FIO Requests Information on Climate Change
The Federal Insurance Office (FIO) of the U.S. Department of the Treasury (Treasury) has issued a Request for Information (RFI) seeking public input on climate-related financial risks and their impact on the insurance industry. The RFI requests written comments from interested parties on or before November 15, 2021.
As background, the FIO points out that the Intergovernmental Panel on Climate Change (IPCC) reported this year that “[h]uman-induced climate change is already affecting many weather and climate extremes” across the globe. In particular, FIO notes that the United States has experienced increased frequency and severity of climate-related catastrophes, which in turn has led to increased economic losses. This has been compounded by trends such as urbanization and continuing migration of the population toward higher-risk areas. According to FIO, these factors are adversely affecting the affordability and availability of property insurance coverage in certain markets.
FIO also assets that climate change could have adverse consequences for insurers’ investment portfolios. The RFI states that insurers could be vulnerable to potential decreases in asset values arising from the transition towards a low-carbon economy.
The RFI defines three types of risks that FIO believes confront the insurance industry– physical risks, transition risks and liability risks.
- Physical risks are defined as “the possibility that the economic costs of the increasing severity and frequency of climate-change related extreme weather events, as well as more gradual changes in climate, might erode the value of financial assets, and/or increase liabilities.”
- Transition risks can arise from the technological, market, and policy changes needed to adjust to a low carbon economy and their effects on the value of financial assets and liabilities. Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organizations.
- Liability risks may “arise when parties are held liable for losses related to environmental damage that may have been caused by their actions or omissions.”
FIO asserts that an assessment of how climate-related financial risks should include how life and property & casualty (P&C) insurers’ business models, including their underwriting activities, market activities, and investment activities, are affected by each category of risk. According to FIO, state regulatory tools like the Own Risk and Solvency Assessment (ORSA) might capture data on some climate-related financial risks but generally are not adequate to assess climate-related risks over an extended time horizon.
Authority of FIO
The Dodd-Frank Wall Street Reform and Consumer Protection Act established FIO within Treasury. FIO’s statutory authorities include monitoring all aspects of the insurance sector, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance sector or the U.S. financial system. FIO’s authorities also include monitoring the availability and affordability of insurance products for traditionally underserved communities and consumers, minorities, and low- and moderate-income persons. FIO believes these segments of the population may be negatively and disproportionately impacted by climate change. FIO is authorized to collect data and information on and from the insurance sector, including through the use of subpoenas. FIO is also authorized to analyze and disseminate data and information and issue reports on all lines of insurance, except health insurance.
FIO’s Role on Climate-Related Issues
FIO asserts that its statutory authorities allow it to take a “leadership position” in analyzing how the insurance sector may be impacted by, and help mitigate, climate-related risks. FIO is engaging with the NAIC and state insurance regulators through their work on climate-related topics. FIO intends to provide an insurance-specific focus within Treasury’s broader climate work, including working with Treasury’s Climate Hub. In particular, FIO intends to initially focus on the following three climate-related priorities:
- Insurance Supervision and Regulation: Assess climate-related issues or gaps in the supervision and regulation of insurers, including their potential impacts on U.S. financial stability.
FIO seeks to identify and fill any gaps in insurance supervision with a focus on assessing climate-related financial risks. This will include monitoring the integration of climate-related financial risks into insurance supervisory practices and regulatory frameworks. FIO also plans to assess supervisory practices and resources, including but not limited to examination policies and procedures, solvency assessment and techniques, data availability and integrity, public disclosures, modeling, and forward-looking assessments.
- Insurance Markets and Mitigation/Resilience: Assess the potential for major disruptions of private insurance coverage in U.S. markets that are particularly vulnerable to climate change impacts; facilitate mitigation and resilience for disasters.
FIO points to evidence that climate change may be associated with a decline in the availability and affordability of private sector insurance coverage. According to FIO, the creation and expansion of insurers of last resort in various states reflect this problem. FIO further asserts that traditionally underserved communities and consumers might be particularly vulnerable to these challenges. Therefore, FIO intends to assess the availability and affordability of insurance coverage in high-risk areas, particularly for traditionally underserved communities and consumers, minorities, and low- and moderate-income persons. In addition, FIO will examine the role of insurers in supporting climate resilience in critical infrastructure, as well as in supporting green investment initiatives.
- Insurance Sector Engagement: Increase FIO’s engagement on climate-related issues; leverage the insurance sector’s ability to help achieve climate-related goals.
FIO plans to take a leadership role in analyzing how the insurance sector may help mitigate climate-related risks. FIO says it will engage with the insurance industry to assess how the industry may help achieve national climate-related goals, including mitigation, adaptation, and transition to a lower carbon economy. This could include evaluations of underwriting activities, investment holdings, and business operations to support a low emissions economy. This also might encompass the insurance industry’s transition of its operational and attributable greenhouse gas emissions. According to FIO, only one state has passed legislation that is intended to leverage the insurance sector’s ability to affect greenhouse gas emissions.
Invitation for Public Comment
In the RFI, FIO presents a number of questions for public response. Through the responses, FIO wants to better understand which data elements are necessary to accurately assess climate risk; which data elements remain unavailable; and how FIO could collect this data. FIO also will issue recommendations on individual actions that can be taken by various insurance industry stakeholders such as state insurance regulators, insurers, and policyholders to address climate-related financial risks.
FIO seeks responses in the following areas:
Executive Order on Climate-Related Financial Risk
- Please provide your views on how FIO should assess and implement the action items set forth for FIO in the Executive Order on Climate-Related Financial Risk.
