American Academy of Actuaries Issues Public Comment on Treasury Notice
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On behalf of the
Executive Order on Climate-Related Financial Risk
1. Please provide your views on how FIO should assess and implement the action items set forth for FIO in the Executive Order on Climate-Related Financial Risk.
We suggest FIO first take the description of action items in the Executive Order and map to measurable goals, define the information that is needed to have a baseline for measurement, and put in place a means to monitor improvement. The next step is to work on a plan to encourage implementation of practices that will measurably move from the baseline toward the goals.
FIO's Initial Climate-Related Priorities
2. Please provide your views on FIO's three climate-related priorities and related activities, particularly with regard to whether there are alternative or additional priorities or activities that FIO should evaluate regarding the impact of climate change on the insurance sector and the sector's effect on mitigation and adaptation efforts.
FIO has articulated three very broad goals that can encompass most aspects of what insurers do. It would be helpful if FIO could consider a refinement of the definition of its goals to focus them so various stakeholders are in a position to understand and respond to FIO's priorities. In addition, the goals should point toward measurable items such that progress can be articulated, providing a baseline and movement.
In order to better facilitate measurable progress toward the goals, FIO might instead articulate the priorities as follows:
Insurance Supervision and Regulation. Assess gaps in the overall supervision of the insurance industry in regard to the stability of the insurance sector related to climate impacts. Areas of focus for this assessment include enterprise risk management (ERM), data, disclosures, modeling, and forward-looking assessments. [To replace the original FIO proposal--Insurance Supervision and Regulation: Assess climate-related issues or gaps in the supervision and regulation of insurers, including their potential impacts on
Insurance Markets and Mitigation/Resilience. Focus on the affordability and availability of insurance, particularly for consumers in traditionally underserved populations as well as mitigation strategies to improve resilience. The words "green investment" may be part of this focus as well. The rate adequacy of the insurance markets can either be addressed within this goal or within the Insurance Supervision and Regulation goal. [To replace the original FIO proposal--Insurance Markets and Mitigation/Resilience: Assess the potential for major disruptions of private insurance coverage in
Insurance Sector Engagement. Insurers assisting meeting climate goals generally through underwriting, investment, and business operations; and insurers' underwriting and investment practices assisting in reducing emissions of greenhouse gases specifically. [To replace the original FIO proposal--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
Climate-Related Data and FIO's Data Collection and Data Dissemination Authorities
3. What specific types of data are needed to measure and effectively assess the insurance sector's exposures to climate-related financial risks? If data is not currently available, what are the key challenges in the collection of such climate-related data? In your response, please provide your views on the quality, consistency, comparability, granularity, and reliability of the available or needed data and associated data sources.
Data requirements will vary by type of insurer, the lines of business that an insurer writes, and potentially the geographic regions in which it provides coverage. As a result, the types of data may be specified in general, but may not apply to all insurers. In addition, the data requirements will vary based upon which particular one of the FIO's goals is being addressed. The data to assess the insurance sector's exposure to climate-related financial risks for short-term horizons may be more asset-based for life insurers and more geographic- and directly climatic-based for health and property/casualty insurers. By "directly climatic" data, we are referring to trends in temperature, precipitation, and wind that might also introduce different levels and kinds of risks, as the Actuaries Climate Index makes apparent.
The Actuaries Climate Index(R) v 1.1--created and maintained by four North American actuarial associations, including the Academy--documents changes in extreme occurrences of six climate-related elements of weather and sea level. The index, a measure summing the observations across all of the six elements, covers the
Figure omitted: https://downloads.regulations.gov/TREAS-DO-2021-0014-0032/attachment_1.pdf
For the longer-term horizons, the data for all insurers will be both geographic- and asset-based information. Longer-term horizons might also be better understood with data on the historical evolution of climate-related risks, over time and geographic regions. Estimates of risk might be based on the losses experienced historically as a result of changing climatic conditions, as discussed and defined by the Academy's 2020 publication, The Actuaries Climate Risk Index. A preliminary model, the Actuaries Climate Risk Index v 1.0, provides estimates for the property losses during the period 1991-2016 that could be attributed specifically to changing climate, controlling for changes in exposure.
