US Feds eye plan to sew climate risks into core of insurance oversight

US state insurance regulators should unify their views and tools on climate-related risks, then sew them more tightly into the full fabric of insurance regulation and oversight, a key US federal insurance office has argued.

Attempts to-date to incorporate such climate-related risks into regulation look “nascent and important,” a report by the Treasury Department's Federal Insurance Office FIO said, ballyhooing early moves to put climate in oversight in New York, Connecticut and California.

But those efforts remain "fragmented across states and limited in several critical ways" and much more can be done, authors add. It’s a wish-list to be sure: the FIO is a federal advisory office for an industry were statutory power and regulatory oversight is firmly rooted at the state level.

Among twenty recommendations to the association of insurance regulatory offices in the 50 states, the NAIC, the feds would start by capturing and unifying data and measures, then incorporating the new standards into both disclosure reporting and even financial analyst certification.

The very Financial Analysis Handbook, the regulators’ Financial Condition Examiners Handbook and even the Own Risk and Solvency Assessment Guidance Manual (ORSA) should all go up for revision to include an array of to-be de rigueur material.

Once a view to climate-related risks are mandatory in ORSA reports, regulatory-approved internal risk assessments at the core of oversight, little can stop it from sinking into the DNA of every medium- and large-sized insurer on the market, authors suggest. Such a movement got underway in May 2022 within the NAIC. So far, only New York has taken the step.

A build-out of modelling capabilities and stress testing could then be rolled out, “commensurate with an insurer’s size, complexity, business activity, and risk profile,” the recommendation list suggested.

State regulatory bodies would then have the tools to sew climate risks into future micro- and macroprudential risk assessments.

Add-on charges for climate related risks in risk based capital (RBC) calculations could be expanded from the singular climate-related risk included today: hurricanes.

The NAIC has already made early moves to add wildfire to a watch list. The NAIC has also considered developing RBC risk charges for additional climate-related perils such as floods and convective storms.

“Continued efforts to consider such risk charges will enhance the ability of both regulators and insurers to better understand climate-related risks and will build the insurance industry’s capacity to model such risks," authors said.

Trends in reinsurance availability and in residual and surplus lines markets should also be watched as touchstones, regulators indicated.

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