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 http://www.regulations.gov.

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