide as they deal with the impact of climate change. Before he was insurance commissioner, Dave served in the California State Assembly as a Sacramento City Councilmember and as special assistant and then counsel to US Attorney General Janet Reno. He began his legal career providing free legal representation to low-income families and individuals with the nonprofit legal services of Northern California. Dave earned a JD from Harvard Law School and an MPP from Harvard’s Kennedy School of Government.
Thanks so much for joining me, Dave.
DAVE JONES: It’s great to be with you.
GWYNETH SHAW: First off, tell me a little bit about the climate risk initiative and what you’re trying to do there.
DAVE JONES: The goal of the climate risk initiative at CLEE is to develop practices to assist financial regulators, financial markets, and financial institutions in addressing climate change. Climate change poses serious systemic risks to the US and global financial system. The physical impacts of climate change result in deaths, injuries, loss of property, destruction of communities, which in turn can have implications for financial institutions like insurance companies, banks, mortgage lenders, and also can have implications for the overall financial system.
In addition to the physical impacts of climate change, there’s also what’s called transition risk, which is the risk that financial institutions face as we transition away from a fossil fuel economy to one that relies less on fossil fuels and less on greenhouse gas-emitting industries. Well, banks are lending to fossil fuel companies. Insurance companies are insuring fossil fuel companies. Pension funds, banks, and insurance companies and others are investing in fossil fuel companies. And so as we make this transition due to market changes, technological changes, and policy changes, there’s a risk that the value of the investments and loans and insurance associated with the fossil fuel and other greenhouse gas-emitting industries will become worth less. And that transition risk as we transition away from fossil fuel-powered economy poses financial risks then to financial institutions.
So these are the sorts of risks that can land on the balance sheets of financial institutions and that pose potential systemic risk to the financial system. So at CLEE, at the Climate Risk Initiative, we’re developing approaches and practices to manage and address those risks.
GWYNETH SHAW: The insurance industry is facing a serious crisis related to climate change. Let’s start with California. Wildfires, earthquakes, and mudslide risks have made California a tricky state for decades. What’s changed and what’s the situation like here now?
DAVE JONES: So what’s happening is that as global temperatures continue to rise, they’re fueling more frequent and severe weather-related events– wildfires, droughts, atmospheric rivers or severe convective storms, extreme heat, sea level rise, wind events like tornadoes and hurricanes. That’s just a partial list. So these natural catastrophes are becoming more frequent and severe driven in no small part by climate change.
In California, the way that’s landing is more frequent and severe wildfires, and that is killing people, injuring people, destroying homes, damaging homes, destroying properties, business properties and whole communities, for example, Paradise. The other contributor to the problem in California is that we have had over a century of mismanagement of our forests. And this is not just a California issue. This is true throughout the Western United States. With Western settlement and genocide against Native American peoples, there’s been an approach that has entailed suppression of all fire in Western forests.
Well, the way that nature and Native American peoples used to manage the forest was fire was a routine part of the Western forest ecology. Fires would burn through routinely. They would burn out low-level vegetation, small trees. And so our Western forests were characterized by a lot less fuel, fewer trees, more mature, taller trees, and more open space. But then with Western settlement, the suppression of wildfire, our forests have become choked with fuel. So that is also contributing to the severity and catastrophic nature of wildfires in California and throughout the West.
The way this is landing for insurance companies is that insurers are seeing more and more losses in California associated with wildfires. In 2017 and 2018, in particular, they paid out each year roughly $10 to $12 billion, which was an extraordinary amount of money. Thankfully, the premiums have been set such and the reserves were such that with the exception of one small insurance company, none of them went insolvent.
But that loss and the potential for more losses, because we’re simply not doing enough to combat global temperature, rise fast enough, we’re not moving away from fossil fuels and other greenhouse gas industries fast enough, so temperatures are going to continue to rise more frequent and severe related weather events, more wildfires, that means that insurers are facing greater risk. And insurers respond in two ways. One is they raise price to cover those additional losses associated with climate change-driven risk. And they will stop writing insurance or renewing insurance in order to reduce their exposure.
