American Council of Life Insurers Issues Public Comment on Treasury Department Notice
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Thank you for the opportunity to provide comments to the Federal Insurance Office (FIO) Request for Information (RFI) following the
Executive Summary
Life insurers are committed to working with policymakers on climate change. As long-term investors and experienced managers of long-term risks, life insurers are inherently interested and actively engaged in understanding how climate change may impact the risks they assume and the supporting investments they make.
ACLI members stand ready to share their uniquely informed perspectives with FIO as it responds to the Executive order and considers the three initial climate-related priorities identified in the
To this end, we offer the following overarching perspectives, which are followed by more detailed responses to questions within the
It is important that FIO:
* Consider the climate-related work the NAIC and state regulators are undertaking to identify and address any supervisory gaps that may exist at this time.
* Work with relevant standard-setting organizations and governmental entities to promote greater understanding of the specificities of the
* Monitor the extent to which climate-related efforts affect traditionally underserved communities and consumers' access to affordable life insurance products./3
* Engage with the industry in dialogue directly and via stakeholder meetings (e.g., the
* Advocate for harmonized, principles-based global standards and tools that adequately address US insurance market-specific approaches to elements such as definitions, taxonomies, disclosures and scenario analyses, as appropriate.
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./4
As FIO is aware, ACLI's member companies are part of an industry that is highly regulated by multiple entities, including state insurance regulators, the
Internationally, the list of organizations proposing approaches to enhance disclosure, assessment and management of climate-related risks includes the Financial Stability Board (FSB) and its
For life insurance companies, climate-related risk will manifest primarily through credit risk or market risk impacts on asset portfolios./5
In our response to Question 7 below, we discuss these impacts from a macroprudential, financial stability, perspective. From a micro-prudential perspective, credit and market risks are not new for life insurers and their supervisors. FIO's assessment should take account of: the existing regulatory environment; the tools under development that are specific to the physical and transition risks from climate change; and the nature of the exposure of life insurance companies to climate-related risks.
The NAIC has been performing a "gap analysis" that is thematically similar to FIO's assessment.
* The Climate Risk Disclosure Workstream of the
* The Solvency Workstream of the
At the federal level, in June the
We share these examples to highlight how multiple organizations are already assessing the existing landscape and will implement new or modified tools that will provide greater insight into insurance companies' exposure to climate related financial risks, leading to more effective management and supervision. FIO should afford these initiatives time to be implemented, mature and be refined, as needed, before determining if there are gaps in the supervision and regulation of insurers.
That said, in keeping with its mandate of identifying regulatory issues and/or gaps, FIO can play an important role with relevant standard-setting organizations and governmental entities to promote greater understanding of the specificities of the
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's three priorities: Insurance Supervision and Regulation;/11 Insurance Markets, Mitigation and Resilience;/12 and Insurance Sector Engagement/13 seem generally reasonable and appropriate.
Supervision and Regulation
ACLI members note that the Executive Order tasked FIO with conducting a supervisory gap analysis. However, as more fully explained above, FIO can and should leverage the analysis that is already underway by multiple supervisory bodies. Moreover, FIO should allow time for the extensive regulatory work being done by the NAIC and state regulators to be implemented, mature and be refined, as needed, before initiating additional efforts or reaching any definitive conclusions.
As FIO considers the existing supervisory frameworks in conjunction with the implementation, maturation and necessary refinement of climate risk specific supervisory tools, we encourage FIO to take into account:
1) The life insurance sector's history of playing a critical stabilizing role and helping society navigate a range of challenges and perils./14
Identifying and managing long-term risks is fundamental to life insurers' business model due to the long-term nature of the liabilities the industry issues, such as life insurance, annuities and long-term care insurance. These long-term liabilities must be appropriately backed by long-term assets such as corporate bonds, government bonds and mortgages./15
Time has proven that the life insurance sector's investment in long-duration, illiquid liabilities, asset/liability matching, and strong risk management policies and processes result in well-diversified investment portfolios built to withstand market downturns or other market disruptions, such as those potentially arising from climate change;/16 2) Existing approaches to insurance solvency have proven durable over a range of crises./17
For example, the
This report, with its acknowledged limitations,/19 concludes that, "[W]hile 35 per cent of insurers' investment assets are exposed to climate risk, even in the most extreme scenario ("too little too late") the industry appears able to absorb the losses."/20
3) The inherent uncertainty in the evolution of climate risk considerations, including the significant policy, societal and technological variables.
