'RESILIENCE IS A GLOBAL RESPONSIBILITY': COMMISSIONER LARA MOVES TO SAFEGUARD CALIFORNIANS' FINANCIAL FUTURE FROM FUTURE INSURANCE CRISES

The following information was released by the California Department of Insurance:

Regulation aims to protect consumers from climate disasters, cybersecurity threats, and misuse of artificial intelligence

LOS ANGELES Strengthening oversight to protect Californians' financial futures, Insurance Commissioner Ricardo Lara announced a public hearing on a new Long-Term Solvency Planning Regulation for the nation's largest insurance market. The regulation will help the California Department of Insurance keep insurance available despite natural catastrophes and technological changes that are emerging today and whose scope will expand in future years.

"The last decade has taught insurance regulators a hard truth: Resilience is not optional, it is a global responsibility," said Commissioner Lara. "California's go-it-alone approach on insurance hasn't served consumers effectively in the past. This regulation embodies our hard-earned insights along with our international regulatory colleagues about the challenges from AI and climate change. Insurance is critical to every part of our economy, so a forward-thinking approach minimizing the risk of sudden disruptions in the insurance market makes every Californian more secure."

Confidential financial oversight of insurance companies is a core function of the California Department of Insurance's consumer protection mission, similar to the U.S. Federal Reserve for U.S. banks. The Long-Term Solvency Planning Regulation would require insurance companies to assemble individualized information on risk mitigation for protecting their solvency, allowing the Department's experts to analyze their planning for 2030, 2040, and 2050. This forward-thinking approach the first such regulation for any U.S. state enhances the financial security of the state's policyholders and minimizes the risk of sudden disruptions in the insurance market, as well as broader systemic risks to California's economy. Commissioner Lara released new draft regulatory text in advance of the Department's virtual public hearing on July 28.

Why it matters

Strong financial oversight protects all Californians: Access to insurance is critical for real estate, agriculture, home construction, and every other business. Under this proposed regulation, California-based insurance companies must provide regular information to the Department to strengthen consumer protection against unforeseen challenges.

Using global tools to safeguard Californians: Better planning can protect Californians from future shocks. The Long-Term Solvency Planning Regulation builds on the experience of financial regulators from the Banque de France, the Bank of England, the Bank of the Netherlands, Canada's chief insurance regulator, and the Monetary Authority of Singapore in projecting future scenarios to test insurance company performance. This approach integrates technical guidance from the International Association of Insurance Supervisors (IAIS) climate risk framework, which Commissioner Lara has contributed to over the past three years. Importing the experience of global regulators will promote sustainability in California's insurance market-- the largest sub-national insurance market in the world.

Investing strategies that plan for climate and technology: Insurance companies invest directly in the U.S. and world economy, with approximately $8.2 trillion in assets reported in 2022. How those investments perform affects companies' capacity to stay and grow in California. The Long-Term Solvency Planning Regulation requires documentation of future risks and opportunities projected for 2030, 2040, and 2050, which could impact underwriting, investments, or operations.

Addressing cybersecurity and artificial intelligence: The regulation will also address the evolving landscape of cybersecurity, focusing on data quality, the use of large datasets, and artificial intelligence.

Mitigating catastrophic risk: Mitigation refers to the science of making people safer from wildfires, floods, heat waves, and other natural catastrophes affecting residents, agriculture, and infrastructure. Under the regulation, companies will share information with the Department on strategies to mitigate climate-related risks, such as extreme weather patterns and gradual market shifts expected to become pronounced by 2050.

Enhancing stability in the marketplace amid transitions: The regulation will require information on transition risks associated with new technologies, particularly regarding the reduction of reliance on greenhouse gas-emitting technologies. Central to this effort are "stress tests" of climate risk scenarios for 2030, 2040, and 2050.

The Long-Term Solvency Planning Regulation has won praise from leading U.S. and international experts and financial regulators.

"With climate change escalating the risks of weather-related extreme events and new technology bringing uncertainty to markets, long-term planning by insurance regulators is needed," said Carolyn Kousky, Associate Vice President, Economics and Policy Analysis, at Environmental Defense Fund. "In order to preserve market stability, we must think longer term about the impacts of growing risks and the investments being made to mitigate them. To prevent surprises that can harm consumers, we need to be planning for a future that will look different from our past."

"Insurer risk and transition plans are a critical step to better prepare insurers, their customers, and other stakeholders for the quickly changing future," said Steven M. Rothstein, Ceres' Chief Program Officer. "The California regulatory process is a critical milestone, and Commissioner Lara and his team deserve credit for their forward-looking approach to ensure insurers are strategically planning and key stakeholders have the information they need."

"Managing climate risk is part and parcel of good risk management and of disaster risk reductionbut the past alone is not a reliable indicator of the future. This is why it is essential for insurers to assess different climate futures and their implications for their underwriting and investment portfolios," said Butch Bacani, Head of Insurance at the UN Environment Programme and Chair of the UN Forum for Insurance Transition. "By insuring and investing with foresight, insurers are better positioned to enhance long-term business resilience and company value, close the protection gap, contribute to financial stability, and support the transition to safer, more resilient and sustainable communities and economies."

"Scenario analysis is a critical risk management tool for navigating uncertainty," said Dr. Sean Carmody, former Executive Director, Policy and Advice Division of the Australian Prudential Regulation Authority, the country's insurance regulator. "It helps institutions anticipate and prepare for emerging riskssuch as the impact of a changing climate and rapid technological innovationby exploring a range of plausible futures and identifying areas of vulnerability and strategies that can strengthen resilience in the financial system."

"This is about giving Californians confidence that their coverage will be there when they need it most," said Commissioner Lara. "Strong oversight means asking the right questions, demanding real answers, and following the data, not just for today but for the decades ahead."