N.Y. State Financial Services Department Issues Public Comment on Treasury Department Notice

WASHINGTON, Nov. 19 -- Yue "Nina" Chen, executive deputy superintendent of the Climate Division at the New York State Financial Services Department, 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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The New York Department of Financial Services (DFS) appreciates the opportunity to respond to the Federal Insurance Office (FIO) request for information (RFI) on the insurance sector and climate-related financial risks ("climate risks"). DFS commends FIO for seeking broad input to help inform its assessment of the implications of climate risks for the insurance industry.

DFS supervises and regulates the activities of nearly 1,800 insurance companies with assets of $5.5 trillion, and more than 1,400 banking and other financial institutions with assets of $2.9 trillion, as of December 31, 2020. The institutions regulated by DFS include 132 life insurance companies, 864 property/casualty insurance companies, and 94 health insurers and managed care organizations. In addition, DFS licenses more than 388,000 individual insurance producers and other licensees.

Climate change poses material risks to the financial system. Prudential regulators, such as DFS, are responsible for ensuring that financial institutions are resilient in the face of all material risks, including climate risks.

Below we provide an overview of DFS's actions to date to support New York insurers' efforts to manage their climate risks and enhance communities' climate resilience, and address key topics identified in the RFI.

Overview of DFS Actions

Today, DFS issued detailed Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change ("DFS Guidance"), following its September 22, 2020 Circular Letter on Climate Change and Financial Risks for all New York-regulated insurers. DFS also issued an Industry Letter on Climate Change and Financial Risks to New York-regulated depository and non-depository institutions on October 29, 2020. These documents set forth DFS's expectations that all such regulated institutions assess and manage their climate risks and start developing their approach to climate-related financial disclosure. Starting in January 2021, DFS has been including climate-related questions in its examinations of property/casualty and life insurers and providing feedback to insurers based on their responses.

Recognizing that many insurers are just starting to focus on climate risks or in the early stages of managing them, DFS has conducted numerous educational webinars on a wide range of topics, including why insurers should care about climate risks, insurers' practices on climate-related risk management and disclosure, climate risk considerations for insurers as investors, and insurers' use of climate-related metrics and targets.

In addition, DFS has published two reports to support insurers' efforts to manage their climate risks: An Analysis of New York Domestic Insurers' Exposure to Transition Risks and Opportunities from Climate Change, which explains how insurers can analyze their transition risks based on their investment portfolios and also provides strategies for mitigating transition risks, and New York Domestic Insurers' Management of the Financial Risks from Climate Change - An Analysis of NAIC Climate Risk Disclosure Survey Responses and Other Reporting, which lists examples of good practices that have been adopted by insurers to manage their climate risks.

DFS has also worked to enhance New York communities' climate resilience. As the historic rainfall caused by the remnants of Hurricane Ida reminded us, we need to be prepared for more frequent and severe storms due to climate change. For example, DFS recently required enhanced flood instruction for insurance producers that sell insurance through the National Flood Insurance Program given the increased flood risk due to climate change. In addition to working closely with local elected officials to assist affected communities, DFS is increasing collaboration with the industry to share best practices, strengthen consumer education, and gather real-time information to help our state be more resilient and better prepared to assist policyholders after extreme weather events.

DFS has actively engaged with national and international networks of insurance supervisors on climate risks. DFS is a member of the Sustainable Insurance Forum (SIF), an international network of insurance supervisors seeking to find ways to help the global insurance industry meet the challenges posed by climate change. DFS is also an active participant in the Solvency and Disclosure Workstreams of the Climate and Resiliency Task Force of the National Association of Insurance Commissioners (NAIC).

Finally, I serve as the vice-chair of the Climate Risk Steering Group of the International Association of Insurance Supervisors (IAIS). DFS intends to continue to work closely with the NAIC as well as international and other U.S. regulators as we continue to develop our supervisory approach to managing climate risks.