This uncertainty creates challenges for accurate quantification of the impact of climate-related risks. As stated aptly by the Financial Stability Board:
"Risks to the financial system from climate change tend to be particularly uncertain in both their severity and the time horizon over which they might crystallise. They may also be more dependent on measures taken by policymakers."/21
This uncertainty should inform current efforts around climate-related data and scenario analysis. Indeed, the focus of the regulatory community should be on remaining agile and adaptable in order to properly account for the risks depending upon how the transition unfolds.
From both a risk management and a prudential supervision perspective it would be imprudent for supervisors to create an environment in which insurers are pressured to act on the basis of highly speculative assumptions and outcomes predicted by such assumptions./22
Insurance Markets, Mitigation and Resilience
With respect to FIO's second priority it is important to distinguish among different insurance sectors. For the many reasons laid out in this response, including those in Question 7, while it is appropriate for ACLI members to consider issues relating to mitigation and resiliency, we do not anticipate that there will be major disruptions to the
Insurance Sector Engagement
With respect to FIO's third priority, everyone, including life insurers, has a role to play in supporting an orderly transition to a less carbon-intensive and more climate-resilient economy. Life insurance companies can and are playing an influential role in helping societies transition through long term investments such as real estate and infrastructure projects.
Furthermore, we note that this Administration has emphasized the importance of taking a 'whole of government approach' to climate-related matters. That is, the work being done across the federal government should not be fragmented, siloed or repetitive. FIO is well-positioned to use this same 'whole of' approach by considering the extensive state, federal and international activity referenced in Question 1, above, to seek to avoid activities that are fragmented, siloed or repetitive.
FIO can play a key role in bringing together expertise to ensure that the strengths and experience of the insurance industry in managing risk are understood across these various regulatory forums and to avoid potential unintended consequences of inconsistent or inappropriately tailored proposals that weaken the industry's ability to help American families achieve financial security./24
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.
To measure and effectively assess exposures to climate-related financial risks, insurance companies need data to assess an investee's current and future environmental footprint. This data may include elements such as: exposure to physical and transition risks associated with climate change, carbon emissions used in the production or use of the investee's products and services, targets for reducing their carbon emissions and plans for meeting those targets, etc.
Efforts by FIO to promote access to credible, decision-useful data by issuers, including government issuers, is an important means for enhancing the ability of life insurers and other institutional investors to assess and report their own exposure to climate related risk. Such efforts would complement the pressure that life insurance companies are putting on investees in this regard./25
More broadly, it is important for all to acknowledge that the availability and quality of the data that are needed to inform an assessment of climate-related financial risks will continue to develop as climate-related risk disclosures become more common. As the quantity and quality of data increases, life insurance companies' ability to assess such risks and take corresponding measures to mitigate such risk will also improve.
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
Key factors that should anchor efforts to expand climate related disclosures are (1) credibility of the data, (2) applicability of that information to decision-making and (3) appropriateness of the reporting framework for the insurance sector. An appropriate disclosure framework would be principles-based, market driven, proportional, sector-specific and include appropriate safe harbors. As noted, above, the NAIC, TCFD,
It is important that FIO let the activities impacting the sector, including work by the NAIC and
While climate disclosure frameworks continue to evolve domestically, FIO should engage with the IAIS and the ISSB and through the
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.
Any data collection efforts FIO undertakes should leverage publicly available information, which will expand over time as the NAIC and
FIO should also consider the NAIC's ongoing efforts to monitor the life insurance industry's General Account investment holdings in aggregate which can enable the NAIC to track how portfolio holdings evolve over time based on net new investment activity.
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.
Due to the nascent and frequently inconsistent nature of the climate data available, it is likely premature to assess any open-source database needs. As climate disclosures become more standardized and the volume of data reported grows, a discussion between FIO and our industry about the specific needs for centralized "climate-related information" would be beneficial. A discussion of what FIO means specifically by both "open-source" and "verified" would also be helpful.
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
We recommend that any assessment be guided by the fundamental understanding that climate-related risk will impact the life insurance and non-life insurance sectors differently because life insurers' business models are less likely to be impacted by physical or liability risks than other insurance sectors./26
The long-term promises life insurers make to their policyholders require life insurance companies to engage in ongoing risk assessments of their investment portfolios. Life insurers review the composition of investment portfolios and investment strategy and consider the impact of emerging, established and potential risks, including climate related risks. Life insurers use these assessments to determine whether to make responsible adjustments and transitions to their existing portfolios or capital planning strategies. Consequently, due to its long-term outlook, ongoing risk assessment and processes, and the diversification of investments, the life insurance business model has proven to be a source of economic stability.
