Association of Bermuda Insurers & Reinsurers Issues Public Comment on Treasury Notice

WASHINGTON, Nov. 20 -- John M. Huff, president and CEO, and Suzanne Williams-Charles, director of policy and regulation, at the Association of Bermuda Insurers and Reinsurers, Hamilton, have issued a public comment on the Department of the Treasury notice entitled "Federal Insurance Office Request for Information on the Insurance Sector and Climate-Related Financial Risks". The comment was written on Nov. 15, 2021, and posted on Nov. 16, 2021:

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On behalf of the members of the Association of Bermuda Insurers and Reinsurers (ABIR) we welcome the opportunity to provide comments in response to the Federal Insurance Office Request for Information on the Insurance Sector and Climate-Related Financial Risks. ABIR members employ over 43,500 people in the United States and generate income from nearly 150 countries. In 2018, Bermuda re-insurers made up about 36% of the global reinsurance market based on property/casualty net premiums earned, according to AM Best. ABIR members and other Bermuda (re)insurers paid US$209.6 billion to United States (US) policyholders and cedants for large catastrophes, property and casualty losses and life insurance claims during the five-year period from 2016 to 2020.

Question

(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.

The Dodd Frank Act grants FIO certain financial stability, monitoring, and international responsibilities. In addition to advising the Secretary of the Treasury (Secretary) on major domestic and prudential international insurance policy issues and serving as a non-voting member on the Financial Stability Oversight Council (Council), FIO is specifically authorized to: monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the U.S. financial system; monitor the extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income persons have access to affordable non-health insurance products; recommend to the Council that it designate an insurer as an entity subject to regulation as a nonbank financial company supervised by the Board of Governors of the Federal Reserve System (Federal Reserve); assist the Secretary in administering the Terrorism Risk Insurance Program, which was established in the Department of the Treasury under the Terrorism Risk Insurance Act of 2002; coordinate federal efforts and develop federal policy on prudential aspects of international insurance matters, including representing the United States, as appropriate, in the International Association of Insurance Supervisors and assisting the Secretary in negotiating covered agreements; determine, in accordance with certain standards and processes prescribed by law, whether State insurance measures are preempted by covered agreements; and consult with States regarding insurance matters of national importance and prudential insurance matters of international importance. These authorities provide ample opportunity to assess, influence and advance the action items set forth for FIO in the Executive Order on Climate-Related Financial Risk.

Question

(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.

Consideration of how climate risk is integrated into existing regulatory supervision seems an appropriate approach. U.S. insurance regulatory oversight is well developed, and mechanisms exist to oversee risk and capital management, such as the NAIC Own Risk & Solvency Assessment (ORSA). Governance disclosure mechanisms already exist such as the NAIC Corporate Governance Annual Disclosure (CGAD). The FIO should work with other stakeholders to integrate climate risk management considerations into these existing mechanisms and avoid requiring additional parallel reporting requirements.

Question

(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.

Climate change related data has a large degree of uncertainty and what is "reliable" is often still under scientific discussion. Some streamlining of commonly accepted data sources should be agreed. Given the split of climate-related financial risks into three segments (physical, transition and litigation risks), this seems an appropriate framework with which to approach data collection.

* Physical risks: Can be quantified based on climate conditioned proprietary catastrophe model results. Information is therefore available in a readily quantifiable basis, but the underlying methodologies, assumptions and parameters of these models can differ significantly. Standardizing reporting against a small number of recognized scenarios (such as Representative Concentration Pathways or Bank of England's scenarios) and agreed assumptions on the impact on perils would be beneficial to ensure standardization of disclosures. Consistent assumptions about future projections, such as inflation rates would need to be defined to ensure consistent reporting.

* Transition risks: Investment exposures relatively well served by proprietary data providers providing information such as Carbon Dioxide intensity for portfolios. Some significant data gaps exist with respect to certain asset classes, particularly securitized instruments. Transition risk exposure assessment for underwriting is less well defined. A number of global regulators (including Bermuda Monetary Authority) have defined data calls with respect to these factors but there is not, yet a consistent definition of sectors exposed to transition risks against which to report. Standardized reporting against a small number of recognized scenarios (such as Representative Concentration Pathways or the scenarios defined by the Bank of England) would be beneficial.

* Litigation risks: Underwriting exposures, less well served by models or standardized scenarios / stress tests. Currently each company is likely to be developing their own scenarios, although some guidance exists, as provided by the Geneva Association and United Nations Environment Programme Finance Initiative (UNEP FI).

(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 Task Force on Climate-Related Financial Disclosures or the NAIC's Insurer Climate Risk Disclosure Data Survey.

ABIR would recommend alignment to existing disclosure standards, such as Taskforce on Climate-Related Disclosures (TCFD) or Sustainability Accounting Standards Board (SASB), reflecting on the efforts of the IFRS Foundation to create a standardized global response.