Now, this is not just a California problem. This problem is landing in various ways across the entire United States, depending upon the nature of the peril in different parts of the country. In the Midwest, severe convective storms are causing major insurance losses. In the Southwest and the South, you have wind events, in the Midwest, wind events like tornadoes, along the Atlantic and Gulf Coasts, hurricanes. Pick your peril.
And all of these in these various states is affecting insurance companies and causing them also, as in California, to raise prices and to decline to write insurance in areas where these climate change-driven risks are landing and causing greater losses. So it’s a big problem nationally. It’s also a problem globally, because what’s happening globally is that losses are going up as a result of climate change, too. And that’s also challenging the insurance industry, not just in the United States, but in regions across the globe.
GWYNETH SHAW: Do building codes have a role to play here as insurance companies and residents and business owners and policymakers are trying to this out? I’m a Florida native, very familiar with hurricanes, very familiar with a long-running insurance crisis there that has only gotten worse in the past few years as they’ve had an extraordinary number of very, very bad storms there. And yet people are being allowed to rebuild on the same beachfront property that was just wiped clean by a hurricane.
How can governments get involved here specifically with building codes in terms of trying to minimize the risk and balance this a little bit? I know in California, some insurance companies have done things require homeowners who live in forests to widen the perimeter that’s tree and brush-free around their house or install sprinklers or things like that. Are there regulations that can help here to make this situation work a little bit better?
DAVE JONES: Yes, there are. I do want to distinguish, though, between building codes, which apply to the structure themselves, and land use policies, which are the laws and regulations that govern whether areas can be developed for housing, businesses, commercial, or industrial use or at all. So the good news with regard to building codes is that there’s been quite a bit of progress made with regard to improving building codes in states across the United States and strengthening building codes, so that, as new structures are built or as structures are rehabilitated, they have to meet higher standards.
And in California, that’s meant improved building codes with regard to home hardening and improving the ability of a home to withstand a fire if a fire reaches it. So things like making sure that the windows are glass-resistant, because with fire heat, the windows can shatter and then embers can flow into the house, protecting the eaves of a home, so that there aren’t open vents that allow embers to get into the attic, using materials for roofing that are more impervious to wildfire. There’s a whole long list of things.
And that also includes defensible space clearing space around the home, so that there’s not vegetation close to the home that can catch fire and then cause the home to catch fire, making sure that there are no attached wooden structures that can be channels for fire to reach the home. In the case of hurricanes and wind, there’s also been a lot of work done with regard to improving the standards for roofs and how roofs are tied down to homes and improving and fortifying homes in ways that will better withstand the impact of hurricanes and heavy winds. So a lot of great work. And also, states are, in various ways, undertaking grant programs to assist people, oftentimes means-tested, to upgrade their home.
The bad news is that land use policies have continued to lag far behind. And in the United States and in every state in the United States and every territory, land use decision making, by and large, is delegated to local governments, and local governments continue to encourage new development and allow new development in areas that we know are going to continue to suffer losses due to climate change-driven risks. So whether it’s building more on coasts that are going to suffer sea level rise and hurricane impacts or building in areas that are heavily forested, where we know they’re going to be continued wildfires, unfortunately, land use decision-making and rules and regulations continue to be such that there really hasn’t been as much constraint on new development or redevelopment of areas facing these risks.
Now, there’s also other good news, though, with regard to wildfire risk and other climate driven perils. There are nature-based investments that can make a big difference in reducing risk. With regard to wildfire, there’s a tremendous amount of science and empirical evidence developed by the Nature Conservancy and other conservancy organizations that managing our forests the way that nature used to by using controlled fire or prescribed fire, and also ecological thinning, not clear cutting, but thinning the forest, using fire as nature used to do, to burn out the low-level vegetation in combination with ecological thinning can dramatically reduce the fuel load and force.
In California, as a state, has appropriated $3.7 billion for forest management like this. Local governments are taxing their residents to undertake forest management. Homeowners associations are doing it. Individual property owners are doing it. And so there’s a tremendous amount of investment in. There needs to be more in forest treatment.
But here’s the problem. The models, the computer models that the insurance companies use to decide what the level of risk is that a given home might burn, those models don’t account for these billions of dollars in investment in forest treatment that the state, federal government, local governments, and homeowners associations are making. So the models the insurers use to spit out a risk score that they then use to decide whether to renew insurance for a home in California or write new insurance for a home in California simply do not account for the billions of dollars that are going into forest treatment.