From a product offering perspective, a severe weather event is unlikely to impact the design and distribution of life insurance company products in the immediate term. Over the long term, life insurance companies do adjust the design and distribution of their products based on long-developed and tested experience studies and processes that track expectations of morbidity, mortality and policyholder behavior.
From a macroprudential perspective, it is not clear that impacts on the life insurance industry due to climate change would be transmitted to the broader financial system or necessitate government intervention, and we encourage FIO to view the life insurance industry as a part of the climate risk solution. Because life insurers often seek long-duration investments to match long-term promises to policyholders, life insurers are well-positioned to help provide stable financing to support the societal transition.
ACLI members fully recognize the challenge and seriousness of climate change and are committed to continuing to play their part to address the impacts of climate change. Climate-related risks will inform the way the life insurance sector manages exposures it has already assumed. Consequently, such risks are being increasingly incorporated into enterprise risk management (ERM) processes. However, our members do not expect the transition to low carbon economies will result in life insurers causing or meaningfully contributing to financial stress.
State regulators have long tailored regulatory frameworks around the different characteristics and business models of the US insurance system through implementation of layered risk management, solvency and disclosure requirements. In addition to the frameworks currently in place in the states,/27 as noted above, the NAIC has multiple workstreams addressing climate risk specific topics. This multi-faceted approach by state regulators is exemplified by the NAIC's advancement of its Macroprudential Initiative, which followed the NAIC's Solvency Modernization Initiative (SMI)./28
The SMI led to the development and implementation of enhanced supervisory and risk management measures, including the Own Risk and Solvency Assessment (ORSA) summary reports and Form F, Enterprise Risk Reports. The ORSA is designed to foster an effective level of enterprise risk management by requiring insurers to continuously identify, assess, monitor, prioritize and report on any risk - including climate risks - that pose a material and relevant risks to an insurer's business or solvency. In addition, in August of 2021, the Macroprudential Initiative of the NAIC completed its own Liquidity Stress Test Framework and has created a
FIO can and should play a role in educating standard-setting bodies and regulators about the stabilizing impact that life insurers' long-term investment strategy can have on the economy, and the need for responsible transition periods to help prevent precipitous, negative policy actions that cause the very harm to financial stability that is sought to be prevented./29
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.
In general, no structural barriers prevent state insurance regulators from ensuring that life insurers are assessing and managing climate-related financial risk. The current high level of activity by the
While state insurance regulators seek to enhance and refine climate-related financial disclosures, the highly conservative insurance solvency framework has proven durable over a range of crises, including the 2008 financial crisis and the COVID pandemic. As noted in Question 1, from a microprudential perspective, the potential impact of climate change on financial assets includes valuation impairments, defaults, and similar events which are already captured through various elements of the existing solvency and reporting frameworks. Therefore, while disclosure and solvency frameworks may need to be modified to further incorporate climate-related risk, state regulators are currently engaging on this in a thoughtful and deliberate manner to minimize unintended consequences that could destabilize life insurers and undermine policyholder protections./30
As explained in Question 7, above, the NAIC's Macroprudential Initiative, which aims to better understand insurers' contribution and exposure to systemic risks and financial market contagion, is an example of the deliberate process available and utilized when developing new disclosure and solvency requirements.
While not a structural issue of state insurance regulation, access to credible, decision-useful data from investee companies presents a challenge for ACLI members. Further perspectives of ACLI members on access to climate-related data and disclosure can be found in our responses to Questions 3 and 4.
Finally, as noted in Question 1, above, FIO can play a key role in advocating for harmonized, principles-based global standards that adequately account for specificities of the US insurance market.
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.
As noted above, many robust efforts are currently underway to address climate-related risk. As a state-regulated industry, we would first note the efforts of our state regulators. As detailed in Question 1, the NAIC is approaching this issue from various perspectives already, including engaging in a gap analysis similar to what is being outlined in this
The NAIC and state regulators have a combination of tools that generate public and confidential data sources. For example, responses to the
Similarly, insurers provide state regulators with robust and granular data regarding their investment portfolios. This information could be leveraged on an industry-wide basis to assess exposure to certain sectors or types of investments. At the same time, state regulators receive confidential and company-specific risk assessments and strategic information through the ORSA and Form F Enterprise Risk Report. This construct allows the primary regulators to receive candid internal assessments about emerging risks, including climate change, and engage in thoughtful conversations about their impact./32
ACLI is supportive of FIO investigating the experience of other jurisdictions to inform its approach to achieving its climate-related priorities. Yet we would underscore the need to account for specificities of the
We would highlight the following experiences:
* It is important to sequence disclosure requirements so that consistent and reliable data is available to companies that are required to make disclosures.