The work on the Actuaries Climate Risk Index also revealed the need for improved access to high-quality, publicly available data on losses from climatic events. While the
For transition risk, additional data elements--beyond those normally tracked for the monitoring of climate change--and compilations of those additional elements will help with monitoring the status and improvement. These can illustrate the gradual loss of fossil fuel insureds, the risk of stranded assets, the effect on supply chains as a result of the transition (e.g., how the automobile manufacturing industry is impacted when oil falls out of favor), and changes in mortality rates due to particular specific climate impacts. Carbon footprint data from insurers (with regards to their own footprint or that of their invested assets) may be available through the disclosures that some companies are preparing.
Finally, some data that would be essential to project the impacts longer term may not currently be captured in insurers' administrative systems (for example, consistent cause of death codes for climate-related deaths, location of death, etc.). Clear guidance could enable insurers to start monitoring so they and regulators can better understand climate risk for their insured population, as compared to the risks to the general population.
4. What are the key factors for the insurance sector in developing standardized, comparable, and consistent climate-related financial risk disclosures? In your response, please discuss whether a global approach for disclosure standards needs to be adopted domestically for insurers. Please also address the advantages and disadvantages of current proposals to standardize such disclosures, such as those set forth by the
Our research to date has revealed several characteristics of the disclosure protocol in place for insurers since 2010:
A. Insurers have generally been increasing their Yes answers, indicating greater awareness of and responsiveness to climate risks;
B. There exists substantial variability in the narrative responses both by type of insurance product and by size of the company;
C. It is difficult to extract information from the narrative responses with which to create benchmarks or otherwise compare the performance of any individual company to others; and
D. A relatively small proportion of insurers--less than 30% of companies--are responding robustly to the current survey.
As a result of our work with the
A. Examine two gaps:
a. Gap between most robust survey responses and the requirements of TCFD and/or CDP
b. Gap between most robust and less robust survey responses
B. Assess different possible methods of encouraging more robust, informative responses from insurers, including:
a. Careful construction and testing of questions
b. More guidance for preparers
c. More Yes/No and/or multiple-choice questions
5. .Please provide your views on how FIO's data collection and dissemination authorities should be used by FIO to research, monitor, assess, and publicize climate-related financial risk and other areas of the insurance markets that are affected by climate change.
We recommend FIO start with a project roundup based upon the answers to this survey of the existing work and data sources in order to make sure that any data collection activities are not duplicative of other work. FIO may be able to provide a combination of a reference library of what information is available and already compiled in addition to determining if there are gaps that it can fill.
6. What are the likely advantages and disadvantages of a verified, open-source, centralized database for climate-related information on the insurance sector? Please include in your response the types of information, if any, that may be most useful to disseminate through such a database and the key elements in the development and design of such a database.
Currently most insurers and insurance stakeholders spend considerable time weighing the strengths and weaknesses of various publicly available information. While climate information from
Insurance Supervision and Regulation
7. How should FIO identify and assess climate-related issues or gaps in the supervision and regulation of insurers, including their potential impact on financial stability? In your response, please address insurance supervision and regulations concerning: (a) Prudential concerns, (b) market conduct regarding insurance products and services, and (c) consumer protection. In addition, please discuss how FIO should assess the effectiveness of
This is a very broad question, and to truly answer it would require delving into the work that FIO may end up taking upon itself to define its role.
a. Prudential concerns. After defining the time horizon over which it intends to address the regulation of both individual insurers and the industry as a whole, FIO may be better able to identify if there are currently gaps in supervision and regulations. In addition, FIO may want to consider whether the focus is on a by company/group basis or is more broadly related to systemic concerns.
More specifically, solvency issues/risks would be more appropriately split between insurance contracts and investments, and by line of business. For property and casualty (P&C) insurance, contract risk is best addressed by catastrophe models, not by a balance sheet approach.
The NAIC's Catastrophe Risk (E) Subgroup is already examining this issue, so it might be advisable for FIO to begin any work here by reaching out to the NAIC. The most challenging catastrophe model issue may be validation of the relatively new and evolving models beyond hurricane that deal with climate (e.g., wildfire, flood, and convective storms including hail). FIO assistance in projects to provide centralized validation of catastrophe models for climate-related perils may be an appropriate approach. Another approach might be public/private partnerships, evaluating highway loss data and possible new building codes for fire and windstorm hazards.