And that’s a problem. For the last three or four years now, I’ve been encouraging insurance companies to modify their models to take up the results of a paper that I led on and helped publish when I was at The Nature Conservancy in 2021 that demonstrated that their models are able to account for wildfire risk reduction associated with landscape scale forest treatment, but they’re simply not doing it.
So as a result of the failure to account for these billions of dollars of investment in forest treatment, I’ve been working with Senator Josh Becker and The Nature Conservancy on a bill, Senate Bill 1060, which, as originally introduced, would require that the models the insurance companies use in California to decide whether to write or renew insurance account for these billions of dollars in investment in forest treatment. And it was a very narrowly written bill, simply required that the models account for this, didn’t even go so far as to intrude on the insurers ultimate underwriting decision, which for the insurers really is the third rail, if you will.
But even that narrower bill, which was an important one, though, because once the models start accounting for it, homeowners have a better chance of getting insurance written for them, the insurance industry opposed. And they were successful in getting an amendment to the bill in the Senate Appropriations Committee to change the word “shall” to “may.” And so now, unfortunately, the bill no longer requires these models to account for this. The models may account for it, but, of course, that’s the existing state of the law.
So I spent some time on this because there are some things that the insurance industry needs to do to better account for nature-based and property level mitigation. And that would provide a path then for insurers to keep writing insurance in certain areas where climate change-driven impacts are occurring, and also encourage homeowners as both owners of property as well as taxpayers to encourage more investment in and to undertake more mitigation themselves.
GWYNETH SHAW: What are some other things that homeowners can do? Because as you said, you’re seeing this kind of across the country. And many of these situations are weather or other catastrophic events that weren’t happening every year or weren’t happening at a particular time of year. You’d have tornadoes come through the Southeast in the early spring, but not the rest of the year or things happening in the Plains that are just kind of off kilter for what historical weather records are telling us has happened. What else can people do? And are there some resources for folks who are looking to make some of these improvements or make some of these changes where they can go and find information?
DAVE JONES: One thing that homeowners can do is consult with the local emergency response officials and building and code enforcement officials in their jurisdiction to find out what are the additional things they could do for their home, given the nature of the peril they face. In California, wildfire. In the Atlantic and Gulf coast, wind. In the Plains states, in the Midwest, tornadoes and more severe convective storms, which are dropping heavier hail and rain on homes and damaging them. So talk to the local emergency response, fire and building code officials, number one.
Number two, state insurance departments can also be an important resource and have information about what homeowners can do in a given state with regard to addressing the peril in their state. Third, there are consumer organizations like in California, United Policies Network, which is a consumer organization that represents home insurance policyholders that also has a wealth of information at their website. And then the insurance industry has the Institute for Business and Home Safety, IBHS, which also has information about what homeowners can do to improve the viability of their home.
But I think the other thing that homeowners can and should do is, as citizens of their states and as citizens of the United States, support policies that more aggressively transition us away from the utilization of fossil fuels and other greenhouse gas-emitting industries, because that fundamentally is what’s causing climate change. And that fundamentally is what’s causing these more severe and frequent weather-related events that are killing people, injuring people, damaging properties, and making it more challenging for insurance companies to keep writing insurance.
And then also within your community and state and as a voter at the federal level, support investments, including especially nature-based investments that help reduce risk. In the context of wildfires, it’s more money for forest treatment. In the context of river flooding, it can be more investments in nature-based approaches like levee setbacks and bypasses, which are good for nature, but also dramatically reduce risk. With regard to sea level rise and storm surge in areas where they are native, replanting mangroves. Mangroves actually reduce dramatically the impact of storms on coasts. Or simply replanting salt marshes.
In the wake of Superstorm Sandy, the US Geological Survey did a study that looked at those communities along the Atlantic Coast that got hammered by Superstorm Sandy that had intact salt marshes versus those that didn’t. Those that had intact salt marshes ended up avoiding about $350 million in losses that would have otherwise occurred if they hadn’t had those salt marshes. And so supporting as a voter and as a citizen, investments in nature-based solutions that reduce mitigation is also an important way to address this problem, too.