* Overly prescriptive taxonomies can introduce complexity and rigidity into how climate-related risks should be managed and disclosed. This reinforces the view that adaptive, principles-based frameworks and taxonomies are more suitable for climate risk.
* Regulatory and supervisory authorities have established forums (e.g., the
In light of the many emerging frameworks, FIO can play an important role in communicating, and representing the perspective and policy objectives of
10. What factors should FIO consider when identifying and assessing the potential for major disruptions of insurance coverage in
As noted in Question 7 above and for reasons set out elsewhere in this response, ACLI members do not expect that climate change and orderly transition to a low-carbon economy will result on significant disruptions to the life insurance sector.
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
Weather-related disasters can affect every industry. Life insurers' core risk management processes include operational resilience considerations to help mitigate that risk. The insurance sector has demonstrated its ability to adapt to emerging risks - including new risks. For example, most recently, at the beginning of the COVID pandemic insurance companies quickly transformed into a "touchless" business without interrupting key processes (including claims payment and policyholder services, as well as cash processing, financial reporting and investment management)./33
Significantly, this rapid transformation was done in partnership with state regulators. We would encourage a similar collaborative, consultative and adaptive approach to managing climate-related disruptions.
14. How should FIO assess the availability and affordability of insurance coverage in
ACLI Members are deeply committed to providing affordable products and services to traditionally underserved communities and consumers, minorities, and low and moderate income persons and stand ready to act as a constructive partner with FIO and all interested FSOC members as FIO embarks on a coordinated approach with stakeholders to "[a]ddress[. . .] the impacts of climate change on financially vulnerable populations"./34
16. Please provide your views on additional ways that FIO should engage with the insurance sector on climate-related issues.
The best way for FIO to engage with the life insurance sector on climate-related issues is to engage with companies and trade associations to gain a richer understanding work currently underway and of distinctions between types of insurers and their different challenges posed by climate change. Such engagement would position FIO well to promote positions that work for the US market in its engagement in international forums such as the IAIS and the FSB.
The insurance sector would also greatly benefit from FIO closely collaborating with the NAIC, which sets standards for and provides accreditation of state insurance regulators.
17. How should FIO assess the efforts of insurers, through their underwriting activities, investment holdings, and business operations to meet
In assessing the progress insurers are making to meeting the
With respect to Scope 1 and 2 activities (direct and indirect GHG emissions as a result of an individual company's operations) life companies are actively taking steps to reduce the carbon emissions of their operations. Insurers are also enhancing disclosures of their Scope 1 and Scope 2 GHG emissions for their operations.
As the question itself acknowledges, Scope 3 emissions (which includes suppliers) will be more difficult to monitor, as it requires access to climate-related data by all of a life insurance company's suppliers (such as cloud and datacenter vendors, delivery and transportation suppliers, and other potentially carbon-intensive service providers)./35
We note that this is not an insurance sector or FIO issue specifically, although as investors life insurance companies are encouraging our investee companies to disclose their emissions, which may in turn spur efforts for standardizing the methodology.
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.
While the push for sustainable investing and climate resilience in investments and disclosures has recently gained traction, as noted in responses to Question 1 - 7, life insurers have been focusing on and addressing the potential impact of climate change risks for some time in their General Account portfolios.
New products are entering the market that allow policyholders to choose sustainable investments for their Separate Account policies. We anticipate that access to these types of innovative products will grow in response to an increased demand.
ACLI and its member companies are addressing resilience on multiple fronts. We are actively involved in efforts to close the coverage gap to ensure that populations that have historically been disenfranchised and economically impacted by climate change, are gaining financial security through an array of targeted products and investments.
19. Please provide any additional comments or information on other issues or topics that may be relevant to work on insurance and climate-related risks.
ACLI's member companies appreciate the thorough engagement by FIO and stand ready to provide additional comments and information as new questions or issues arise.
Thank you for allowing us to participate in the important inquiry. Please let us know if you have any questions or require any additional information.
Very truly yours,
View footnotes at https://downloads.regulations.gov/TREAS-DO-2021-0014-0019/attachment_1.pdf
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The notice can be viewed at: https://www.regulations.gov/document/TREAS-DO-2021-0014-0001
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