One caveat to the argument that catastrophe models are the best way to assess climate risk for P&C insurance is un-modeled or under-modeled risk: What impacts of climate risk are not being captured by the models and what is the extent of their effects? Models are changing rapidly to reflect this and consideration should be made to small and midsized companies' lack of bandwidth to adopt as quickly as others. Other than adjusting models, companies are using other approaches to quantification (e.g., additional risk loads, underwriting scores by peril), so regulators should take a holistic view in assessing. Another facet to modeling is stress testing and scenario testing of climate risk. Non-
The ability to re-underwrite and reprice (and change the product terms) on an annual basis has a material impact on P&C industry exposure to climate risk. An insurer can largely avoid developing risks that it understands, so the issue is whether the P&C insurers understand these risks. That is addressed via catastrophe models combined with stress testing and scenario testing.
For health and life insurance, the links between climate change and adverse events has been much less studied than is true for P&C insurance. While there is work underway on many of these issues, the impact of climate change on contract risk is less clear, whether on the long-duration contracts of life or the short-duration contracts of health.
For investments and climate change risk, the issues relate to industry sector, type of investment, and duration of the returns. Short- to medium-term debts are less of a climate issue, as current credit ratings should be able to incorporate any short- to medium-term climate-related investment loss issues. Long-term debt with poor liquidity may be an issue depending on the industry sector. The biggest risk may be real estate and other relatively illiquid investments, such as privately placed investments. The importance of liquidity and time horizon is paramount. If investments are sold as they are downgraded, then risk is only the loss after a downgrade. If held to maturity (due to a strategic decision or because of no secondary market), then duration determines the amount of climate-risk disclosure. For example, a mortgage on oceanfront property that matures in five years has far less risk of investment loss than one that matures in 30 years, if they are illiquid. Similarly, a five-year mortgage on a new gas station is less of an issue than a 30-year mortgage, as gasoline-powered cars will still be a major portion of total cars in five years but maybe not in 30. Finally, if there are analyses that assume no change in investment mix by industry sector, they are flawed, as such an assumption is based on investment departments never incorporating new information.
Transition risk is receiving attention on the investment front. For example, the
b. Market conduct. FIO should also consider whether the concern of supervision and regulation is related to price, availability, or other specified impact on the consumer in general or of particular products. The issues related to climate may be interwoven with other concerns beyond climate, so the interdependence of climate and other matters such as inequitable impacts will need to be articulated.
c. Consumer protection. Consumer protection is also greatly influenced by market conduct concerns.
d. Interdependence of insurance and other industries. The major channels through which climate-related physical, transition, and/or liability risks may impact the stability of the
8. Please identify the key structural issues that could inhibit the ability of insurance supervisors to assess and manage climate-related financial risk in the insurance sector (e.g., accounting frameworks, other standards). What barriers could inhibit the integration of climate-related financial risks into insurance regulation?
Rather than classifying these as major barriers, consider them as challenges to the supervisors:
* Time horizons embedded within core financial statements. This is a combination of accounting frameworks as well as general approaches of many financial statement preparers.
* Global nature of larger insurers. Larger insurers have multiple jurisdictions to consider related to supervision, financial statement preparation, and operating approaches. The multi-jurisdiction approach could be a challenge for the insurers themselves as well as FIO.
* Multiple frameworks under which climate change risk disclosures are produced and evaluated. The existence of multiple frameworks (
9. What approaches used by other jurisdictions or multi-national organizations should FIO evaluate that would help inform it about existing supervisory and regulatory issues and gaps concerning climate-related financial risks? Please describe these approaches, including their advantages and disadvantages, as well as available data sources on these approaches.
The
Insurance Markets and Mitigation/Resilience
10. What factors should FIO consider when identifying and assessing the potential for major disruptions of insurance coverage in
The time horizon for viewing disruptions to the availability and affordability of insurance coverage is a determining factor on how to focus this response. Property insurers are most vulnerable in the short term to climate change impact related to currently measured elements of climatic conditions. Additional impacts on longer-term horizons will affect other insurance coverages such as health, liability, and life.
As mentioned above, a measure of particular climate impacts, the Actuaries Climate Index(R) v 1.1, created and maintained by four North American actuarial associations, including the Academy, documents changes in extreme occurrences of six climate-related elements of weather and sea level. The index, a measure summing the observations across all of the elements, covers the
11. What markets are currently facing major disruptions due to climate change impacts? What markets are likely to be at risk for major disruptions due to climate change impacts in the future? When discussing markets at risk for future disruption, please estimate the likely time horizons (e.g., 5, 10, 20, or more years) when these disruptions may occur.
