The Treasury Department’s Federal Insurance Office (FIO) released a report on June 26 calling on state regulators to refine efforts to evaluate climate change risks in insurance markets. The report comes amid some insurers leaving Louisiana, Florida and California, citing the costs associated with an increase in extreme weather events linked to the effects of climate change. In its report, FIO outlined that “climate-related risks present new and increasingly significant challenges for the insurance industry that warrant careful monitoring by financial regulators, policymakers, and insurance companies.” The report highlighted existing efforts by certain state insurance regulators and the National Association of Insurance Commissioners (NAIC) on climate change risks and issued 20 recommendations moving forward.
The FIO’s report, Insurance Supervision and Regulation of Climate-Related Risks, was following President Biden’s Executive Order 14030 on Climate-Related Financial Risk, which called on the Treasury Department to examine climate-related issues in the insurance markets and gaps in supervision and regulation, among other directives.
The FIO report pointed to the “well established” connection between climate change and extreme weather events, as “nine of the ten costliest U.S. hurricanes have occurred since 2005, and eight of the ten costliest U.S. wildfires have occurred since 2017, after adjusting for inflation.” FIO noted that the increase in extreme weather events threatens the solvency of insurance companies in areas where frequent and severe natural disasters occur, as evidenced by insurance companies’ actions in states vulnerable to extreme weather events.
FIO detailed state-level actions on climate-related risks, noting that the New York State Department of Financial Services (NYSDFS) developed and adopted the first state insurance regulatory guidance on managing climate-related risks. Additionally, the report mentioned the Connecticut Insurance Department’s (CID) 2022 finalized bulletin outlining “Guidance for Connecticut Domestic Insurers on Managing the Financial Risks for Climate Change” and California’s “Sustainable Insurance Roadmap” in 2022. NAIC, the regulatory support and standard-setting organization governed by insurance regulators from all 50 states, issues comprehensive guidance that currently excludes requirements that insurers’ risk management processes address climate-related risks. The report noted that NAIC’s Climate Resiliency Task Force serves as the main body for climate-related risk and that NAIC is currently considering changing regulatory tools to include climate-related risk concepts.
On Risk-Based Capital (RBC), the report highlighted that “current considerations of climate-related risks in RBC formulas are limited and apply only to property and casualty (P&C) insurers.” The report also noted that the RBC formula includes hurricanes as the only climate-related risk within NAIC-defined hurricane exposure jurisdictions. New York is the only state that “currently requires insurers to consider climate-related risks as part of their Own Risk and Solvency Assessment (ORSA).” However, NAIC detailed in a comment letter to FIO that many insurers analyze climate-related risks and present them in their annual ORSA summaries.
An additional tool for climate-related risk management outlined in the report is the use of natural disaster and climate change modeling. The report highlighted the NAIC Executive Committee’s decision to establish the “Catastrophe (CAT) Modeling Center of Excellence” within the NAIC Center for Insurance Policy and Research. The center functions by:
1) Facilitating regulators’ access to CAT modeling documentation and assistance in distilling this information;
(2) Promoting regulators’ technical education and training on the mechanics of commercial models and treatment of perils and risk exposures; and
(3) Conducting applied research to help in the development of regulatory climate risk and resilience priorities.
The report outlined that California and New York insurance regulators use climate scenario analysis to identify risks in the insurance industry. FIO noted that following the Financial Stability Oversight Council’s (FSOC) recommendations for members to use appropriate scenario analysis for assessing climate-related risks, the Federal Reserve Board of Governors initiated efforts to support supervisors and banks in measuring climate-related risks. FIO added that it intends to continue its work on scenario analysis along with FSOC and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
Additionally, 15 states and Washington, D.C., require covered insurers that write more than $100 million in annual premiums to complete the NAIC Climate Risk Disclosure Survey. The survey is a voluntary tool used by state insurance regulators to annually request non-confidential disclosures of the insurers’ assessment and management of climate-related risks. The report also outlined that the Securities and Exchange Commission’s (SEC) Climate Disclosure Proposed Rule would apply to “over 110 public U.S. insurance companies, accounting for over half of the U.S. P&C insurance market (by direct premiums written) and 55 percent of the life insurance market.”
The FIO’s report included 20 recommendations focused on NAIC and state insurance regulators’ supervisory and regulatory efforts. The first recommendation stated that “state insurance regulators and the NAIC should build on the initial steps they have taken and expand their work on climate-related risks in order to promote increased regulatory uniformity among the states in considering such risks.” FIO also recommended that state insurance regulators and federal authorities encourage insurers to capture consistent data on climate-related risks to improve their ability to quantify climate-related exposures. The report recommends that all state insurance regulators develop and adopt climate-related risk monitoring appropriate to their regions.
For reporting data and examinations, the report recommended that “NAIC should revise the Financial Analysis Handbook to recommend, and states should require, that financial analysts and lead state analysts integrate climate-related considerations into their analysis.” The report also recommended that NAIC and state insurance regulators provide guidance on implementing climate risk monitoring and reporting to regulators on the impact of climate-related risks. Other recommendations included refining the capabilities of the CAT Modeling Center of Excellence, prioritizing scenario analysis, considering changes to RBC formulas, and adopting enhancements to ORSA.
Next Steps and Brownstein’s Take
FIO’s recent report follows the Treasury Department’s proposed data collection from insurers to assess climate-related financial risk in October 2022. The proposal would collect data from property and casualty insurers regarding current and historical underwriting data on homeowners’ insurance at the ZIP Code level. The Treasury Department will continue to examine the climate-related risk in the insurance industry, as Treasury Secretary Janet Yellen stated, “This effort should be deepened and broadened so that it is both more fully integrated into oversight of insurers and adopted by more state insurance regulators.”
As the insurance industry increasingly makes business determinations based on climate-change risks, many industry sectors that rely on sufficient insurance coverage are also likely to continue being impacted by significant premium increases and a less competitive market. As regulators and lawmakers consider future solutions to these concerns, it will be imperative to consider the impact and views of all industry stakeholders.
We will continue to provide updates on potential market impacts as multifamily housing and other real estate industry sectors continue to encounter challenges in the insurance market, resulting from extreme weather events and other factors.
This document is intended to provide you with general information regarding the federal government's interest in climate-related issues in insurance markets. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.