FIO’s Initial Climate-Related Priorities
- Please provide your views on FIO’s three climate-related priorities and related activities, particularly with regard to whether there are alternative or additional priorities or activities that FIO should evaluate regarding the impact of climate change on the insurance sector and the sector’s effect on mitigation and adaptation efforts.
Climate-Related Data and FIO’s Data Collection and Data Dissemination Authorities
- What specific types of data are needed to measure and effectively assess the insurance sector’s exposures to climate-related financial risks? If data is not currently available, what are the key challenges in the collection of such climate-related data? In your response, please provide your views on the quality, consistency, comparability, granularity, and reliability of the available or needed data and associated data sources.
- What are the key factors for the insurance sector in developing standardized, comparable, and consistent climate-related financial risk disclosures? In your response, please discuss whether a global approach for disclosure standards needs to be adopted domestically for insurers. Please also address the advantages and disadvantages of current proposals to standardize such disclosures, such as those set forth by the Task Force on Climate-Related Financial Disclosures or the NAIC’s Insurer Climate Risk Disclosure Data Survey.
- Please provide your views on how FIO’s data collection and dissemination authorities should be used by FIO to research, monitor, assess, and publicize climate-related financial risk and other areas of the insurance markets that are affected by climate change.
- What are the likely advantages and disadvantages of a verified, open-source, centralized database for climate-related information on the insurance sector? Please include in your response the types of information, if any, that may be most useful to disseminate through such a database and the key elements in the development and design of such a database.
Insurance Supervision and Regulation
- How should FIO identify and assess climate-related issues or gaps in the supervision and regulation of insurers, including their potential impact on financial stability? In your response, please address insurance supervision and regulations concerning: (a) Prudential concerns, (b) market conduct regarding insurance products and services, and (c) consumer protection. In addition, please discuss how FIO should assess the effectiveness of U.S. state insurance regulatory and supervisory policies in addressing and managing the climate-related financial risks with regard to the threat they may pose to U.S financial stability, including identifying (1) the major channels through which climate-related physical, transition, and/or liability risks may impact the stability of the U.S. insurance market, and (2) the degree to which insurers’ business models could be affected by each category of risk and the relevant time horizons for such effects.
- Please identify the key structural issues that could inhibit the ability of insurance supervisors to assess and manage climate-related financial risk in the insurance sector (e.g., accounting frameworks, other standards). What barriers could inhibit the integration of climate-related financial risks into insurance regulation?
- What approaches used by other jurisdictions or multi-national organizations should FIO evaluate that would help inform it about existing supervisory and regulatory issues and gaps concerning climate-related financial risks? Please describe these approaches, including their advantages and disadvantages, as well as available data sources on these approaches.
Insurance Markets and Mitigation/Resilience
- What factors should FIO consider when identifying and assessing the potential for major disruptions of insurance coverage in U.S. markets that are particularly vulnerable to climate change impacts?
- What markets are currently facing major disruptions due to climate change impacts? What markets are likely to be at risk for major disruptions due to climate change impacts in the future? When discussing markets at risk for future disruption, please estimate the likely time horizons (e.g., 5, 10, 20, or more years) when these disruptions may occur.
- Climate change is currently exacerbating economic losses caused by weather-related disasters and is projected to cause further damage in the future. Please provide information on the actions that insurers have taken in response to the threat of increased economic losses from climate-related disasters, including how insurers are incorporating mitigation and resilience considerations into their business operations, as well as what other strategies or solutions that insurers or U.S. regulators may want to explore that would help insurers mitigate the impact of climate change and build resilience.
- To what extent, if any, are models (whether internal proprietary models, open-source models, or third-party vendor models) used in the underwriting process to consider the impact of climate change? How do these models affect pricing of insurance products and business decisions (e.g., level of catastrophe exposure, utilization of reinsurance)? What are the best practices for model validation?
- How should FIO assess the availability and affordability of insurance coverage in U.S. markets that are particularly vulnerable to climate change impacts? In your response, please discuss how to balance maintaining insurer solvency with the need to address the availability and affordability of insurance products responsive to perils associated with climate-related risks, particularly for traditionally underserved communities and consumers, minorities, and low- and moderate-income persons.
- In what areas have public-private partnerships or collaborations among state or local governments been effective in developing responses to climate change that may be taken by the insurance sector or insurance regulators? How can FIO evaluate the potential long-term or permanent effects on the insurance sector of such public-private partnerships or state and local collaborations to address climate-related risks? How should FIO consider state insurance regulatory efforts on consumer education related to climate risks?
Insurance Sector Engagement
- Please provide your views on additional ways that FIO should engage with the insurance sector on climate-related issues.
- How should FIO assess the efforts of insurers, through their underwriting activities, investment holdings, and business operations to meet the United States’ climate goals, including reaching net-zero emissions by 2050? For example, what steps should the insurance sector be taking to help improve transparency, comparability, and assessment of Scope 1, Scope 2, and, to the extent possible, Scope 3 greenhouse gas activities?
- What role or actions might states take to encourage the insurance sector’s transition to a low emissions environment and an adaptive and resilient economy? In your response, please discuss whether efforts by states to encourage the development of new insurance products, to promote sustainable investment and underwriting activities, and to address protection gaps created by climate-related financial risks might facilitate this transition.
- Please provide any additional comments or information on other issues or topics that may be relevant to FIO’s work on insurance and climate-related risks.