Supervisory Approach to Managing Climate Risks

Leading international regulators and the IAIS expect insurers to manage climate risks through their existing enterprise risk management frameworks and analyze how climate change impacts their existing risk factors, including credit risk, pricing and underwriting risk, market risk, operational risk, legal risk, liquidity risk, reputational risk, and strategic risk. At a high level, these expectations are consistent, including similar components, a focus on proportionality and long-term analysis, and the expectation of an increasing level of sophistication over time. To ensure consistency across jurisdictions and minimize the compliance burden on insurers, international regulators have engaged in meaningful collaboration and coordination to develop international best practices. DFS encourages FIO to further this international collaboration and regulatory consistency.

The Network for Greening the Financial System (NGFS) has issued a Guide for Supervisors: Integrating climate-related and environmental risks ("NGFS Guide") and a Progress report on the Guide for Supervisors, both of which provide a good summary of international regulators' climate-related work.

DFS believes that the approach recommended in the NGFS Guide is well-balanced and can be applied to U.S. insurers. While NGFS focuses on banking supervision, several of its members also supervise insurers, such as the Prudential Regulation Authority (PRA) at the Bank of England, the Monetary Authority of Singapore, and the Autorite de controle prudentiel et de resolution at Banque de France.

As the climate risks faced by banks and insurers overlap significantly, approaches used by banking supervisors should be considered.

DFS's supervisory approach has largely mirrored that of the PRA and is consistent with the recommendations in the NGFS Guide, which outlines the following steps:

1. Educating the industry on how climate change creates financial risks.

2. Assessing the industry's exposure and risks to climate change.

3. Establishing expectations for the industry on integrating the consideration of climate risks into governance, business strategies, risk management, scenario analysis, and public disclosure.

4. Establishing a timeline for implementation of the expectations.

5. Supervising insurers against the expectations.

Between Steps 4 and 5, several prudential regulators have conducted scenario analysis, which are summarized in the NGFS Scenarios in Action: a progress report on global supervisory and central bank climate scenario exercises.

In terms of resources for climate-related supervision of insurers:

* IAIS and SIF have issued an Application Paper on the Supervision of Climate-related Risks in the Insurance Sector.

* European Insurance and Occupational Pensions Authority has issued multiple papers on climate-related supervision: Opinion on the supervision of the use of climate change risk scenarios in

ORSA, Opinion on Sustainability within Solvency II, and Technical Advice on the integration of sustainability risks and factors in the delegated acts under Solvency II and IDD. It has also conducted a sensitivity analysis of climate-change related transition risks.

* Bank of Canada and the Office of the Superintendent of Financial Institutions launched a pilot project on climate risk scenarios.

State-Based Regulatory Framework and Tools for Climate Supervision

The U.S. system of state-based insurance regulation has developed an extensive set of tools to assess and monitor insurers' solvency and liquidity, which can be used or, if necessary, adapted to specifically address climate risks. These include insurers' Own Risk and Solvency Assessment and Enterprise Risk Management reports, Risk-Based Capital, and Group Capital Calculation. These tools tend to be focused on the short-term while the impact of climate change may manifest itself over a much longer period.

Insurance regulators can request information that is more focused on the medium- or long-term, including through the NAIC Climate Risk Disclosure Survey, Examination Planning Questionnaire, and Corporate Governance Annual Disclosure.

State regulators are already collecting climate-related data from insurers and can expand the scope of this collection as necessary to further assess insurers' climate risks. An important tool used by state regulators to assess and prioritize regulatory review of insurers is the NAIC Insurance Regulatory Information System (IRIS), a collection of analytical solvency tools and databases designed to provide state insurance departments with an integrated approach to screening and analyzing the financial condition of insurers. This system produces key financial ratio results based on financial information obtained from insurers' statutory annual financial statements. These ratios help to highlight which insurers need more regulatory attention by identifying possible solvency concerns. As climate-related supervision progresses at the state level, more climate-specific data can be collected through IRIS.

