Insurance Coalition Issues Public Comment to Treasury Dept.

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WASHINGTON, Dec. 26 -- The Insurance Coalition has issued a public comment to the U.S. Department of the Treasury. The comment was written and posted on Dec. 20, 2022.

The comment, on Docket No. TREAS-DO-2022-0021-0001, was sent to Steven Seitz, director of the Federal Insurance Office.

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We write on behalf of the Insurance Coalition (the Coalition), a group of insurance companies that share a common interest in federal policy affecting the industry. As a group representing a diverse cross-section of the life and property & casualty insurance industries, we hope that our perspective is useful as you consider the proposed collection of climate-related financial risk data. We appreciate this opportunity to respond to the request for comment.

Executive Summary

We are committed to understanding and addressing the effects climate change may have on our businesses and policyholders. The Coalition will continue to serve as a constructive and critical partner for the Federal Insurance Office (FIO) as it advances its work. Insurers have been adapting and will continue to adapt to a climate that is in a constant state of change. As such, we believe that insurers are likely to remain highly resilient to the effects of climate change and can serve as a source of strength for our policyholders and the broader economy.

The Dodd-Frank Act (in 31 U.S.C. Sec. 313(e)(2)(A)) states that FIO may require an insurer to submit "such data or information as the Office may reasonably require" in carrying out its statutorily authorized functions. While the proposal indicates that the data collection is intended to assist FIO's assessment of climate-related risks and their effects on insurance availability for policyholders, it does not set out a clear objective for the data collection or identify a data gap that must be filled for that purpose. We believe that before moving forward with a data collection which would impose significant compliance costs on the industry, FIO should first identify a problem statement and work with experts to determine what data elements are reasonably required for FIO to carry out its efforts.

Given the robust ongoing work of the National Association of Insurance Commissioners (NAIC) and state regulators, among others, we believe that before moving forward with collecting additional data, FIO can and should consider the myriad requirements that already apply or are likely to apply to US insurers. As a result, any data collection proposed by FIO should take into account existing statutory reporting requirements imposed by state insurance regulators.

Additionally, we are concerned that the proposal neither comports with the Paperwork Reduction Act (PRA) as required under 31 U.S.C. Sec. 313(e)(4), nor adequately defines the problem it is seeking to solve. We ask that FIO respond to these concerns before moving forward with a proposed data collection.

Question 1 - Focus on Underwriting

Question 1 of the RFI asks, "FIO proposes to focus this data collection on insurers' underwriting for homeowners' policies to assess the impact of physical risk on the availability of insurance coverage for policyholders as well as whether the available insurance coverage is affordable for policyholders. Please provide your views on FIO's focus on insurers' underwriting."

Insurance affordability is influenced by a wide variety of factors, such as coverage amounts, market conditions, building codes, replacement cost of goods, and risk exposure, among many other factors. In addition, affordability and availability are dramatically affected by the regulatory environment in a particular state and meaningful state by state comparisons can be difficult.

We believe that, due to the nature of the insurance business model and the flexibility and strength of our regulatory regime, property & casualty insurers will remain resilient to any impacts resulting from climate change and continue to act as a source of financial stability for American households and the broader economy.

Property & casualty insurers are subject to rigorous state-based insurance regulation and investment laws that similarly protect against transition risk. We believe that property & casualty insurers will remain resilient to such risks and are actively managing such risks, as are state regulators. The Federal Reserve's November 2021 Financial Stability Report noted that property & casualty insurers' leverage is affected by climate risk, but that the industry's low leverage allowed it to handle climate-related weather events "without solvency issues."/1

Subsequent Financial Stability Reports have affirmed that leverage at property & casualty insurers remains low./2

Property & casualty insurers generally provide relatively short-term policies using sophisticated underwriting and pricing models based on historical data. Because of the nature of property & casualty insurance policies, insurers' robust risk management practices, and ongoing robust work in the state regulatory system, property & casualty insurers are likely to be highly resilient to climate-related financial risks.

Question 4 - Inclusion of Data Elements

Question 4 of the RFI asks, "The data template includes elements related to insurers' policies, claims, premiums, and losses. Are there any additional data elements you would propose to include? Are there any data elements you would propose to exclude? How should FIO's analysis consider other potential elements such as additional living expenses or reinsurance?"

