Liberty Mutual Insurance Issues Public Comment on Treasury Notice

WASHINGTON, Nov. 20 -- Edmund C. Kenealy, executive vice president and chief public affairs officer at the Liberty Mutual Insurance, Boston, Massachusetts, has 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 Liberty Mutual Insurance (Liberty Mutual),/1 I appreciate the opportunity to provide comments to the Federal Insurance Office's Request for Information on the Insurance Sector and Climate-Related Financial Risks ("RFI")./2

Liberty Mutual exists to help people embrace today and confidently pursue tomorrow. This belief is underpinned by our conviction that insurance is a socially responsible product, delivering security to individual consumers and businesses. We assume risk across several industries and support different aspects of economic activity. Our company insures homes, automobiles, and businesses small and large throughout the country and the world through a diverse suite of property and casualty (P&C) products. Through those products, we promise our customers protection from the unexpected including damage from natural catastrophes resulting from climate change.

At the outset, it is important to note that the risks posed by climate change are not new to Liberty Mutual or the P&C insurance sector. As one of the largest P&C carriers in the world, we have extensive experience with the underwriting and investment risks associated with climate change, operate in jurisdictions with extensive climate risk regulations such as the United Kingdom and the European Union, report using the recommendations provided by the Taskforce on Climate-Related Financial Disclosure (TCFD), are the first U.S. P&C insurer to become a signatory to the Principles for Responsible Investment (PRI), and participate in the Partnership for the Carbon Accounting Framework (PCAF) as well as the Taskforce on Nature-related Financial Disclosures (TNFD). In fact, over the past several years, we have engaged in an extensive undertaking to understand how we can best incorporate the risks of climate change into our business. We have established a corporate governance structure around evaluating climate change risks through our Board of Directors, our Executive Leadership team, and through the establishment of an enterprise-wide Climate Council to manage climate-related risks and opportunities. Our enterprise risk management function includes climate scientists who provide expert insights on climate risks on a day-to-day basis. These scientists as well as others have reviewed copious amounts of data and models to understand the areas where such information has utility as well as any limitations. We believe this work is critical for our risk management and the views outlined in this comment letter are informed by our experience and the significant amount of work we have undertaken in this area.

It is also important to acknowledge that P&C insurers like Liberty Mutual are mitigants to the impacts of climate change, but their ability to do so is not boundless. That is why it is critical that the public sector at home and abroad develop a holistic approach to address climate change and its devastating impacts. Such measures could include:

1) Measures that ensure businesses (including insurers) are managing the risks posed by climate change but allow for flexibility in approach given, for example, the limitations in climate science and modeling and the recognition that some jurisdictions' transitions may take longer than others;

2) an appropriate level of transparent disclosures to policyholders and investors relating to climate change risks that may materially affect a financial entity's business and are based on TCFD;

3) providing substantial government investment in pre-disaster mitigation to help communities adapt to and manage climate change risks that have already come to fruition or which are inevitable in the future even if the most aggressive emissions goals are met;

4) providing regulatory environments that enable the development of products that can fill protection gaps created by climate change; and

5) enacting direct measures through legislation that will stem climate change and address the existential risks it poses to economic functioning and the planet in recognition that ancillary or indirect measures on insurance markets will not meaningfully address the root causes of climate change or its impacts.

With these principles in mind, Liberty Mutual provides the following comment in response to the questions proposed by the Federal Insurance Office's 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 risk.

Given that the Federal Insurance Office (FIO) was established to monitor the insurance sector and its regulation, it may be appropriate for FIO to issue a written report identifying the risks posed by climate change in the insurance sector and potential policy recommendations for the Administration, Congress, state insurance regulators, and the NAIC to consider. In developing its assessment and recommendations, the FIO should consult with federal agencies, state insurance regulators, and the NAIC regarding those entities' initiatives to address climate-related risks. It should also convene forums (including but not limited to the FACI) with federal administrative agencies, regulators, the NAIC, industry, and consumer groups to discuss the issues identified in the Executive Order.

FIO's Initial Climate-Related Priorities

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 adaption efforts.

Liberty Mutual believes the three priorities that FIO identified are appropriate. However, the "Insurance Markets and Mitigation/Resilience" priority should be treated as two separate priorities, given the importance of pre-disaster and mitigation resilience measures separate and apart from the potential disruption to insurance markets caused by climate change. The U.N. Intergovernmental Panel on Climate Change (IPCC)'s most recent report and others in the scientific community have concluded (1) climate change is already affecting many weather and climate extremes globally; and (2) those trends will continue even if the most aggressive emissions targets are met and global temperature increases are limited to 1.5 degrees Celsius by 2050.3 In light of those conclusions, pre-disaster mitigation is critically important not only to address future risks from climate change but also to mitigate the risks that have already come to fruition. Given FIO's coordinating role on insurance-related issues for the federal government, we strongly encourage FIO to coordinate with federal agencies and to work expeditiously to identify additional government funding sources that could be used for mitigation for communities, consumers, and businesses. For example, the National Oceanic and Atmospheric Administration (NOAA) is at the cutting edge of assessing climate risks. FIO should partner with them along with other federal agencies such as the Federal Emergency Management Administration (FEMA) to identify communities at particular risk to climate change and help steer federal funds to those areas to make them more resilient to its impacts.