As with other emerging risks for the industry, state regulators must develop their internal capacity in terms of staff and expertise to work with their regulated entities to assess and manage climate risks.

Like in other areas where specialized expertise is required, the NAIC is uniquely positioned to assist state regulators in developing their internal capacity for climate-related supervision by providing specialized NAIC staff support and resources to those that may require it. DFS encourages FIO to work with the NAIC and state regulators to support these efforts.

Climate-Related Data

Insurers need a large amount of data to assess and manage their climate exposure and risks. FIO can play a valuable role in helping to collect or generate this data for insurers. For example, data on physical risks at the county, city, and even property level, and transition pathway scenarios for climate-impacted industries (both high-carbon and low-carbon) at the U.S. and regional levels, are important for assessing climate risks. NGFS has created a set of climate scenarios with regional- or country-level granularity for both physical risks and transition pathways. For insurers to be able to use these scenarios as part of their risk management processes, it would be helpful for FIO to convert this regional- or country-level data to more granular data.

Similarly, in the health insurance market, there is an increasing recognition that climate change impacts human health. The World Health Organization stated that "[c]limate change is the single biggest health threat facing humanity, and health professionals worldwide are already responding to the health harms caused by this unfolding crisis."/1

However, we are not aware of any existing data or data collection efforts on how climate change affects health insurers.

A verified, open-source, centralized database for relevant climate-related information that is currently not available would be a tremendous resource for both insurers seeking to manage their climate risks and state regulators responsible for supervising them. International bodies, such as the Monetary Authority of Singapore and the European Commission, have engaged in similar efforts. FIO could work with the Office of Financial Research, which is building a climate data hub, to create a central hub for climate-related information that is relevant for climate risk management and supervision. FIO should support academia, the insurance industry, and/or service providers in generating relevant data financially or through its convening power.

Users of the data, including insurers and regulators, must be mindful of the uncertainty in existing data and models, which may create a false sense of security or precision in the results; rather, the data and models should be viewed as tools to help insurers and regulators assess climate risks and not dictate any particular course of action.

Disclosure Framework

Multiple international financial regulators have adopted the Task Force on Climate-Related Financial Disclosures (TCFD) framework for their disclosure requirements. The NAIC is in the process of updating its Climate Risk Disclosure Survey and considering frameworks such as TCFD. While it was initially intended to address climate-related disclosure, the components in TCFD - governance, strategy, risk management, and metrics and targets - are consistent with existing NAIC exam manuals, New York insurance laws and regulations, and the DFS Guidance. Given the importance of regulatory consistency, FIO should support the use of the TCFD framework for the U.S. insurance sector.

Based on DFS's review of New York insurers' TCFD reports, the quality of disclosure varies widely, reflecting the broad range of maturity and sophistication among insurers in terms of understanding, managing, and disclosing climate risks. Over time and with the active review of insurers' TCFD reports by state insurance regulators, the quality of insurers' disclosure should improve.

Climate Resiliency and Disadvantaged Communities

Although no one is spared from the impact of climate change, it disproportionately affects disadvantaged communities, including low-income communities and communities of color, and feeds into the vicious circle of social inequality. FIO should encourage all stakeholders, both public and private, to work together to help close the protection gap, consider adaptation measures, develop new products that mitigate issues of insurability or affordability, and support the resilience of communities that are most vulnerable to climate change.

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We look forward to continuing to work with FIO to secure a sustainable future for our financial system and the people that it serves.

Sincerely,

Yue (Nina) Chen

Executive Deputy Superintendent, Climate Division

New York State Department of Financial Services

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Footnote:

1/ World Health Organization, COP26 SPECIAL REPORT ON CLIMATE CHANGE AND HEALTH: THE HEALTH ARGUMENT FOR CLIMATE ACTION, October 11, 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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