FSOC tasks insurance industry authorities to make climate risk a bedrock of their oversight

FIO will undertake extensive work in coordination with states as FSOC points to international coordination efforts a guide

Oct. 22, 2021 — The Federal Insurance Office at the U.S. Treasury Department will suit up on orders from the Financial Stability Oversight Council to examine how climate change will affect both insurance and reinsurance coverage, especially in those regions of the country most affected by climate change.

And there is no time to waste–FIO “should act expeditiously,” said FSOC, which is led by Treasury Secretary Janet Yellen.

This is one of many recommendations made by the Treasury-led panel of top financial regulators as part of its new report on climate-related risk released Oct. 21. It is a tall order, and includes investments made in bonds, equity markets, real estate and private funds and financial vehicles as well as pricing issues and availability of insurance in hard-hit and historically underserved and financially vulnerable areas.

The report, part of the Biden Administration action plan for addressign climate change also calls for more internal investment in staff and climate change, risk and tech experts from all member agencies or groups and sharing, methodology, coordination of standardization of data and analystical tools so everyone is speaking the same language with regard to climate risk scenarios.

One recommendation that couldpotentially change the data-sharing practices of both the insurance industry’s and its state insurance regulators is to have FSOC members make “all climate-related data for which they are the custodians freely available to the public, as appropriate and subject to any applicable data confidentiality requirements.”

The FSOC will also birth a new staff-level committee, the Climate- related Financial Risk Committee (CFRC) within the next two months. The CFRC will have its own hand-picked advisory committee and will serve as as a coordinating body for the eforts of the members and interested parties, helping it hthe standardization of data language and tools across the member agencies. The Office of Financial Research at Treasury will help form a data backbone for the new committee as it identifies, hosts and gathers climate risk and fianncial data to analyze.

The recommendations are extensive and span about seven pages to conclude the report, create building blocks to the final goal of assessing and mitigating climate risk and to financial stability and providing coverage to all who need it, if not through the private insurance market, than through state or federal pools or backstops.

The report also gave props to international efforts in climate change financial risk assessment and preparations as well as pointed out international regualtory or financial stability forum analysyes that had found short-comings or data gaps here in the U.S.

“FSOC members will likely need to procure or collect and use data with which they may have limited experience, such as climate-related data, projections (or scenarios) of climate risks, and scenarios of financial and economic outcomes based on climate scenarios,” the report stated. FSOC’s 15 members, 10 of whom have voting power, “will need to take steps to ensure data is in a usable format—for example, addressing data inconsistencies or data aggregation challenges. They will also need to utilize new methodologies and metrics to quantify physical and transition risks that do not have generally accepted definitions and standards,” the report stated.

The Council recommended that its members, who include the chairs of the Securities and Exchange Commission and the Federal Reserve Board, a state insurance regulator sometimes represented by an National Association of Insurance Commissionersexecutive and an independent member with insurance expertise, “coordinate with their international regulatory counterparts, bilaterally and through international bodies.” One of the goals is to address data gaps and work toward the goal of standardizing data formats and structures to promote comparability.

The report did make reference to efforts out of the NAIC and the SEC in 2010.

The SEC “remind[ed] companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors” 11 years ago while the NAIC adopted the Insurer Climate Risk Disclosure Survey, adopted by the NAIC in 2010.

California, Connecticut, Minnesota, New Mexico, New York, and Washington now require U.S. insurers or insurance groups that, on an annual basis, write more than $100 million in direct premiums to complete the survey.With eight additional states plus the District of Columbia added to the roster, the survey participant coverage will extend to 78% of U.S. direct premiums written, according to the FSOC report, citing the NAIC. The eight additional states are Delaware, Maine, Maryland, Massachusetts, Oregon, Pennsylvania, Rhode Island, and Vermont.

Photo by Maria Orlova on Pexels.com


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