Treasury’s Federal Insurance Office Releases Report Assessing Climate-Related Risk, Gaps in Insurance Supervision

The U.S. Department of the Treasury’s Federal Insurance Office (FIO) has released a report on the supervision and regulation of climate-related risks in the insurance industry. Specifically, the report, prompted by President Biden’s Executive Order 14030 on Climate-Related Financial Risk, examines the existing efforts and gaps in incorporating climate-related risk into state insurance regulation and supervision.
While FIO acknowledges that the National Association of Insurance Commissioners (NAIC) and state insurance regulators have made notable progress to enhance supervisory efforts with respect to the integration of climate-change risks in the risk management of insurance and reinsurance undertakings, these efforts are isolated and scattered. Additionally, the efforts are not reaching far enough to adequately address and tackle the effects of climate change upon the insurance sector. Therefore, the report also includes 20 recommendations to improve regulatory oversight and enhance supervisory convergence and uniformity across regulators as regards the supervision of climate change-related risks of (re)insurance firms. The key recommendations are briefly described below; for all of them, please refer to the original report.
#### Key Recommendations
(1) State insurance regulators and the NAIC should continue their efforts in addressing climate-related risks and work towards promoting regulatory uniformity among states in considering such risks. The NAIC should identify best practices in the state insurance regulatory community and encourage states to adopt them.
(2) State insurance regulators and federal authorities should encourage insurers to collect more granular, consistent, comparable, and reliable data on climate-related risks. They should also work on identifying relevant data to improve insurers‘ ability to assess and quantify climate-related exposures and fill data gaps in relation to climate-related risks.
(3) The NAIC and state insurance regulators should provide guidance and encourage insurers to implement climate risk monitoring in their strategic planning processes. Insurers should report to regulators in a uniform manner on the impact of climate-related risks on their strategic processes.
(4) The NAIC and state insurance regulators should consider changes in the Risk-Based Capital (RBC) requirements of insurers to account for floods, convective storms, and other climate-related risks.
(5) The NAIC should adopt proposed enhancements to the Own Risk and Solvency Assessment (ORSA) Guidance Manual, requiring insurers to incorporate climate-related risks into ORSAs and ORSA Summary Reports. Insurers that do not consider climate-related risks in the reports should have to explain their reasoning.
(6) The NAIC and state insurance regulators should adopt a single standard for defining „materiality“ for climate-related risks to be used in the ORSA Summary Report and the NAIC Climate Risk Disclosure Survey, ensuring more consistent information across disclosures.
(7) The NAIC and state insurance regulators should introduce scenario analysis for climate-related risks, initially focusing on large insurers. The NAIC should develop pilot scenarios which may be adjusted in accordance with an insurer’s size, complexity, business activity, and risk profile.
(8) The NAIC should include climate-related risks in future Macroprudential Risk Assessments, providing additional detail specific to insurer underwriting and investments.
(9) The NAIC and state insurance regulators should increase efforts to improve climate-related disclosures by the insurance industry. All state insurance regulators should adopt the NAIC Climate Risk Disclosure Survey as a mandatory survey to be performed among insurers, and the NAIC should monitor and publish an annual report summarizing the results of the survey (the survey is currently voluntary for regulators to apply; it seeks to annually gather information from insurance and reinsurance undertakings as to their assessment and management of their climate-related risks).