Under the Microscope: Feds Red-Flag Huge Holes in Insurer Climate Defenses
The Federal Insurance Office (FIO) has released a landmark 120-page report analyzing gaps in state insurance regulation of escalating climate risks. The report outlines current oversight frameworks, identifies issues, and provides detailed recommendations to enhance insurer resilience. With climate change fueling more extreme weather than existing models predict, insurers face growing financial threats that necessitate adapting insurance supervision.
Scope and Approach of the FIO Climate Risk Report
Released in June 2023, the report responds to a 2021 presidential executive order directing the FIO to review climate issues in insurance regulation. Development included engagement with state regulators, the NAIC, federal agencies, and industry.
The report comprises four sections:
Background on Climate Risks: Details how climate change increases extreme weather and catastrophic losses, creating new physical, transition, and litigation risks for insurers.
Assessment of Current Oversight: Analyzes state climate risk oversight in three areas — prudential regulation, market conduct regulation, and disclosure initiatives.
Additional FIO Priorities: Summarizes other FIO climate priorities like analyzing insurance market disruptions, studying insurer transition risks, reviewing protection gaps, and promoting mitigation.
Recommendations: The FIO report provides twenty detailed recommendations to enhance insurer and regulatory capacity to address escalating climate threats.
The report aims to drive urgent actions to modernize oversight due to rising climate threats.
While recognizing state progress, the FIO finds significant gaps in integrating climate into insurance company solvency regulation. The report stresses the importance of properly adapting regulatory supervision for climate risks.
Key FIO Recommendations to Strengthen Climate Risk Management
The report’s twenty recommendations span the following areas:
Governance and Risk Management
States should issue guidance for insurers to address climate risks in governance, enterprise risk management, strategy, planning, and internal controls.
Regulators should encourage improved insurer data collection on climate exposures.
Prudential Oversight
States should integrate climate risks into financial analysis, risk-based capital rules, solvency assessments, and on-site exams.
The NAIC should finalize proposed climate updates for its Financial Condition Examiners Handbook.
The NAIC and states should conduct more quantitative scenario testing on climate impacts.
Modeling and Expertise
The NAIC’s new Catastrophe Modeling Center of Excellence should further incorporate climate risks into models and tools.
The Center should develop platforms to help states access modeling resources.
Disclosures and Transparency
States should adopt and enhance the NAIC Climate Risk Disclosure Survey over time.
The NAIC should produce annual summary reports on survey results.
Market Trends and Resilience
FIO will collect data to evaluate climate effects on insurance availability.
States should monitor climate impacts on reinsurance, state guaranty funds, and residual markets.
Stakeholders should launch new education campaigns on disaster resilience.
The Urgency of Enhancing Insurer Climate Risk Oversight
The FIO report conveys the urgency of addressing climate threats, which are already increasing insolvencies and market disruptions. But it finds that many regulators lack specialized climate expertise or tools to evaluate climate impacts properly.
Implications include:
Insurer solvency oversight requires adapting to worsening climate risks.
Current regulatory regimes anchor heavily on historical data.
Climate scenario testing and data need strengthening.
Transparency and disclosure should improve.
Consumer education is vital for resilience.
Multi-stakeholder mitigation incentives can reduce risks.
Without modernizing oversight, insurers and policyholders face excessive climate losses. The report provides a regulatory roadmap to enhance climate risk management.
Conclusion
With climate threats growing, the FIO delivers a timely call to action on insurance oversight. The report’s proposals seem to lay a strong foundation for regulators and the industry to build climate risk capacity. Implementing recommended improvements is crucial for insurers, regulators, and households to weather the changing climate and risk profile.
A copy of the full report is available by clicking this link: “FIO Climate Report.”
About the Federal Insurance Office
The Federal Insurance Office was established under Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
FIO has the authority to monitor all aspects of the insurance sector, monitor the extent to which traditionally underserved communities and consumers have access to affordable non-health insurance products, and represent the United States on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors. In addition, FIO serves as an advisory member of the Financial Stability Oversight Council, assists the Secretary with administrating the Terrorism Risk Insurance Program, and advises the Secretary on important national and international insurance matters.