GWYNETH SHAW: And I’m really glad that you brought up what people can do as voters and citizens, because that I think is really important and gets lost a lot in the public debate over who’s the villain in these kinds of stories. And often it’s those of us who aren’t using our voices to advocate for these kinds of policies.
And specifically, politics does always come into this conversation. And I was going to ask you, is this becoming a blue state, red state thing in terms of going back to my example of Florida, where there have been a number of examples over the past couple decades of making what seem to be deliberate decisions to ignore climate change and policy changes that could go along with it, but then we just saw the New York governor scrap, at least for now, congestion pricing in New York City. So it’s not quite as simple as red state, blue state. What
Are some things that in the broader climate change debate you think are the most important? Obviously, you’ve already mentioned, you know, reducing our use of fossil fuels. What are some realistic ways to do that, especially since you are pretty well aware of, as you mentioned at the beginning of this episode, the number of companies and other institutions that are invested still in fossil fuels as a business, that seems like it’s going to make it very hard to get out of this if people have a lot of money tied up in continuing it.
DAVE JONES: So let’s talk about some things the insurance industry can do, and then we can broaden the lens from there. So one of the big questions that’s out there is that of the following. Why are insurance companies, which are facing significant challenges writing insurance in parts of this country that are being impacted by climate change, why are they continuing to invest over $360 billion or so in the fossil fuel industry when it’s the fossil fuel industry that’s the major contributor to the emissions that are causing temperatures to rise, that are causing climate change, and more frequent and severe weather-related events that are making it impossible in some areas for insurance companies to continue writing insurance?
Those investments in the fossil fuel industry are contributing to the very underlying problem that’s making it a challenge for insurance companies to keep doing business in parts of this country and which in turn is impacting homeowners and renters and communities with regard to having a necessary product insurance to help them recover from sadly inevitable climate-driven, catastrophic events. So one thing the insurance industry could do would be to adopt meaningful transition plans with meaningful time horizons to transition out of those fossil fuel investments and to contribute in that way to the transition away from utilization of fossil fuels.
Second thing the insurance industry could do is to stop writing insurance for the fossil fuel industry and its ancillary industries. And so the insurance industry should adopt transition plans to transition out of that. The third thing the insurance industry can do is to support measures like Senate Bill 1060, which require that the models they use and that they’re using to decide whether to write or renew insurance account for the billions of dollars of public and private investment in nature-based solutions that are reducing risk. In the case of Senate Bill 1060, which is in the California legislature right now, that would require the models to account for billions being invested in reducing wildfire risk, but there are other perils and risks across the country where similarly the models aren’t accounting for those investments and should account for them.
And then taking the lens more broadly, financial institutions overall need to transition from lending to and investing in the fossil fuel industry in order to transition, help assist the transition away from an economy that’s principally based on fossil fuels to one that’s based on clean energy. We need more investment in clean and alternative energy. The Biden administration’s Inflation Reduction Act is the most important climate bill to have been enacted in the United States, and it’s making sizable investments in all sorts of different alternative and clean energy. But we’re going to need more.
We need states also to enact policies that require their energy producers and their utilities to transition away from fossil fuel-based energy to clean, green and alternative energy. We need a transition away from carbon in terms of combustion engines and towards electric vehicles. So adopting California’s vehicle clean air standards is something other states can and should do. We need to dramatically increase the regulation of and reduce the emissions of methane, which is a major gas that’s contributing to global warming.
So there’s a long laundry list. They’re not things that aren’t known. They’re very well-known and they’re all things that need to be done and that individuals as actors themselves and as voters need and should support. Unless we move more aggressively transition away from a fossil fuel-based economy, the regulatory and policy changes that various states are adopting to try to make insurance more available are ultimately going to be overwhelmed by the rising risk and loss associated with climate change.
So Florida is a terrific example. Florida has done basically everything the insurance industry has asked of it. They’ve allowed forward looking probabilistic modeling for some time. They’ve allowed reinsurance costs to be included in home insurance rates for some time. They’ve set up two taxpayer-funded reinsurance facilities, basically public reinsurance options for home insurers, so that they don’t have to pay as much for reinsurance, which is insurance for insurance companies on the private market. They’ve adopted laws to dramatically reduce third party lawsuits. The list goes on and on and on.
