US policy: what Biden’s attention to climate change means for re/insurers

US President Joe Biden has nailed his environmental colours to the mast by reinstating the US into the Paris Agreement—and this will have a knock-on effect for US re/insurers.

In particular, the industry will be impacted by direct regulations placed on re/insurers and by the effects of the regulatory pressures placed on its clients.

This was one of the main talking points from a panel discussion titled “What the US election result means for the re/insurance market”. The discussion took place on Intelligent Insurer’s Re/insurance Lounge, an online platform where interviews and panel discussions are available on demand.

The event featured Frank Nutter, president of the Reinsurance Association of America; Michael Biltoo, partner at Kennedys; Nat Wienecke, senior vice president federal government relations & political engagement at the American Property Casualty Insurance Association; and Joel Wood, senior vice president, government affairs at the Council of Insurance Agents & Brokers.

Discussing the return of the US to the Paris Agreement, Biltoo highlighted its particular significance for the shipping industry.

“In the shipping industry, sustainability is taking a front role. The International Maritime Organisation (IMO) is pressing forward with policies to try and do precisely what the Paris Agreement is also doing.

“This is going to be important generally, but for the marine industry and the shipping sector, it’s going to help advance the policies that the IMO is trying to implement across the sector to ensure that we move towards a carbon-neutral way of shipping,” Biltoo explained.

“With the US back in the Paris Agreement, the economic and political clout that brings is going to force a lot of other countries to make sure that these requirements are met.

“I’m interested to see how the insurance sector as a stakeholder is going to be able to implement these policies and these requirements on their own insureds. In the shipping finance sector, the Poseidon Principles (a global framework for assessing and disclosing the climate alignment of financial institutions’ shipping portfolios) encourage shipping portfolios to meet certain requirements.

“It will be interesting, given re/insurance’s position, to see whether it will also be able to effect change among its portfolios.”

New guidance

Nutter also emphasised the cascading effects of the Biden administration’s commitment to addressing climate change.

“There’s probably no federal agency or independent agency in the US government that isn’t going to have some climate change agenda,” he said. He noted that the Securities and Exchange Commission (SEC) is highly likely to issue new guidance to public companies about the risk associated with climate change and that is likely to affect generally accepted accounting and reporting principles.

Nutter added that this will affect the state insurance commissioners as they develop their own disclosure mandates, and will highlight the tension between oversight by federal financial agencies on banks, insurance companies, securities companies and other financial institutions, and the effect of disclosures on economic activity as greater emphasis is placed on factors such as green infrastructure and green bonds.

Disclosures

Wienecke added that in terms of mandatory disclosures and disclosures in general, the US insurance regulatory environment is ahead of the banking regulators when it comes to having a template for climate disclosures and (in some cases) mandatory disclosures at state level.

“We would be very concerned about using mandatory disclosures to force what customers invest in or what they might have to divest in. Every company has to balance its portfolio relevant to the risks that they have,” he said.

Wood noted that “companies use everything from political considerations to heavenly reward” as reasons for their investments and predicted that there will be heightened awareness around investment motives.

“As long as I’ve been in the industry, we’ve had this circular firing squad on state versus federal regulation—and we’ve generally been more progressive on the brokerage front, just because almost all of my member firms operate in all 50 jurisdictions, if not internationally.

“With regard to climate-related disclosures issues, we’re all feeling a little more comfortable with our state-based system. I would firmly agree that our states have been ahead of the banking sector and the securities side. The SEC is going to be controlled by President Biden—three of its five members are controlled by the president in power—and I expect to see a lot more activity having an impact on the industry going forward.”

Hurdles and opportunities

Nutter said that he expects to see efforts to reconcile how global companies respond to regulatory initiatives and ensure that there is recognition of some of those responses within the state system of regulation.

“It can be cumbersome resolving this at a 50-state level but, clearly, global companies and the global compliance that they’re giving for environmental, social and governance issues is something that we hope the states recognise and rectify with a uniform and consistent approach.”

Wienecke highlighted the fact that the standards applied in Europe are extremely broad, and their enforcement structure is different from that in the US: for example, companies do not have to respond to all the questions in their climate disclosures; they can respond back to some and yet still be in compliance.

“In the US, we need to be cautious that we don’t take those global standards and have an unnecessarily strict system. Companies need to have flexibilities; not all may be able to answer every question and you don’t want it as a punitive system, you want to construct a system that moves everyone in the right direction.”

Nutter added that while there are clearly hurdles, there are opportunities ahead. For instance, there could be incentives in the tax code for investments in green bonds by insurers or other financial institutions.

“We ought to be looking at whether there are tax incentives for companies that would find value in investing in some of these communities, or corporate initiatives that would help the industry orient some of its investment portfolio to achieve some of these societal goals, particularly related to environmental matters,” he said.

In conclusion, Wood added: “I think that we are definitely going to see a decarbonisation roadmap that will have a cascading effect on every player in the financial services system.

“And we’re going to see a lot more steps towards so-called moral capitalism.”

To view the full Re/insurance Lounge session click here.