August 31 -- The Federal Insurance Office (FIO) of the U.S. Department of the Treasury (Treasury) is issuing this Request for Information (RFI), following the May 20, 2021 Executive Order on Climate-Related Financial Risk, to solicit public input on FIO's future work relating to the insurance sector and climate-related financial risks. FIO's efforts will focus on three initial climate-related priorities, which are described below. Additionally, this RFI seeks input on how FIO's data collection and dissemination authorities can best be used by FIO in support of these priorities, as well as to monitor and assess the insurance sector and climate-related financial risks. Submit written comments on or before November 15, 2021.
The United States 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. Economic growth combined with changing socioeconomic trends, such as urbanization and the migration patterns to areas at higher risk of climate-related disasters, are increasing the financial risks associated with the effects of climate change. The increased frequency and severity of climate-related disasters, as well as the magnitude of associated insured losses, highlight the significance of these climate-related financial risks and the role of insurers in responding to them. Additionally, some insurance consumers are increasingly unable to find affordable and available property insurance coverage in certain insurance markets.
The impact of climate change also affects insurers through their broader role in financial markets. For example, the U.S. life insurance sector is one of the largest investors in the U.S capital markets, with over $4.7 trillion in investments held in general accounts at year-end 2020. As owners of significant amounts of assets, insurers could be vulnerable to potential decreases in asset values arising from the transition towards a low-carbon economy.
More broadly, climate-related financial risks may present challenges to the stability of the financial system (of which the insurance sector is an important part) including as shocks that increase financial system vulnerabilities. An assessment of how climate-related financial risks may affect the insurance sector should consider physical risks, transition risks, and liability risks. More specifically, the assessment should include how the life and property & casualty (P&C) insurers' business models (including their underwriting activities, market activities, and investment activities) are affected by each category of risk.
The lack of available data complicates the ability to conduct such assessments. Government and private sector stakeholders have noted the significant issues caused by the lack of available data to assess climate-related financial risk within the insurance sector. These stakeholders could all potentially benefit from high-quality, consistent, comparable, and reliable data for their risk management, disclosures, and forward plans to assess and address climate-related financial risks. State regulatory tools, such as the Own Risk and Solvency Assessment (ORSA), may capture data on some climate-related financial risks if they are recognized by a reporting insurer as having a material impact on its solvency over the next one to two years, but these tools may be inadequate to assess climate-related risks, particularly over a longer time horizon. Additionally, only six states have regularly collected from insurers certain limited, high-level qualitative data directly focused on climate-related financial risks. No federal authority is collecting climate-related financial data specific to the insurance sector.
FIO's role and statutory authorities enable it to take a leadership position in analyzing how the insurance sector may be impacted by, and help mitigate, climate-related risks. FIO intends for its climate-related work to respond not only to the Executive Orders, but also to provide an insurance-specific focus within Treasury's broader climate work, including working with Treasury's Climate Hub. In particular, FIO intends to initially focus on the following three climate-related priorities:
1. Insurance Supervision and Regulation: Assess climate-related issues or gaps in the supervision and regulation of insurers, including their potential impacts on U.S. financial stability.
Maintaining the financial stability of the insurance sector will involve identifying and filling gaps (if any) in insurance supervision with a focus on assessing climate-related financial risks. This will include monitoring the integration of climate-related financial risks into insurance supervisory practices and regulatory frameworks, as well as assessing whether sufficient data, methodologies, and tools exist to manage the solvency of insurers and to protect them against the long-term risk of climate change. To that end, FIO plans to assess supervisory practices and resources, including but not limited to examination policies and procedures, solvency assessment and techniques, data availability and integrity, public disclosures, modeling, and forward-looking assessments (e.g., scenario analysis, stress testing). FIO will consult with individual state insurance regulators and the NAIC during its assessment of such supervisory practices and resources.
2. Insurance Markets and Mitigation/Resilience: Assess the potential for major disruptions of private insurance coverage in U.S. markets that are particularly vulnerable to climate change impacts; facilitate mitigation and resilience for disasters.
Growing evidence indicates that climate change may be associated with a decline in the availability and affordability of insurance provided by the private sector (i.e., private insurance coverage) in certain markets. The creation and expansion of insurers of last resort by individual U.S. states and the federal government highlights this problem. FIO intends to examine the insurability of disasters that are produced or exacerbated by climate change, including wildfires, hurricanes, floods, wind damage, and extreme temperatures.
Additionally, traditionally underserved communities and consumers, minorities, and low- and moderate-income persons may have disproportionate challenges in obtaining affordable property insurance to cover the risks posed by climate-related disasters; further declines in available and affordable insurance could exacerbate the inequities that these persons face. This situation underscores the need to identify solutions to address the growing protection gap exacerbated by climate change. Therefore, FIO also intends to assess the availability and affordability of insurance coverage in high-risk areas, particularly for traditionally underserved communities and consumers, minorities, and low- and moderate-income persons.
Beyond analyzing potential insurance market disruptions, FIO intends to look at solutions, including identifying best practices for mitigation that can then increase post-disaster resilience, including solutions that can help ensure sufficient availability and affordability of insurance for consumers in light of increasing climate-related disaster risk. In addition, FIO will examine the role of insurers in supporting climate resilience in critical infrastructure, as well as in supporting green investment initiatives.
3. Insurance Sector Engagement: Increase FIO's engagement on climate-related issues; leverage the insurance sector's ability to help achieve climate-related goals.
FIO plans to increase its engagement on climate-related issues and take a leadership role in analyzing how the insurance sector may help mitigate climate-related risks. Throughout this work, FIO will engage with stakeholders, including through this RFI. Additionally, the insurance sector has the ability to shape industries, products, and practices through its functions in the financial markets and broad understanding of risk. Thus, it can influence climate-related activity of other sectors of the U.S. economy. FIO therefore will engage with the insurance sector to assess how the sector may help achieve national climate-related goals, including mitigation, adaptation, and transition to a lower carbon economy. This could include insurance sector consideration of underwriting activities, investment holdings, and business operations to support a low emissions economy. It also could encompass insurance sector transition of its operational and attributable greenhouse gas (GHG) emissions. In addition, FIO plans to consider ways to address the lack of common methodology and standardization in measuring financed emissions, particularly those of non-public companies in which the insurance sector underwrites and invests. Currently, only one state has passed legislation that is intended to leverage the insurance sector's ability to affect GHG emissions.
FIO invites public comments on a series of 19 questions. The responses to this RFI will help inform FIO's assessment of the implications of climate-related financial risks for the insurance sector. It also will help FIO better understand (1) which data elements are necessary to accurately assess climate risk; (2) which data elements remain unavailable; and (3) how FIO could collect this data and make it available to stakeholders as needed. Access to high-quality, reliable, and consistent data will be necessary for accomplishing all three of FIO's initial climate-related priorities. FIO also will identify and issue recommendations on individual actions that can be taken by various insurance sector stakeholders (such as state insurance regulators, insurers, and policyholders) to address climate-related financial risks and facilitate the U.S. insurance sector's transition to a more sustainable future. FIO recognizes that an effective policy response to climate-related financial risk requires an iterative approach and intends to adjust its work and priorities as needed.
FIO RFI:
https://www.federalregister.gov/documents/2021/08/31/2021-18713/federal-insurance-office-request-for-information-on-the-insurance-sector-and-climate-related