FIO adopts leadership role in climate change risk; eyes tools to collect & measure data for solvency & improve consumer coverage

UPDATES with NAIC COmment Sept. 7th

Aug. 31, 2021 — The Federal Insurance Office is teeing up a potential apparatus for only the collection of data from insurers on climate-related financial information as well as staking out a fleshed- out leadership role in insurance supervisory-adjacent and market-based best practices.

It is acting to fulfill an existing presidential Executive Order on climate change risk to the financial sector in its own arena of insurance and made clear it intends to undertake a thorough and all-encompassing job. The US. has experienced a dramatic increase in the frequency and severity of climate-related disasters with a corresponding increase in economic losses in the past 40 years, it stated.

FIO issued a request for information (RFI) in a formal notice Tuesday to get feedback on how it could work with the insurance industry, stakeholders and state regulators in monitoring, assessing and mitigating climate change financial risks, including through the use of data collection and a possible open-source centralized database. It also includes a sharp focus on improving insurance coverage and prices in underserved communities.

In its lengthy request, FIO suggested it might look under the hood of the existing state insurance regulatory framework to gauge whether the state system’s oversight is capable, as is, to maintain financial stability maintenance with climate change events bearing down on the country in the years ahead. 

The U.S. Treasury Department-based office asks a series of questions that reflect a need for much more detailed information from insurers on everything from underwriting to investing, and how it can best meet three climate-related priorities it has now laid out. 

In doing so, FIO was not shy about its new role in climate change risk assessment. It said it plans to increase its engagement on these issues by taking “a leadership role in analyzing how the insurance sector may help mitigate climate-related risks.” 

The three areas FIO, led by Director Steven Seitz, is addressing are insurance supervision and regulation, insurance markets and mitigation/resilience and insurance sector engagement. 

FIO stated it plans to examine existing state supervisory practices and resources.These will include, at a minimum, examination policies and procedures, solvency assessment and techniques, data availability and integrity, public disclosures, modeling and even stress testing.

The 2010 Dodd-Frank Act-created entity warned it could go ahead to fill any “gaps” —if any — in existing insurance supervision, if they exist, with regard to climate-related financial risks. This is a function of its intent to maintain financial stability. 

It is uncertain how FIO would go about filling any gaps it found.

The watchdog office has the power to monitor, collect data, enter into information-sharing agreements with states advise the Treasury secretary, pre-empt state law in narrow circumstances and has subpoena powers, as well, related to international covered agreements and in the less favorable treatment of a non U.S. insurer than a domestic insurer.

President Biden’s May 20, 2021 executive order told the Treasury secretary to have FIO “assess climate-related issues or gaps in the supervision and regulation of insurers” as part of the Financial Stability Oversight Council‘s analysis of financial stability, and to identify, with state regulators, the potential for major disruptions of private insurance coverage in areas vulnerable to climate change impacts…” Treasury Secretary Janet Yellen chairs the FSOC and has a broad directive to undertake climate change risk assessment and remediation work.

A big financial risk concern the new RFI revealed is a “lack of available data” for assessing climate change risk to the balance sheet of insurers. 

State insurance regulatory efforts like the Own Risk and Solvency Assessment (ORSA) that measure for risks that have a material impact on solvency might be too short-term in scope, according to FIO. “These tools may be inadequate to assess climate-related risks, particularly over a longer time horizon,” it aid in the request. FIO also warned that “only six states have regularly collected high-level qualitative data” from insurers on specific climate-related financial risk, citing the National Association of Insurance Commissionerswork

“No federal authority is collecting climate-related financial data specific to the insurance sector,” FIO stated, hinting it could step in to do so. 

In fact, one of the RFI’s 19 questions asks about the advantages and disadvantages of an “open-source, centralized database” for climate-related information on the insurance sector.

Another question asks how FIO can “assess the efforts of insurers, through their underwriting activities, investment holdings, and business operations” so that the industry could meet the U.S. climate goals, including reaching net-zero emissions by 2050. This indicated the federal office might take a hard look into the nuts and blts of measuring risk and setting premiums.

FIO’s engagement with insurance sector “could include insurance sector consideration of underwriting activities, investment holdings, and business operations to support a low emissions economy.” It is unclear what the consideration might entail and if it would result in advice or a best practices framework. 

Climate change’s impact on the availability and affordability of insurance in the private sector is also a focus of the new FIO request.

