A report issued yesterday by the Federal Insurance Office (FIO) has concluded that state insurance regulators should more aggressively address climate-related risks. The FIO, which is housed within the Treasury Department, produced the report in response to an Executive Order (EO) on Climate-Related Financial Risk, which was issued by the Biden administration in early 2021. The EO instructed the Treasury Secretary to have the FIO “assess climate-related issues or gaps in the supervision and regulation of insurers … and to assess the potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change impacts.”
The FIO report finds that climate-related risks pose new and increasingly important challenges to the insurance industry and suggests that state insurance regulators intensify their oversight efforts regarding climate-related risks. The report also recommends that financial regulators, policymakers, and carriers increase their monitoring of climate-related risks. The FIO report commends “initial efforts” by the National Association of Insurance Commissioners (NAIC) and state insurance regulators to incorporate climate-related risks into state insurance regulation, but it describes said efforts as “fragmented” and “limited.”
The report recommends that state insurance regulators prioritize efforts to integrate climate-related risks into their existing regulatory regimes and that NAIC and state regulators also create “new … climate-related risk tools and processes.” It encourages the NAIC to promote “regulatory uniformity” in its treatment of climate-related risks and urges the NAIC to identify “best practices” that state insurance regulators may then adopt.
The report also tasks state and federal regulators and policymakers, the private sector, and the climate science and research communities with achieving greater understanding of the effect of climate-related risks on the insurance industry and the implications of such risks on both insurance regulation and “the stability of the financial system.”
It recommends that state and federal regulators encourage carriers collect “more granular, consistent, comparable, and reliable data” on climate-related risks, suggesting that such data will allow insurers to “quantify climate-related exposures and otherwise fill data gaps” in the context of climate-related risks in the insurance industry. The report recommends that state regulators provide insurers with guidance to incorporate climate-related risk into their annual financial planning and strategic plans.
Also, the report recommends that all state regulators adopt the NAIC Climate Risk Disclosure Survey and that the NAIC revise the survey over the next several years “to incorporate more prescriptive elements.” The report advises the NAIC to revise several other publications, including its Financial Analysis Handbook, its Own Risk and Solvency Assessment (ORSA) Guidance Manual, and the Financial Condition Examiners Handbook to ensure that climate-related risks are considered in these contexts.
Finally, the report notes that consumers could be better educated about climate-related risks, including knowing which climate-related risks are typically covered by personal lines insurance policies. Particularly in markets especially susceptible to climate change, consumers should be encouraged to learn more about the value of pre-disaster mitigation investments.
This week’s report is just the FIO’s latest foray into the climate-related financial risk space; among other activities, it previously issued a Notice of Proposed Rulemaking (NPRM) announcing a plan to collect current and historical data from property and casualty insurers to assist in its efforts to assess climate-related risk.
The Federal Insurance Office was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and has limited oversight over the insurance industry, which is primarily regulated by the states. This new report offers yet another reminder of the FIO’s ongoing intrusion into the states’ regulatory authority over climate-related risks in the insurance industry.
PIA has long argued that the very existence of the FIO undermines the primacy of our enduring system of state insurance regulation. As such, PIA has led the effort to repeal the FIO for years and has continued to urge Congress to repeal the FIO this year. In the 118th Congress, PIA successfully led efforts to have House and Senate repeal bills introduced, and FIO repeal was a cornerstone of our Advocacy Day efforts in May.
Going forward, PIA will continue to champion the primacy of state insurance regulation and encourage both chambers to repeal the Federal Insurance Office.