Americans for Financial Reform Education Fund Issues Public Comment on Treasury Notice
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The Americans for
The insurance industry, controlling
Insurance companies are both exposed to climate risk and drive additional systemic climate risk through multiple channels. They have exposure to physical risks in their underwriting and investments in climate-vulnerable properties, businesses and communities; exposure to transition risk through their underwriting and investments in fossil fuel projects and other emissions intensive industry; and they drive systemic risk through the greenhouse emissions that they finance and underwrite and through the ways they exit insurance markets as climate change accelerates.
The systemic risks created by this cycle of dangerous activity--using property insurance premiums to fund climate damaging investments which further endanger policyholders--fall disproportionately on BIPOC communities and exacerbate racial and economic inequality.
FIO should collect and disseminate climate risk data and support regulatory efforts towards standardized disclosures and enhanced supervision related to climate risk and racial and economic justice.
A fundamental challenge for financial actors in responding to climate change is a lack of standardized methods for data collection, disclosure, and the incorporation of that data and climate scenarios into governance frameworks, risk management, business strategies and supervision by regulators. FIO has a key role to play in convening stakeholders and should work with the
With regard to physical risks from climate-fueled disasters and chronic damages, FIO should collect and disseminate data from insurers on property claims payouts, claim rates, premium rate increases, rates of non-renewals, claims denial, and systematic regional exits of property insurance markets (or "bluelining") in climate-impacted areas, which often occurs without adequate disclosure./1
FIO should work to identify trends, especially in areas following climate disasters, and disaggregate data to determine disparate impacts on the affordability and availability of coverage in underserved communities and communities of color. FIO should work with
Insurers and regulators also must begin to use climate scenario analysis and stress testing to better understand their risks from climate change, ensure their solvency in the face of future disasters, regulatory and market changes, and to inform policyholders about their own forward-looking risks and the likely cost increases of insurance coverage.
FIO should work with insurers and state regulators to incorporate climate scenarios--such as those outlined/2 by the
* a 1.5 degree Celsius warming scenario consistent with science-based emissions targets
* a 2 degree scenario
* a 3 degree scenario
* the extent to which a firm's decarbonization goals and climate strategy depend on the availability of carbon offsets, factoring in orderly and disorderly transitions.
State regulators should incorporate scenario analysis and climate stress testing into supervision and examinations for insurers.
Insurers must provide accurate, comparable, and decision-useful climate disclosure so that regulators, investors, market participants, and the public are able to assess the climate risk that insurance companies face and hold them accountable for their contribution to the climate crisis.
FIO should support efforts to require disclosure of Scopes 1, 2, and 3 greenhouse gas emissions/4 (including financed emissions) and the efforts of the
Underserved communities in particular face a host of challenges related to climate risk, including lacking financial resources and access to capital to build climate resilience, higher levels of physical vulnerability due to location and the built environment, and fewer financial resources for post-disaster recovery./6
Insurers and state regulators have a responsibility to proactively consider and mitigate potential disparate impacts related to affordability and availability of property insurance as well as the impact of insurers' investments in lower income communities and communities of color, which bear disproportionately the harms of toxic fossil fuel pollution that insurers' finance and insure.
It's critical that environmental, racial, and economic justice is incorporated into climate supervision and enhanced disclosure requirements. FIO should work with insurers to develop strategies around promoting environmental, racial, and economic justice and enhance outreach and engagement efforts towards affected or vulnerable communities and clients.
FIO should address the cycle through which investment portfolios - invested in riskier assets to respond to climate change driven losses - in turn contribute to further climate change
Insurance companies are exacerbating the losses on their policy books as they try to make up for losses that result from the greater frequency and costs of disasters resulting from climate change.
Losses by property and casualty insurers have been trending higher since the 1980s, marked by certain catastrophic years where losses are many times those of the prior years. Insurers in 2017 experienced a record
In order to generate greater investment income to make up for insured losses in 2017, property and casualty insurers invested larger portions of their investment portfolios in riskier corporate debt and securitizations,/8 many of which are widely invested in fossil fuel companies./9
There is a vicious cycle here: after taking losses due to climate change, insurers systemically ended up taking on greater amounts of credit risk and further financing the very activities that drive climate change caused losses.
FIO should investigate insurance company financing of shadow banking; true extent of potential losses from stranded assets unknown
Since 2008, insurance companies have been playing a much greater role in providing financing to 'real economy' companies, in the process stepping into a role traditionally played by banks. Such activity is often referred to as "shadow banking" and takes place in the form of insurers investments in corporate debt and corporate loans packaged into securitizations called Collateralized Loan Obligations (CLOs).
CLOs have been active providers of financing to the shale oil boom in the past decade./10
And insurers have contributed significantly to CLO growth, with the industry's holdings of CLOs growing by an astounding 863% over the past decade from
As FIO seeks to understand the full extent of carbon emissions being financed by the portfolios of insurers, the department and state regulators must also have the ability to look-through to the underlying companies being financed by securitizations such as CLOs.