Climate-Related Data and FIO's Data Collection and Data Dissemination Authorities

3. What specific types of data are needed to measure and effectively assess the insurance sector's exposure 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.

Liberty Mutual has done and continues to do extensive work evaluating available climate data sources and modeling as part of our efforts to thoughtfully incorporate climate change into our risk management. While we continue to invest resources in improvements to modeling and data, we have learned that the current availability and quality of data and models particularly for purposes of projecting impacts over longer time horizons is quite limited. For purposes of orientation, there are 3 types of models: 1) catastrophe models, 2) climate models, and 3) investment models. Each brings particular strengths and limitations to the problem of incorporating climate risk into insurance industry risk appetites. In the longer term, effective climate risk management will require incorporating the strengths of each (extreme events from catastrophe models, forward perspective from climate models, and economic risk from investment/transition models). But in the short term, the limitations of each tool must be respected to ensure that the data that they produce is not misused or misinterpreted.

A. Catastrophe Models

Catastrophe models are the tools that insurers have used for the last three decades to handle extreme disasters. Their strength lies in capturing the statistical distribution of historical extreme events, including hurricanes, floods, wildfires, and more, which are the focus of property insurers' year-to-year profitability as well as long-run solvency.

To effectively extend catastrophe model usage to incorporate climate risk, it is important to understand the fundamentals of how they are built. While they are designed to provide a current view of potential hazard, that current view is constructed using historical statistical distributions of extreme event characteristics. These models can be adjusted in frequency or intensity to incorporate near-term views of future climate risk, but climate assessments further in the future, by necessity, may include ranges of extreme events that are beyond the historical experience that the models currently capture. Therefore, at long-term horizons, an insurer's best-available tool for capturing economic losses of extreme events is no longer fit for purpose.

B. Climate Models

Climate models are very large data models that represent the climate system and help us understand the evolution of the system over longer time scales. However, climate models are not designed to capture the specific types of risk that are most material to the insurance sector. Climate models: (1) produce results that are the clearest and most robust at long (30 year+) timescales (recognizing they don't account for policy or technological developments) rather than the near term time horizon that insurers typically focus on for business decisions; (2) capture change on at most a regional scale whereas insurance is looking at impacts at a very local level, ideally down to individual properties; and (3) capture changes in average conditions more accurately than extreme scenarios at the tail of the risk distribution whereas insurance focuses on changes in extremes.

While climate models can fill some gaps in the catastrophe modeling ecosystem (such as incorporating forward-looking views of risk rather than present day), they are more appropriate for capturing the types of impacts likely to affect the banking sector (such as mean temperature effects that may flow through to economy-scale productivity) rather than the extreme hazards that fundamentally drive insurance markets. Unlike catastrophe models, climate models do not measure financial or economic impact of climate events. These models are typically built by academics and government labs and are open-source data sets. The efficacy of data from climate models are dependent on resolution (degree of geographic specificity) and time horizons, with data quality being lower for high resolution or extreme hazards. Climate models are best at capturing impacts at long time-horizons but can be more complex to interpret at the time periods that are most relevant to insurers (less than 10 years) due to the influence of natural, decadal-scale internal variability.

An important gap in all available physical risk tools is that none measure societal or community impacts. Integrating that lens into these models is imperative if there is to be a better understanding of the impacts climate events will have on our communities. For example, communities may be at risk of physical damage that could threaten their critical infrastructure, bond ratings, or municipal tax bases. However, not all impacts will happen at the same time, and the most important hazards to focus on for the allocation of limited climate adaptation resources is not always clear. Advances in this space between the climate and catastrophe modeling communities will facilitate policy development and resource allocation decisions, and we continue to assist in further refining these types of models.

C. Investment Models

From an asset/investment perspective, insurers face two types of climate-related risks in their investment portfolio: (1) physical risks associated with assets that may themselves be directly impacted by climate change (physical risk); and (2) transition risks associated with assets exposed to risk due to changes in public policy, technology, or investor preferences. In both cases, investors are faced with notable data limitations.

Physical risk modeling of investments is very basic, and heavily constrained by limited information on the location of the asset. For some asset classes (municipal bonds and real estate), physical location can be ascertained, and physical risks quantified, although translating physical damage to the risk of bond defaults, for example, is not a straightforward exercise. For other asset classes, the paucity of information about the physical locations of any particular investment renders limits the utility of the models. For example, Miami faces a very different set of climate risks than Minneapolis, but investors may only know that a company operates in the U.S., and not its precise location.

