American Property Casualty Insurance Association Issues Public Comment on Treasury Department Notice
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Property-casualty insurers have been long-time leaders in addressing the impacts of climate change by advocating for stronger mitigation, resilience efforts, and building codes. As insurers of physical and liability risks, insurance companies confront climate change in the normal course of their business. Property-casualty insurers are experts in understanding and measuring climate-related risk and already address it in their enterprise risk management practices. Insurers continue to enhance modeling capabilities, while developing innovative products and incentives for policyholders to mitigate the risks posed by climate change.
Below please find our comments on the specific questions included in the request for information.
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.
FIO's primary role should be to coordinate the assessment of climate-related risk among the prudential insurance regulators, with the goal of enhancing consistency and avoiding potentially conflicting regulatory requirements. In this regard, FIO should collaborate with the current assessment efforts by the states and the
FIO has a specific role to engage in international affairs, so its coordinating role should extend to its interactions with international bodies, such as the
A review of "gaps" in supervision and regulation is not explicit in the NAIC charges but may be implied by the NAIC workstreams. FIO's collaboration with the states and NAIC can address that aspect of the Executive Order.
Regarding the second charge "to further assess, in consultation with States, the potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change impacts," FIO should coordinate among other federal agencies, as well as state and local authorities, the assessment approach used for climate-related risks, aiming for consistency. In addition, FIO might consider talking with a select, diverse group of individual insurers - in a confidential setting - on how climate-related risks are being reflected in their respective insurance markets and what mitigation measures may be most effective in reducing or preventing the potentially disruptive effects of climate change.
We believe it would also be helpful for FIO to study the long-term potential increase in risk-based insurance costs from climate change as reflected by more frequent catastrophes, such as wildfire, hurricane, tornadic activity, and flooding. FIO could analyze:
1) the cost
2) the additional capital needed to insure such increased risk; and
3) the optimal potential resiliency and mitigation solutions.
2. Please provide your views on FIO's three climate-related priorities and related activities, particularly regarding 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.
To avoid duplication of effort, FIO can play a constructive role in collaborating with the states and the NAIC as they continue their review of all aspects of climate risk and insurance, stressing coordination and consistency in any climate-related risk data collection efforts. The states collect and use extensive data on climate and other relevant, material risks to insurers; all levels of government should be able to use this information to effectively evaluate risk and build consensus on mitigation, resiliency, and reporting. Notably, the states have laws that balance regulatory need and industry rights to protect intellectual property and trade secrets.
FIO should also consider reaching out to non-governmental bodies that may possess relevant research on mitigation and adaption, such as the
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.
Collaboration with the fifteen states that require insurers to report climate change-related data is a good starting point for determining the sufficiency of data - especially since those states' filing requirements align with the reporting framework of the
The lack of consistent emissions data from other sectors will be problematic for insurers; insufficient data may restrict insurers' ability to properly assess climate-related risk to properly price that risk for lack of well-defined and consistent metrics and climate scenario analysis tools for the insurance sector.
FIO and insurance regulators should also remain mindful of current data limitations and other unknowns that relate to the transition to a net-zero economy and, accordingly, avoid hard-wiring prescriptive requirements for insurers.
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
The most significant disclosure challenge is the lack of consistent and reliable emissions data from other sectors and sources. Because the Executive Order contemplates a whole-of-government approach for responding to climate change, FIO could facilitate movement toward the goal of consistent and standardized financial risk disclosures by coordinating with other federal agencies, such as 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.
In addition to collaborating with state-based insurance authorities, FIO could use its relationship with other federal regulatory agencies to improve data availability from other sectors of the economy. Any publication by FIO of climate-related financial risk assessment of insurance markets should include sector-based aggregated data and should not include company-specific data.
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.
Insurers have already developed their own sources of data. A clearly stated purpose for creating a centralized database on the insurance sector and a defined scope and type of climate-related information to be included in any such database would be essential. Unlike the consumer products sector or other non-financial sectors, insurers provide risk transfer products based on proprietary factors, such as insurer risk tolerance, capital management practices, and customer-specific terms and conditions. Use of this proprietary information must address privacy and data protections, as well as enforcement mechanisms to address improper use of the data.