They also need this information to understand risks to insurers. Over the past decade, oil and gas explorers have burned through an estimated
It is therefore vital for FIO to accurately assess how much of insurers portfolios are directly and indirectly exposed to fossil fuel companies that may become stranded assets as the energy transition accelerates. FIO and state insurance regulators should consider utilizing data services that receive monthly updates as to the underlying holdings of CLOs and other securitizations.
Given the large role that insurance companies play in financing shadow banking and the vulnerabilities insurers face from either absorbing large capital shocks from climate change or in financial losses on their portfolio from the energy transition, FIO should publish a quarterly report that summarizes the insurance industry's investment portfolio holdings, including looking through securitizations such as CLOs, including information on how much the industry is contributing to Scopes 1, 2, and 3 greenhouse gas emissions.
In addition to action by FIO, to the extent that FSOC finds that insurers are posing threats to the financial system through their extensive shadow banking financing and/ or their exposure to climate-related risks, it should use its authority to designate individual insurers as Systemically Important Financial Institutions (SIFIs).
FIO needs to work with the NAIC and state regulators to reverse the loosening of capital requirements
Climate-related insurance losses are continuing to rise, but these risks have not been incorporated into the NAIC's risk based capital (RBC) charges. As long as NRSRO ratings, which determine the NAIC's capital charges, ignore climate risks, there is a serious danger that insurance companies will be unprepared and potentially undercapitalized against future losses.
In the context of this failure to incorporate climate risk into capital standard setting, it is particularly alarming that the NAIC is in fact loosening the capital standards for "junk" or "sub-investment grade" investments/12 based on arguments from the
Meanwhile, investors in higher-rated and supposedly safer debt have already been surprised by losses due to catastrophic climate events. One example is the
Going into 2017,
The case of
FIO must coordinate with the NAIC and state regulators and incorporate the scenarios outlined under NGFS to ensure that insurers are adequately insured for what are expected to be more frequent and increasingly more costly climate events.
FIO needs to better monitor the effects of private equity management of insurers portfolios
Insurers chasing after higher-yielding securities following natural disasters highlights an uncomfortable reality for regulators: in a monetary policy environment where interest rates have been set close to 0% to urgently support an economic recovery and foster maximum employment, insurance companies are moved to take on greater amounts of risk as returns across corporate debt and securitizations fall lower and lower./15
The current yield on "junk" corporate bonds averages around 4% compared to insurers' target returns of 7%;/16 as a consequence, insurers are either taking on much greater amounts of credit risk to reach their targets or outsourcing their investment portfolios to private equity firms which are not subject to the same disclosure requirements.
To capitalize on such demand, private equity giant
Insurers have become such reliable sources of new capital and fees for the private equity firms that in the instance of
Since then, several other private equity firms have acquired insurance company assets, including KKR acquiring insurer Global Atlantic,
Many of these same private equity firms continue to finance new pipelines and extend lifelines to coal companies./20
FIO in conjunction with state regulators should conduct a separate study on the growing private equity ownership and management of the insurance industry, including assessing how much of their portfolios are being invested directly in both public and private fossil fuel assets after such transfers. Beyond the climate context, FIO should look generally at the impacts of PE ownership and control of insurance assets, including impacts on opaque and illiquid investments.
Conclusion
We appreciate FIO's formal acknowledgement that climate risks pose systemic risks to the financial system. We also commend FIO for recognizing the significance of the role it can play in combating climate change as a monitor for the insurance industry and policy coordinator across state and federal agencies.
Insurers face great physical risks to their policy liabilities from climate change and they play a major role in financing the industries contributing to climate change through their collective
We urge the Treasury Federal Insurance Office to:
* Work together with state regulators, the NAIC, OFR, and individual insurers to collect the climate data necessary to conduct a thorough scenario-analysis under NGFS to set the appropriate prudential standards for insurers. Such data includes:
- Scope 1, 2, and 3 emissions, including financed and insured emissions
- Qualitative disclosures in-line with those of the TCFD.
- In conjunction with
* As a non-voting member of FSOC, recommend individual insurers it determines should be designated nonbank SIFIs, including financed greenhouse emissions in the criteria for designation.
* Work with individual insurers on setting goals and achieving net zero emissions targets
* Subscribe to the necessary data services to be able to look through the underlying holdings of securitizations such as CLOs to more comprehensively assess on a quarterly basis the risks insurers face from both transition risks as well as their contributions to scope 1, 2 and 3 emissions
* Monitor the impacts of insurers outsourcing of portfolio management to private equity, as well as PE firms' acquisition of insurers, and whether PE firms are increasingly allocating insurers investments into more opaque investments that contribute heavily to carbon emissions.
We appreciate your consideration of these issues. If you have any questions please do not hesitate to reach out to
View footnotes at https://downloads.regulations.gov/TREAS-DO-2021-0014-0010/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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