We believe that any data collection should account for the additional costs burden imposed by requiring to provide additional data elements beyond those included in statutory filing requirements. The proposed collection includes multiple data elements that are not currently part of statutory filings, including: the number of policy in force exposures; total dollar value of coverage for dwelling and/or other structures and personal property; total dollar amount of replacement cost value; total dollar amount of insurance deductible; and amount of direct premiums written, renewed, or retained. FIO's data collection efforts should focus on existing statutory reporting requirements imposed by state insurance regulators as well as the current form that the data exists to avoid significant expense and burden to insurers.

1 Board of Governors of the Federal Reserve System, Financial Stability Report (November 2021).

2 Board of Governors of the Federal Reserve System, Financial Stability Report (November 2022).

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Furthermore, we believe that FIO does not need to collect claims information in order to in assess affordability, as coverage and premium information give sufficient insight.

Question 7 - Collection at Zip Code Level

Question 7 of the RFI asks, "Please provide your views on FIO's proposal to collect data at a ZIP Code level."

The Coalition has concerns about requiring reporting at the ZIP Code level. ZIP Code-level data is too granular to allow for the appropriate assessment of the broader impacts of climate change and would exacerbate the volatility of claims data and render it not decision-useful. There are numerous ZIP Codes in which homeowners face significant long-term weather-related risks of loss that experienced no large weather events and losses in the five-year window, which is normal. Accordingly, collecting five years of ZIP Code-level weather-related loss information would not help FIO accurately assess climate risk in individual ZIP Codes. In addition to the volatility inherent in the occurrence of weather-related claims, we would also expect volatility in any exposure data collected at such a fine geographic categorization as some ZIP Codes may not have a sufficient number of policies outstanding to make the data statistically relevant. It is also possible that ZIP Code-level data will expose personally identifiable information or proprietary information, particularly in remote locations.

Question 8 - Collection Across All Jurisdictions

Question 8 of the RFI asks, "FIO is proposing to collect nationwide data for identified insurers to allow for a nationwide understanding and assessment of U.S. insurance markets that may be affected by climate-related events. Please provide your views on FIO's proposal to collect nationwide data from certain insurers."

The Coalition's members have expressed concern that the proposal will result in an unprecedented undertaking requiring significant financial and personnel resources for compliance. This is particularly true if this data is requested at the ZIP Code level as outlined in the proposal. Additionally, the breadth of the proposed collection (i.e., in every jurisdiction in which an insurer offers coverage) is seemingly disconnected from FIO's stated focus on ten potential "climate-vulnerable states." As such, we believe it is unreasonable that FIO is requesting data across all jurisdictions nationwide.

The issue of climate change and its effect on financial markets and financial companies is being seriously considered by all levels of government, from states and localities to the federal financial agencies, foreign governments, and international regulatory bodies.

Specifically, the NAIC and state regulators have several tools in place to ensure that climate-related risks are adequately monitored. The NAIC has created a Climate and Resiliency Task Force/3 and an Insurer Climate Risk Disclosure Survey./4

Insurers incorporate risks material to their business into their Own Risk and Solvency Assessment (ORSA). Additionally, the NAIC's...

3 Climate and Resiliency Task Force, NAIC, available at: https://content.naic.org/cmte_ex_climate_resiliency_tf.htm, (last accessed Dec. 19, 2022).

4 Center for Insurance Policy and Research, NAIC, Assessment of and Insights from NAIC Climate Risk Disclosure Data (November 2020)

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...Macroprudential Initiative is well positioned to monitor system-wide risks to the insurance sector, including climate-related risks./5

As described above, the ORSA requires insurers to account for asset and other risks and provides an iterative process to measure and address those risks. State risk-based capital requirements adjust as assets move up or down the credit scale - this real-time approach mitigates shocks to insurer solvency. Additionally, state investments laws impose limits on the percentage of assets insurers can hold in any assets class, and the insurance business model requires investment diversification and careful asset-liability matching. Furthermore, the NAIC's Macroprudential Initiative provides regulators with the tools and insight to understand systemwide solvency risks and adjust accordingly. Finally, the Solvency Workstream is reviewing existing solvency oversight tools and conducting a gap analysis to determine what regulatory mechanisms may need to be created or updated to better incorporate climate-related information.