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
State-based insurance regulators are actively considering how to monitor the extent to which insurers are incorporating climate risks and opportunities in their business practices. State insurance regulators have multiple tools available to them to address concerns with consumer protection, market conduct, and financial strength. Evaluating these concerns in the context of climate change, however, is more nuanced, given that climate change occurs over a long period of time and the metrics used in connection with climate change are still developing. Since regulators and insurers must address weather-related perils over a shorter period, we cannot provide a response at this time. However, FIO should consider engaging in a more in-depth discussion of these concerns with state insurance regulators and the insurance industry.
To be clear, the property-casualty insurance industry is well-capitalized and subject to minimal (if any) liquidity risk. Its liabilities are diversified with low market concentration, and backed up with conservative, high-quality assets. Historically, property-casualty insurance failures have been uncorrelated with economic cycles, and in the rare event of insolvencies, policyholders' claims are paid by state guaranty funds. There is no foundation for assuming that climate change could result in systemic risk to the insurance industry. Further collaborative work is necessary to determine whether climate-related risk can propagate systemic risks through key transmission channels (liquidity, credit and counterparty, and substitutability).
We welcome the opportunity to have further discussion about this question.
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?
State regulators monitor and assess insurance companies for all risks. In particular, the Enterprise Risk Report and the Own Risk and Solvency Assessment process are mechanisms for providing on-going information about emerging risks, including climate risk. We are not aware of any structural barriers that have impeded the utility of these reporting tools; however, FIO could push for more harmonization of regulatory practices, such as streamlining forms and terms. Standardizing these practices would be more useful and impactful.
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 state-based system is responding to climate risk as it relates to insurers. FIO is better positioned than the states to coordinate with other federal agencies on how to reduce climate risks that impact insurers. Consistent with its international role, FIO should continue its engagement with relevant international bodies, such as the
10. What factors should FIO consider when identifying and assessing the potential for major disruptions of insurance coverage in
FIO should consult with relevant federal agencies, state and local government authorities, and other relevant sources of information for identifying the most significant climate change-related risks, and what steps can be taken to mitigate those risks to make them more insurable. For example, business and housing development patterns may have exacerbated climate-related risks through policies that have been encouraged by state, local, and federal governments, rather than mitigating them. FIO should also consider the public policy benefits of a risk-based pricing framework as an efficient, market-based tool for encouraging mitigation efforts.
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.
Many geographic areas within the
As a suggestion, FIO should study the legal and regulatory environments of disaster-prone states to understand how difficult regulatory environments may compromise the private market's ability to provide coverage in the most at-risk regions as climate change impacts worsen and make recommendations that might help ease market disruptions caused by the lack of available insurance coverage.
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
As experts in risk management, the property-casualty industry's core competencies include mitigating severe weather-related risk and building resiliency to recover from weather-related disasters. The property-casualty industry supports efforts to better understand the science behind, and the ramifications of, these risks, including the industry's work with the
APCIA helps improve the public's understanding and appreciation of resiliency through awareness programs aimed at risk identification, preparedness and response, and recovery. Understanding the various dimensions of weather-related risks also allows insurers to appropriately balance the risks in their portfolio and provide confidence to reinsurers who play a critical role in providing expanded capital for high-risk markets. Insurers continue to embrace new tools and technology, including forward-looking catastrophe models, to better understand and assess property risk, considering the impacts from climate shifts. Insurers are developing an understanding of climate scenario analysis models and related tools designed to help insurers assess physical risks, transition risks, and liability risks associated with climate change.
Insurers continue to emphasize pre-disaster mitigation, including hardening of homes and businesses. The insurance industry has been proactive in providing consumer awareness tips prior to, and recovery tips after, a loss. These tips include information on how to harden a home or business to reduce the risk of having a loss, often pointing to the materials from organizations such as IBHS.
APCIA also supports federal and state legislation that incentivizes mitigation efforts through tax credits or deductions and/or provide funds through a variety of sources such as tax-exempt retirement plans and more. A good example is legislation that would create a federal tax exemption for funds received from state programs that help homeowners protect their homes from earthquakes, windstorm, and wildfires. A growing number of states have also recognized the need for establishing mechanisms, such as catastrophe savings accounts, to assist property owners in mitigating expenses that may occur following catastrophes.
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?
