Climate-related insurance supervision shifts gear with US Treasury move

In what could prove to be a crucial turning point with regard to federal oversight on the topic, the US Federal Insurance Office (FIO) has embarked on a on major survey of climate-related financial risk within the insurance sector.

The FIO, part of the US Department of the Treasury, was created after the financial crisis of 2008 to monitor and advise upon all aspects of the insurance industry. It works closely with the National Association of Insurance Commissioners (NAIC), its director is appointed by the Secretary of the US Treasury, though it serves only in an advisory role without any regulatory authority.

This week the US Treasury said that, in response to President Biden’s May 2021 executive order on climate change, the FIO’s efforts will focus on three initial climate-related priorities:

  • assessing climate-related issues or gaps in the supervision and regulation of insurers, including their potential impacts on U.S. financial stability;
  • assessing the potential for major disruptions of private insurance coverage in U.S. markets that are particularly vulnerable to climate change impacts, as well as facilitating mitigation and resilience for disasters;
  • increasing the FIO’s engagement on climate-related issues and leveraging the insurance sector’s ability to help achieve climate-related goals.

The US Treasury said that the responses to the request for information will help inform the FIO’s assessment of the implications of climate-related financial risks for the insurance sector.

It added that the exercise also will help FIO better understand the need for and current availability of high-quality, reliable, and consistent data related to these issues.

“Over the past 30 years, the incidence of natural disasters has dramatically increased and the actual and future potential cost to the economy has skyrocketed. We are now in a situation where climate change is an existential risk to our future economy and way of life,” Treasury Secretary Janet L. Yellen said.

She added that the filing in the Federal Register is an important step towards assessing climate-related financial risk in the insurance sector:

“Ensuring that consumers have adequate information, and that the insurance industry is appropriately assessing climate-related financial risk is essential as we work to address the climate crisis.”

On 20 May 2021, President Biden signed into effect an Executive Order on Climate-Related Financial Risk aimed at addressing the threat that climate change poses to US financial stability. The Executive Order requires federal agencies, including financial regulators, to undertake work to advance clear and comparable disclosure of climate-related financial risks and act to mitigate such risk and its drivers.

Mandating climate disclosures

The move by the US Treasury follows steps taken by the Bank of England over the past year which have significantly upped the regulatory ante with regard to climate-related risks.

Last autumn, for example, the Bank of England said that existing rules on company disclosures to help markets price risks from climate change will become mandatory.

“Disclosing your plans can improve your credit rating, broaden your investor base, reduce your cost of finance, and economise on the fixed costs of meeting increasingly vocal investor requests for information,” declared Andrew Hauser, the BoE’s executive director for markets.

To date the UK has been applying climate disclosure principles for companies on a voluntary basis, based on principles developed by the global Taskforce on Climate-Related Financial Disclosures (TCFD).

TCFD is not granular enough to rigorously compare companies and more forward-looking measures were needed, he said, highlighting three key building blocks to help do this to achieve the goals of cutting carbon emissions:

Standard setters need to agree on a single, mandatory framework for companies to disclose risks from climate change; ,ore tools are also needed to provide incentives for green investment, as well as a consensus on terminology for asset-allocation strategies to provide a “clear and credible” choice for investors.

Climate stress testing

More recently, UK insurers and banks have been given a new set of tests which will allow regulators to see how they can withstand the impacts of climate risks.

This summer the Bank of England published the Climate Biennial Exploratory Scenario (CBES) to explore the financial risks posed by climate change for the largest UK banks and insurers, with an accent on how the two interact to identify and support exposures.

The CBES uses three scenarios of early, late and no additional action to explore the two key risks from climate change: the risks arising from the significant structural changes to the economy needed to achieve net zero emissions – ‘transition risk’ and risks associated with higher global temperatures – ‘physical risks’.

The Bank said it expected to publish the CBES results in May 2022.

Comments to the FIO must be received within 75 days of the request for information’s publication in the Federal Register.

“Over the past 30 years, the incidence of natural disasters has dramatically increased and the actual and future potential cost to the economy has skyrocketed. We are now in a situation where climate change is an existential risk to our future economy and way of life.”

Janet L. Yellen, US Treasury Secretary.

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