The office indicated it intends not only to assess coverage in high risk areas and in traditionally underserved markets and communities but to also find solutions to unfair and disparate treatment and coverage inadequacies.

For example, FIO could come up with a best practices model for mitigation in disasters and ways to get more affordable coverage and wider-spread coverage to consumers that need it.

However, the industry and existing state and federal laws might put pressure on the wide-ranging scope of FIO’s intended project. Some say that FIO’s requests and plans are no surprise with no change is imminent. FIO has been operating since 2011 when it opened its doors under its first director, Michael McRaith, who served through the end of the Obama Administration and helped forge the covered agreement on reinsurance collateral with the European Union. FIO also has other roles with the the federal terrorism risk insurance program and in its many reports and consultations.

Nevertheless, FIO sees climate change creating a dangerous snowball effect in the creation expansion of pools for high risk areas run by state and federal government and impacts to economic and financial stability long-term, for which the Administration will want some solutions.

The office also plans to do a deep dive into the insurability of disasters like including wildfires, hurricanes, floods, wind damage, and extreme temperatures caused or made worse by climate change. 

The NAIC responded through a spokesperson by noting it was aware of FIO’s request for information on climate risk and insurance and that it welcomed the Treasury’s interest in the important issue of climate change risk, which it has been working on for over a decade through its membership, it said.

In addition, “there is extensive ongoing work in the areas of disclosure, pre-disaster mitigation, solvency monitoring, and innovation, as well as extensive engagement and coordination with federal and international counterparts,” the NAIC said. “To the extent FIO has questions about state insurance regulation or NAIC’s ongoing workstreams in the area of climate risk, we welcome opportunities for dialogue and collaboration to inform their work.”

Comments are due Nov. 15 through the Federal eRulemaking Portal at


Court approves insolvent LTC insurer SHIP’s rehabilitation plan

UPDATE: Find the approved rehabiliation plan posted by the court on Sept. 30 here:

Aug. 26, 2021 — The Commonwealth Court of Pennsylvania has approved the amended rehabilitation plan for insolvent long-term care insurer, Senior Health Insurance Company of Pennsylvania (SHIP.) 

The rehabilitation will address SHIP’s “hazardous financial condition” involving about 39,000 in-force policies by increasing premiums and shaving benefits in many cases, according to the court. 

The goal is to avoid liquidation fo the company and a spill of all its liabilities into the state guaranty funds, where benefits could be more severely capped. 

SHIP has a deficit of about $1.2 billion, reflecting $1.4 billion in assets and $2.6 billion in liabilities. It was licensed in 46 states and had issued 645,000 LTC policies, covering services provided in nursing homes and assisted living facilities, as well as home-based health care services and adult day care. 

About 13% of SHIP’s LTC policyholders are on claim, and the Pennsylvania-based rehabilitator expects that number to rise to 32% by 2050, the court’s approval order stated. The order calls for the rehabilitator, the Pennsylvania Insurance Department regulators, to submit an actuarial memo on rates to use in the first phase of the effort, according to a court decision Aug. 24.

In her decision, Judge Mary Hannah Leavitt rejected the arguments of the intervening state regulators from Maine, Massachusetts and Washington State for an opt-out provision of the plan. 

She focused on how the plan would give existing policyholders as much choice as possible in their more narrow outcomes, given the state of the company.

“The Plan is structured to maximize policyholder choice in several ways. Depending on his circumstances and preferences, a policyholder may choose to continue his policy with all benefits and terms unchanged by paying the actuarially justified annual premium for that policy. Alternatively, the policyholder may choose to reduce some policy coverages as more suitable to the policyholder’s current circumstances in order to avoid or temper a premium increase,” the judge noted. 

She offered the example of a 95-year-old policyholder, as SHIP’s customers now are aging seniors.. 

This senior citizen might decide to reduce the maximum coverage period from 10 to five years instead of paying the premium required for a policy with a 10-year period of coverage, she stated. 

The rehab plan also intends to smooth out premiums for similar coverages as currently, SHIP policyholders pay very different rates for the same amount of benefits. This “discriminatory” rate structure is a results of decisions of different state regulators on SHIP’s proposed rate increases, according to Leavitt. 

“Policyholders whose state of issue has approved the requested rate increase pay more for the same coverages than policyholders whose state of issue has disapproved the requested rate increase. As a result, the former group of policyholders pays more than its fair share of the costs of providing the coverages and the latter group pays less than its fair share,” Leavitt wrote.

