The U.S. Department of the Treasury’s Federal Insurance Office (FIO) released a report this week that assesses climate-related issues and gaps in the supervision and regulation of insurers.
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The report, entitled Insurance Supervision and Regulation of Climate-Related Risks, was done in response to President Joe Biden’s Executive Order on Climate-Related Financial Risk.
The report revealed that there are important existing efforts to incorporate climate-related risk into state insurance regulation and supervision. However, while commendable, those efforts are fragmented across states and limited in several critical ways. Thus, the report encourages state insurance regulators and the National Association of Insurance Commissioners (NAIC) to build on their progress.
“I’m encouraged to see the progress that the National Association of Insurance Commissioners and some state insurance regulators have made on incorporating climate-related risk into regulatory and supervisory practices,” Secretary of the Treasury Janet Yellen said. “This effort should be deepened and broadened so that it is both more fully integrated into oversight of insurers and adopted by more state insurance regulators. The Federal Insurance Office will continue to assess and support efforts by state insurance regulators and the National Association of Insurance Commissioners to address climate-related financial risks in the insurance industry.”
Among other findings, the report said that climate-related risks, including physical, transition, and litigation risks, present increasingly significant challenges for the insurance industry. In addition, state insurance regulators and the NAIC are increasingly focused on incorporating climate-related risks into supervision and regulation. However, it pointed out that in most cases, their efforts are at a preliminary stage.
The document also recommended that NAIC and state insurance regulators should prioritize the creation and use of new and effective climate-related risk tools and processes. This might include developing scenario analysis and increasing their use of the NAIC’s Catastrophe (CAT) Modeling Center of Excellence.
Overall, it concluded that more work is needed by state and federal regulators and policymakers, as well as by the private sector and the climate science and research communities, to better understand climate-related risks for the insurance industry, and their implications for insurance regulation and supervision.
The FIO was established by Congress through the Dodd-Frank Act in 2010 to monitor all aspects of the nation-wide insurance industry.