Proprietary models are used by insurers to assess their risk and manage it. State regulators have the authority to assess the models. For example, the AIR and RMS models are well vetted models that have been in use since the 1990s and are recognized as being useful predictors for hurricane and earthquake risks. They are used to help establish the expected loss at various annual return periods and are also becoming more robust for secondary catastrophe perils, such as severe convective storms, wildfires, hail, and winter storms. The industry and modelers are exploring how to include forward-looking climate projections into those models.
14. How should FIO assess the availability and affordability of insurance coverage in
States routinely review rates and market conduct. The best way to assess availability and affordability is to assess the underlying losses that are the real drivers of insurance premiums. Review of affordability compares premium levels with the level of losses, i.e., a higher level of losses would justify a higher level of premiums to cover the losses. Availability is also determined by losses and whether the market and regulatory environment will allow a sufficient level of premiums to compensate for the losses and the return on the cost of capital to provide coverage. The best approach for addressing availability and affordability issues requires dual action by the relevant governments to make structural changes to reduce losses and by insurers to make premium adjustments, consistent with their economic realities, including the need to remain solvent and competitive.
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?
Community resiliency is an area where public-private partnerships or collaborations have been effective in developing responses to climate change. For example, insurers can engage in efforts to enhance public awareness about the need for effective adaptation strategies to reduce losses related to natural disasters, and can actively support and participate in research, advocacy, and education. Various NGOs, such as IBHS, the
16. Please provide your views on additional ways that FIO should engage with the insurance sector on climate-related issues.
FIO could use its convening authority to bring together industry experts and bridge the regulatory dialogue on climate risk issues. The
17. How should FIO assess the efforts of insurers, through their underwriting activities, investment holdings, and business operations to meet
Insurers are already taking steps to reduce their carbon footprint in their own business operations and by revising underwriting criteria and investing strategies to incentivize other industries to reduce their carbon emissions. These steps are voluntary measures, taken pursuant to their business strategies and sustainability objectives.
State insurance regulators and the NAIC are currently evaluating the ability of the insurance industry to reach net-zero emissions through their underwriting and investing activities. FIO should collaborate with the states and the NAIC in developing a consistent approach for evaluating the efforts of the insurance industry to meet the 2050 net-zero target. FIO may also wish to have direct conversations with, and seek guidance from, specific insurance stakeholders who have expressed a forward-learning stance on climate change.
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.
Insurers have negligible GHG emissions, so there may be little that states need to do to help the insurance sector reach net zero emissions. However, if the question is aimed at whether states (i.e., state insurance regulators) should encourage insurers, in their roles as underwriters and investors, to compel other business sectors to move to net zero emissions, then serious public policy issues would be involved - legislators never intended insurance regulators to exercise such authority. Insurance regulatory authority is and should be to focus on solvency and consumer protection.
The transition to a lower carbon-emitting economy is a society-wide issue that needs to be a collaborative effort between the state and federal governments, and the primary sectors engaged in GHG emissions. As the risk profiles of these sectors moderate, the insurance industry will necessarily refocus their underwriting and investment activities to include new technologies and innovations, which will likely arise as result of transitioning to a lower GHG emitting economy.
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.
The transition to a lower carbon-emitting economy is a society-wide, global challenge. The business of providing property-casualty insurance is not, in and of itself, a significant carbon emitter. As underwriters, however, insurers can encourage mitigation and resiliency efforts among businesses and consumers to reduce the financial impact of physical risks. As investors, insurers are positioned to facilitate an orderly transition of carbon-intensive industries to less harmful business models.
In addition to its work with financial regulators, FIO might consider how it might engage with the regulators of carbon-intensive sectors and offer transitional solutions for reducing climate risk and thereby make those sectors more insurable.
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We look forward to a continuing dialogue as FIO proceeds with its work relating to climate-related financial risks. Thank you for considering the points addressed above, and please do not hesitate to contact us if you have any questions.
Sincerely,
Department Vice President - Financial Regulation
555 12th Street, NW Suite 550
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The notice can be viewed at: https://www.regulations.gov/document/TREAS-DO-2021-0014-0001
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N.Y. State Financial Services Department Issues Public Comment on Treasury Department Notice
American Council of Life Insurers Issues Public Comment on Treasury Department Notice
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