For insurers that operate in several States and/or internationally, a common approach globally would be highly beneficial to allow reporting to be as efficient as possible and not distract limited resources from seeking to address the underlying climate risk exposures.

The NAIC Insurer Climate Risk Disclosure Data Survey benefits from being long established, but the nature and level of questions are relatively high level and allow for insurer answering in a non-standard manner. The NAIC has more recently started to accept TCFD disclosures in lieu of a separate report, which is beneficial and a good model for future reporting, to prevent unnecessary duplication.

(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.

One the of the challenges for the insurance industry is the time horizon over which measurable climate change happens is longer than the one-to-three-year planning horizon for shorter-tail lines in a competitive and price sensitive market. The insurance market does, however, have an incentive to support the expansion of what is insurable risk and in reducing the coverage gap. The Federal Government can play an important role in engaging insurance industry capabilities, such as the understanding and modelling of risk, to help in the understanding and planning to maintain the economic viability of insurance products for the most exposed locations and communities.

Beyond supporting and promoting further research, the FIO can play a useful role by working with other federal and state agencies in to ensure that risks remain insurable. Practicality this could include identifying factors that could reduce the severity of any given risk event. In the immediate term this could include encouraging the enforcement of existing building codes and working to avoid the further development of high-risk areas such as the wetlands and those areas prone to wildfire. If well organized, topics such as building code compliance could form a greater part of the insurance pricing cycle, just as factors such as construction type is today.

In the longer, risk reduction could include federal initiatives around, for example, restoring wetlands and mangrove forests on wind exposed coasts and reforesting and vegetation management in wildfire exposed areas. By reducing risk at a community level, benefits can be targeted to those most likely to be impacted by climate change, often those who can least afford increased insurance premiums. Initiatives can also control mitigation strategies in one community which may negatively affect another community, relevant, particularly for to topics such as inland flooding.

Beyond the most obvious property risks, transition risks are also important in the context of climate change and the path to net-zero. The Federal Government can support the transition by plotting a national transition strategy. A well-coordinated plan can help all industries explain, where applicable, their role in the transition to net-zero. Insurers can then better bridge the potential conflict between the S and the E of ESG as they seek to support climate progress while also protecting those workers in industries that are on a transition path.

Question

(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.

A database including detailed definition of underlying scenarios and for physical risk expected changes in peril regions would be beneficial. The database should also include information on assumptions on e.g., inflation and, potentially, mitigation measures or exposure changes. Wider acceptance of the market needs to be ensured. Advantages: 1) responses are standardized and comparable 2) smaller companies can follow a defined approach and don't need to develop methodology and assumptions themselves. Disadvantages: 1) scenarios and/or changes might not be in line with the insurer's or other regulators' assumptions and, thus, might create extra work. 2) diversity of assumption reduces, and the range of possible outcomes gets narrower which might create overconfidence in expected outcomes.

Question

(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.

If regulators recognize the value of TCFD and United Nations Project on Responsible Investment (UN PRI) reporting, or other reports perhaps such as Climate-Wise or UN Principles of Sustainable Insurance, it would be very beneficial for organizations to be allowed to provide these in lieu or alongside their existing comparable regulatory filings, instead of having to provide different disclosures to various regulatory and non-regulatory agencies.

Organizations able and willing to make voluntary disclosures such as TCFD should be rewarded and not penalized by having to repeat disclosures in another format. Where organizations already disclose in another way, such as TCFD, this should be considered and allowed to be referenced or cross-referenced to avoid parallel reporting requirements. ABIR supports the need for supervisors to carefully consider proprietary and confidential information when establishing disclosure requirements. ABIR supports supervisors allowing insurers to meet public disclosure requirements via existing standard general purpose financial reports versus requiring duplicative disclosures for regulatory purposes.

Question

(10) What factors should FIO consider when identifying and assessing the potential for major disruptions of insurance coverage in U.S. markets that are particularly vulnerable to climate change impacts?

The emerging factors will be linked to the insurability of exposures (in terms of frequency and legislative environment) for perils such as wildfire, flooding and winter storms. If the insurance market perceives certain perils and in certain jurisdictions to no longer be fortuitous, but rather inevitable (e.g. wildfire in western States) then it might become uncommercial to offer the cover in the private insurance market, without government backing.

Question

(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 U.S. regulators may want to explore that would help insurers mitigate the impact of climate change and build resilience.

The key role for a federal body should be to influence other federal and state bodies to ensure building standards are enforced, non-porous ground coverings are avoided and development of wetlands and similar is avoided. This will help ensure that more areas remain insurable. The insurance industry can encourage insureds to improve their mitigation and improve their own resilience to climate related events through premium rebates and enhanced protection, but in some jurisdictions, regulators will need to assist this process by providing increasing flexibility on ratemaking, premium rebates, and policy terms.

Question

(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?