State insurance regulators have also undertaken several workstreams relating to climate oversight through the Climate & Resiliency Task Force. Notably, the Task Force has undertaken workstreams relating to disclosure and solvency. The Disclosure Workstream is intended to build on the existing NAIC Climate Risk Disclosure Survey, which provides information to regulators regarding how insurers manage the risks associated with climate change. In 2022, the NAIC adopted modifications to the survey to bring it into greater alignment with the Financial Stability Board's Task Force on Climate-Related Financial Disclosures (TCFD)./6

Given state regulators' nationwide attention to the issue, as well as the data that state regulators already collect, FIO should continue to engage with them before proceeding with any data collection.

Questions 12 and 13 - Analysis of Availability/Affordability

Question 12 of the RFI asks, "Please provide your views on how FIO should assess the impact of climate-related risks on the availability of insurance."

Question 13 of the RFI asks, "Please provide your views on how FIO should assess the impact of climate-related risks on the affordability of insurance."

We take very seriously our charge to protect policyholders by maintaining financial strength. As this question implies, there is a strong interrelationship between solvency, actuarially sound pricing, value, and availability in property & casualty insurance. Under our system of regulation, one that emphasizes policyholder protection above all else, insurers must charge rates that are neither excessive nor too low - they must match price with risk - to support solvency. Additionally, we support the rate-approval process that requires rates to be adequate - in other words, insurance rates should reflect differences in risk across geographic areas, and net reinsurance margin should be treated as a permitted expense in rate filings.

5 Macroprudential Supervision, NAIC, available at: https://content.naic.org/cipr-topics/macroprudentialsupervision

6 Climate Risk Disclosure Workstream and Climate and Resiliency Task Force, NAIC, Proposed Redesigned NAIC Climate Risk Disclosure Survey (March 2022).

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Insurers work aggressively to control cost by supporting increased resilience to reduce risk and allow for more affordable prices. The Coalition seeks to work with regulators and policymakers at the state and federal levels to mitigate the effects of climate-related weather events on insurance policyholders and markets.

Specifically, we support pre-event resilience funding, with a focus on vulnerable communities. For example, we support increased funding for the U.S. Forest Service, power line safety, and community and individual home actions to reduce wildfire risk. To reduce hurricane risk, we support funding for resilient roofs programs and addressing building codes for at-risk communities. We believe that post-disaster spending should be geared towards building more resilient structures. We also believe that post-disaster responses should maintain the integrity of clear contract terms, which support affordability across the system.

We also support leveraging state-collected data to identify the highest-risk areas to assist in prioritizing allocation of government funds and resilience efforts. Additionally, we believe that protecting underwriting, rating, and form freedom for excess and surplus line carriers helps address availability of insurance and supports the functioning of private markets. Finally, we believe that studying the state residual markets would help produce a more holistic picture.

Question 14 - Additional Comments

Question 14 of the RFI asks, "Please provide any additional comments that may be relevant to FIO's proposed data collection and analyses."

The Coalition is concerned that the proposed data collection does not comport with PRA as required of FIO under 31 U.S.C. Sec. 313(e)(4). For instance, PRA requires a determination that "the collection of information by an agency is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility."/7

Coalition members have expressed concern that the granular nature of the proposal will result in data that is unreliable and unfit for use in drawing larger conclusions about the effect of climate change on property and casualty insurance. As a result, it is possible the data will not have sufficient "practical utility" for FIO.

Additionally, PRA requires agencies to both fully inform respondents about how it will use collected data and protect the privacy of that data./8

FIO's proposal neither fully explains how data collected from insurers will be used, now or in the future, nor outlines a process by which proprietary information (including customer data) will be protected. These questions must be adequately answered before any proposed data collection goes forward.

Conclusion

The Coalition appreciates the opportunity to comment on this important topic. We would be happy to provide additional information and look forward to continuing to engage on this issue as your work on the proposed data collection progresses.

Sincerely,

Chris Brown and Lisa Peto, The Insurance Coalition

7 44 U.S.C. Sec. 3508.

8 44 U.S.C. Sec. 3506(e)(1).

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Original text here: https://downloads.regulations.gov/TREAS-DO-2022-0021-0019/attachment_1.pdf