The time horizon for viewing disruptions to the availability and affordability of insurance coverage varies by coverage. Property insurers are most vulnerable in the short term to climate change impact related to currently measured elements of climatic conditions. Additional impacts on longer-term horizons will affect other insurance coverages such as health, liability, and life. In addition, as fossil fuel sectors potentially decline, there may be impacts on their insurers as well as the insurers of related industries such as aviation, transportation, and automotive.
12. Climate change is currently exacerbating economic losses caused by weather-related disasters and is projected to cause further damage in the future. Please provide information on the actions that insurers have taken in response to the threat of increased economic losses from climate-related disasters, including how insurers are incorporating mitigation and resilience considerations into their business operations, as well as what other strategies or solutions that insurers or
No response provided.
13. To what extent, if any, are models (whether internal proprietary models, open-source models, or third-party vendor models) used in the underwriting process to consider the impact of climate change? How do these models affect pricing of insurance products and business decisions (e.g., level of catastrophe exposure, utilization of reinsurance)? What are the best practices for model validation?
Many property insurers use catastrophe models within the underwriting process in part to determine issues related to concentration of risk combined with determination of the catastrophe portion of the premium. These models are also used by reinsurers for underwriting of contracts as well as in determining the reinsurance price including rate and attachment. These uses cover a short-term time horizon and do not build in longer-term impacts of climate change. Specific considerations include the following:
* Performing validation of catastrophe models. The model governance structure for some companies incorporates a model validation framework for catastrophe models. In addition, a technical analysis of hurricane storm surge risk may be performed outside of the vendor catastrophe models as an additional validation to determine which risks are appropriately being reflected.
* Aligning ceded reinsurance to reflect non-peak perils (often insurers focus on reinsurance purchased by the
* Consider whether geographies may now be essentially uninsurable (e.g., property within 1 mile of south
14. How should FIO assess the availability and affordability of insurance coverage in
As FIO looks at impacts of availability and affordability in both the short term and long term on vulnerable and underserved populations, consider the example of the National Flood Insurance Program (NFIP). Flood peril for many reasons has been considered an uninsurable risk as in its current form it is a threat to insurer solvency. The NFIP struggles with the various considerations of collecting an affordable premium balanced with covering the costs of the program. Please see further details about the NFIP in the Academy's monograph, The National Flood Insurance Program: Challenges and Solutions. For a discussion of comparable issues in dealing with wildfires, see the Academy's paper, Wildfire, An Issue Paper: Lessons Learned from the 2017- 2018 California Events.
15. In what areas have public-private partnerships or collaborations among state or local governments been effective in developing responses to climate change that may be taken by the insurance sector or insurance regulators? How can FIO evaluate the potential long-term or permanent effects on the insurance sector of such public-private partnerships or state and local collaborations to address climate-related risks? How should FIO consider state insurance regulatory efforts on consumer education related to climate risks?
Some of the issues related to the financial impacts of climate change on property are embedded in land-use issues, as that is where development occurs. See a good description of these issues in recent Academy publications related to wildfire and flood.
Insurance Sector Engagement
16. Please provide your views on additional ways that FIO should engage with the insurance sector on climate-related issues.
While not part of the industry sector, the Academy has completed and has many work streams in progress which might be useful to FIO as it seeks to develop a plan of action. Whether it is dealing with flood insurance or wildfires, the climate index or solvency, we have information and expertise we would be happy to share. Please feel free to contact us if we might provide further information.
17. How should FIO assess the efforts of insurers, through their underwriting activities, investment holdings, and business operations to meet
No response provided.
18. What role or actions might states take to encourage the insurance sector's transition to a low emissions environment and an adaptive and resilient economy? In your response, please discuss whether efforts by states to encourage the development of new insurance products, to promote sustainable investment and underwriting activities, and to address protection gaps created by climate-related financial risks might facilitate this transition.
No response provided.
General
19. Please provide any additional comments or information on other issues or topics that may be relevant to FIO's work on insurance and climate-related risks.
No response provided.
Sincerely,
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Footnotes:
1/
2/ http://www.insurance.ca.gov/0250-insurers/0300-insurers/0100-applications/ClimateSurvey/.
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The notice can be viewed at https://www.regulations.gov/document/TREAS-DO-2021-0014-0001
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Americans for Financial Reform Education Fund Issues Public Comment on Treasury Notice
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