The Commonwealth Court’s decision following mid-May 2021 hearings.

SHIP filed an rehabilitation application in April 2020 and appointed the Pennsylvania Insurance commissioner to serve as rehabilitator of SHIP and to “ take steps to address SHIP’s financial challenges; and to protect its policyholders and other creditors.” The Pennsyvlani regualtors filed an amended plan in October 2020.

SHIP, founded in 1887 as the Home Beneficial Society, continues to see its financial condition deteriorate. Prior to the filing for rehabilitation in January 2020, it was licensed to do business by state regulators. It has not sold new policies since 2003 and was once part of  Conseco Senior Health Insurance Co.

The states with the most SHIP LTC policies in force as of Dec. 31, 2020, are Texas, Florida and Pennsylvania. The three states represented by the intervening state regulators in this matter have much fewer policies in force, according to the court opinion and order.

For more on how this affects policyholders, see:

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New York regulator balks at life insurers’ new powers to assume improved policyholder mortality

Aug. 18, 2021 –A new amendment that allows life insurance in an industry beleaguered by low returns has sparked concern from New York State insurance regulators. 

During the final meeting of its summer conference on Aug. 17, the National Association of Insurance Commissioners adopted an amendment that allows insurers to use in their calculations a “prudent” level of mortality improvement for their contracts beyond the valuation or contract-setting date. This move would allow life insurers to cast a bet that mortality improves over time when calculating the reserves they put aside to back policies.

“Insurers should not be allowed to assume that experience improves from where things are today when setting their reserves,” New York Department of Financial Services’ top insurance regulator Mi Chi To cautioned fellow commissioners at the meeting of the executive/plenary committee in a hybrid live/video-streamed meeting.

In her argument, she cited the unknowns of the long-term effects of Covid-19 on mortality as well as the pressures life insurers were under in today’s challenging persistent low interest rate environment

The sustained low interest rates impact industry reserve margins and capital adequacy, according to Fitch Ratings, as it outlined in a December 2020 wire report. These now chronic low interest rates impact all major product lines of life insurers , particularly guaranteed universal life insurance, payout and other fixed annuities, and long-term care insurance, Fitch said. In general, better mortality assumptions decrease the need for heftier reserves. 

New York’s To said that the newly-adopted NAIC measure flies in the face of not only fundamental principles of statutory accounting, but also of ultimately of consumer protection.

Despite the votes not being in her favor among fellow regulators, she advised that insurers should not be allowed to assume that experience improves “from where things are today” when setting their reserves.

It is not clear whether her concerns would lead to any action or separate regulatory guidelines at some point from the New York DFS for insurers doing business in the state. 

“At minimum, we respectfully believe that it is really an awkward time to be considering the possibility of changing mortality assumptions in the middle of during a pandemic at a time when unfortunately no one knows the lasting effects of Covid on future mortality,” To said.

The American Academy of Actuaries and the Society of Actuaries noted in a joint presentation last December to the NAIC’s Life Actuarial Task Force that Covid-19 could have potential longer-term impacts that could come from survivors with impaired health as well as from their delays in healthcare and testing during the pandemic. 

The amendment, known as 2020-10, was adopted by the task force Aug. 12 at its meeting. 

Another SOA slide deck presentation to the NAIC in August citing Centers for Disease Control and Prevention statistics showed mortality rates for 2020 increased 4.4% over 2019, excluding Covid. With Covid, they were 16.1% higher. Heart issues as a cause of death had its largest increase in 20 years in 2020, according to the statistics while lower cancer steadily continued as a trend.

Before Covid, in 2019, life expectancy at birth was 78.8 years for the total U.S. population, an increase of 0.1 year from  2018, according to the CDC

But setting sufficient reserves come first, according to New York’s executive superintendent for insurance. 

“We, of course, understand the immense pressure life insurers are under in terms of setting their reserves given how long interest rates have remained at extremely low levels. We know this is a critical issue for the industry,” she said.

She said solvency regulators “are all laser-focused” on the reserve challenges of life insurers. “We are certainly open to discussing whether there are any regulatory changes that would be appropriate to provide relief to address this issue, but we really do not believe this amendment is the solution,” To said.

Insurance commissioners from New Mexico and Louisiana joined New York in opposition to the measure, saying they shared her concerns about the new allowance to assume mortality improvement past the valuation date of life insurance policies. 

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