And yet, despite this, major national insurance companies are still pulling out of Florida. And so even though Florida’s rates are three or four times the national average and the state has enacted policies to dramatically reduce the cost to Florida insurers, nonetheless the risk of loss and the magnitude of losses in Florida, driven in no small part by climate change, are so high that national carriers are continuing to leave. Florida farmers announced about six months ago that not only was it going to not write new insurance, but it wasn’t going to renew any auto, home, or umbrella insurance it was writing in the state of Florida.
So Florida may very well be, sadly, the example of a geography, where because the climate risk has grown so large, and also because we continue to put more people and businesses in harm’s way, that the risk of loss and the magnitude of loss is so high that even at the highest level of rates allowed, the rates are simply not going to be high enough to allow the insurance companies to make a profit and continue writing insurance. That is at least the national carriers. So that is a big problem.
And so in California, we’re going through a similar exercise where my successor, Commissioner Lara, has proposed a number of changes to the rate regulations that fundamentally will allow insurance companies in California to get more rate. And they may well need more rate to keep writing insurance, given the magnitude of the losses and the risks that they face.
But even though those changes may help in the short and mid term get insurance companies to start writing in some areas again, the challenge is that those policy changes and regulatory changes as much as is the case in Florida, may very well be overwhelmed by the growing rise in temperature and growing climate change-driven, severe and frequent weather-related events that are simply growing and are projected to continue to grow and will overwhelm whatever regulatory and policy changes are devised to try to give insurance companies more rate and reduce their costs. So that fundamentally is the problem.
So we need to more aggressively address climate change by transitioning from a fossil fuel-based economy. We need to make investments in nature-based mitigation that substantially reduce risk. We need to make sure the insurance models account for that risk mitigation that homeowners and homeowners associations and towns and states and the federal government are undertaking. We need insurers to transition out of insuring fossil fuels and investing in fossil fuels. We need to improve our land use rules and regulations, so that we discourage sprawl in areas that we know are only going to be inevitably hit by some climate change-driven disaster. And we need to make sure that throughout the United States we’re doing everything we can, as I said a moment ago, to accelerate the transition.
GWYNETH SHAW: Yeah. So what you’re basically saying is that it’s not an insurance crisis, it’s just part of the climate crisis and that we have to start taking much more drastic action to deal with that. And I think that’s a really– I think that’s a really valuable perspective.
DAVE JONES: Insurance is the canary in the coal mine with regard to climate change. And the canary is expiring, and, in fact, it’s dead in some parts of this country because insurers simply can’t make a profit writing insurance given the risk and losses associated with climate change driven impacts. The insurance crisis that a number of parts of the country are experiencing– and again, this is not just California.
The New York Times published a very, very comprehensive investigative piece of journalism the other month that looked at all of the states and found something on the order of 18 states are facing in various ways, shapes, and forms, challenges with regard to insurance availability and insurance pricing. So it’s not just California, it’s not just Louisiana, it’s not just Florida. It’s a national problem.
And so the insurance crisis is sadly one of the prices we’re paying for the failure to move more aggressively to combat climate change and to transition away from fossil fuels. The insurance crisis is a price that where many, many homeowners and business owners and whole communities are paying for the failure to more aggressively address climate change.
GWYNETH SHAW: Well, thanks so much, Dave, for this great conversation. It’s really been informative. And I think your closing remarks are a great pitch for why our listeners should go and spend some time on the CLEE website and look at all the interesting things that not just the climate risk initiative, but all of the different initiatives at CLEE are and all the work that you and your colleagues are doing, because it’s a really exciting and fascinating resource for people who are looking for ways they can get involved in fighting climate change. So I really appreciate your time. It’s been so interesting to talk to you. So thanks very much.
DAVE JONES: Thanks. Thanks for the opportunity to spend some time with you and your listeners.
GWYNETH SHAW: And thanks to you listeners for tuning in. If you’d like to know more about Dave and CLEE, you can find links in the show notes. I’ll also put a link into that New York Times article you just mentioned, what you’re quoted, because I agree, it’s a really great national perspective and I think very visual, gives people a really good sense of what’s going on here at the national level.
If you enjoyed this episode, please share it. And be sure to subscribe to Voices Carry wherever you get your podcasts. Until next time, I’m Gwyneth Shaw.
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