Likewise, the modeling of transition risk remains simplistic, limited by the current lack of company-specific emissions data because reliance on actual reported emissions data can, at this juncture, be misleading. Two companies may both disclose emissions data, but one may report lower emissions due to differences in sophistication in capturing carbon emissions relative to another company. Until emissions reporting is more standardized, emissions-based transition risk modeling will not produce meaningful or actionable outputs. Transition risk models also tend to use broad sectoral assumptions with little differentiation between individual companies. For example, an insurer may hold assets in a company in a sector deemed high risk by the model even where the company has successfully mitigated their actual carbon risk (e.g., a company in an energy intensive sector that has or has a credible plan to transition to more renewable energy sources). In such cases, by failing to correctly identify the actual climate risk or to give credit for effective mitigation measures, the model's outputs may lead to policy outcomes that are different than intended.

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

As a threshold matter, in implementing any new requirements, policymakers and regulators should be clear about the rationale for specific disclosure requirements and how such requirements are linked to their regulatory authorities and objectives. As regulators domestically and internationally press for more specific climate disclosures, they should seek to promote consistency across sectors and jurisdictions as standardization will improve data quality. Liberty Mutual produced its first TCFD report in 2020 4 and given TCFD's broad adoption, we believe that disclosure framework provides a solid foundation if regulators decide to require disclosures for the insurance sector. However, we caution against requiring quantitative climate risk reporting until there is improvement in the area of climate data and modeling./5

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.

Analysis of climate change risks and the impacts extend well-beyond the insurance sector, so it is important that any role FIO plays is limited to its remit and informs the broader federal and state government response. FIO should serve a supporting role by providing insurance expertise to other federal agencies by acting as a facilitator between the insurance sector and the federal government, and by working closely with state insurance regulators and the NAIC on information collection.

With respect to data collection specifically, it is not appropriate for the FIO, given its monitoring role and lack of insurance regulatory authority, to collect company-specific proprietary data that is being collected by state insurance regulators individually or collectively through the NAIC, or otherwise could be. Given that states and the NAIC already collect information and have separate climate-related workstreams already in process, FIO should in the first instance rely on the copious amounts of data that already exists including public sources and existing regulatory sources (as appropriate). To the extent, FIO believes it has legitimate need for additional data and can justify that need, it should coordinate with the NAIC and states on the collection of any data that may be required for FIO's purposes. This will streamline the process, reduce regulatory burdens, and ensure state insurance regulators and FIO are operating within the bounds of their respective remit. Further, given FIO's authorities and its charge to examine the impact of climate change on the sector as a whole, any data FIO obtains from regulators and the NAIC should be aggregated.

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.

There are two types of information at issue: 1) climate information generated by the insurance sector, and 2) climate analytics used by the insurance sector. With respect to climate information generated by the insurance sector, unless it is contemplated to be merely a catalog of existing publicly disclosed information, it is not clear how a verified open-source centralized database for climate-related information would be helpful given what is currently collected and disclosed through TCFD, the NAIC climate survey as well as what is being contemplated for future disclosures to regulators.

As described above, of greater concern is the lack of credible, decision-useful climate-related data and modeling to assess both physical and transition risks that can be used by the insurance sector and financial sector more broadly. The academic sector, private sector, and government research are seeking to fill those gaps, but the existing science and data do not support many of the specific types of risk assessment approaches being contemplated by some regulators. Importantly, a significant private sector ecosystem of climate data analytics providers has developed, but with widely varying levels of expertise and public accountability.

While many climate models are already public, they have significant limitations as they are not designed to answer questions necessary for insurer risk management or the insurance business. Models that could be more useful for insurers, such as those designed to model certain extreme events, simply do not exist at the scale needed for the insurance market today. While the industry continues to invest in research to enhance such models and data, the government should also invest significantly in the development of these types of data sources. Liberty Mutual's October 2021 joint workshop with NOAA on climate risk analytics focused on highlighting known data gaps in the financial sector regarding climate risk and fostering public-private partnerships in research in this space. Investment in "climate-conditioned" public catastrophe models, which would be built-off of climate model output rather than historical event distributions, would pay dividends both within the insurance sector, as well as among a broader range of end-users, such as city planners, who currently do not have access to catastrophe models due to their high cost.

View full comment at https://downloads.regulations.gov/TREAS-DO-2021-0014-0029/attachment_1.pdf

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Footnotes:

1/ Liberty Mutual is a U.S. headquartered global P&C insurer. We rank 71st among Fortune 500 companies (based on 2020 revenue), are the 6th largest global P&C insurer (based on 2020 gross written premium), and the fourth largest P&C insurer in the United States (based on 2020 direct written premium).

2/ See, Federal Insurance Office Request for Information on the Insurance Sector and Climate-Related Financial Risks, 86 Fed. Reg. 48814 (August 31, 2021).

3/ See, Climate Change 2021: the Physical Science Basis, Intergovernmental Panel on Climate Change, https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_Full_Report.pdf (August 2021).

4/ See, Liberty Mutual Insurance's 2020 Task Force on Climate-Related Financial Disclosures Report, at https://www.libertymutualgroup.com/documents/task-force-climate-financial-disclosures.pdf (2020).

5/ As described in Liberty Mutual's response to question 17, Liberty mutual also recently joined PCAF and will participate in its newly established Insured Emissions Working Group. The work of PCAF will help improve TCFD reporting on emissions.

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

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