Catastrophe models are an essential tool used for underwriting insured risks. In addition, models are also used to help determine capital requirements due to the exposure of the (re) insurer to catastrophes. Each insurer and reinsurer will review the available models, which includes internal, open-source and third-party models, for the regions and perils where they have exposure. In this review, the (re)insurer determines whether the model represents the risk the (re)insurer is expected to pay in the event of a loss. The (re)insurance industry has been actively working to increase the number of models in the market through open-source modeling initiatives such as Oasis. If the model doesn't encapsulate all the considerations in the event of a claim, (re)insurers will adjust the modeled results. Those considerations include items such as unmodeled exposures, additional expenses, unmodeled perils, unmodeled regions as well as changes to climate that may not be incorporated into the available models. Even if the insurer uses a model that incorporates all of those factors for their internal risk analysis and capital requirements, some state insurance departments will not allow the use of a modeled loss as support for an insurance price. Many of the insurance departments that allow modeled losses, will only allow the modeled loss if it is based on the historical average, which is not always representative of future losses due to climate change. Insurers that cannot charge a premium that includes their view of the current climate, may reduce their exposure to these perils and regions.

Question

(14) How should FIO assess the availability and affordability of insurance coverage in U.S. markets that are particularly vulnerable to climate change impacts? In your response, please discuss how to balance maintaining insurer solvency with the need to address the availability and affordability of insurance products responsive to perils associated with climate-related risks, particularly for traditionally underserved communities and consumers, minorities, and low- and moderate-income persons.

Leveraging international re/insurance markets, like Bermuda, for natural catastrophe, disaster prone areas in the U.S. continues to diversify risk and ensure coverage is affordable and accessible for Americans at all income levels. From 2016 to 2020, Bermuda re/insurance paid over $209 Billion to US policyholders and cedants for insured losses including large catastrophes intensified by increased severity and frequency because of the changing climate. International tax proposals under consideration to eliminate or restrict tax competition in global markets are estimated to increase the cost of insurance for U.S. consumers between $10.8 billion and $20.3 billion per year, depending on the tax rates ultimately chosen by policymakers./1

The long-standing reliance on Bermuda-based coverage specifically for property catastrophe coverage is significant. Final passage of any proposals and ultimate implementation should take availability and affordability of insurance products for climate risk losses for Americans into consideration.

Question

(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?

ABIR supports the consideration of a public/private partnership, however this must be carefully considered. Some elements of climate-exposed risk may become simply uninsurable given the combination of the legal environment in some jurisdictions and their climate exposures. Putting risks that cannot be properly priced, or where the interplay of pricing and low take-up creates a market "death spiral", solely into the private market may in certain situations not be consistent with safety and soundness and/or achieving the level of insurance penetration necessary. In those narrow cases, a tailored government solution (ranging from encouraging take-up, to providing affordability support, to a government backstop, and in certain cases to even more extensive government solutions) may be required.

There have been many examples where government intervention for access to insurance purposes has severely damaged market pricing, with resulting predictable negative outcomes (perverse, and climateor resiliency- damaging, incentives; adverse selection and death-spirals; and risk to the solvency of insurers, to name a few). Insurers and reinsurers are market participants. They have great capacity to respond to and give market signals about climate risk, but they are not themselves equipped to cure nonmarket social ills that impact insurance affordability. As such, public-private and non-profit efforts are better mechanism, rather than attempting to put that on the back of insurers and reinsurers.

Insurers and reinsurers (and Bermuda in particular) have stellar capacity to model and price insurance affordability.

Question

(17) How should FIO assess the efforts of insurers, through their underwriting activities, investment holdings, and business operations to meet the United States' climate goals, including reaching netzero emissions by 2050? For example, what steps should the insurance sector be taking to help improve transparency, comparability, and assessment of Scope 1, Scope 2, and, to the extent possible, Scope 3 GHG activities?

FIO will recognize that public listed insurers have commercial pressures to disclosure Greenhouse Gas emission information, particularly with respect to Scope 1 and 2 activities. A level playing field would be created by requiring all insurers to disclose this information publicly. Scope 3 disclosures are currently more problematic to report based on (a) challenges in gather information about third party operations, (b) establishing the boundary with third parties such as vendors and partners (such as brokers, agents and reinsurers) and (c) establishing attribution rules for partners where an insurer may only represent a small proportion of the partners economic activity.

Conclusion

ABIR appreciates the opportunity to present these comments. The ABIR Climate Committee's objectives include promoting the importance of climate resilience and sustainability. Our membership includes companies that employ scientists and insurance professionals with decades of experience in evaluating climate-related risks. ABIR offers our technical expertise to support FIO as it navigates its work on insurance and climate related-risks and looks forward to an opportunity to answer questions and further engage in a dialogue about these matters.

Sincerely,

John M. Huff, President and Chief Executive Officer

Suzanne Williams-Charles, Director of Policy and Regulation

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Footnote:

1/ Dr. Lars Powell," Estimating Potential Effects of the Global Minimum Tax on Catastrophe Insurance Markets", R Street Institute, 2021.

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The notice can be viewed at https://www.regulations.gov/document/TREAS-DO-2021-0014-0001

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