Federal Insurance Office (FIO) Issues Report on Climate Risk Supervision Among State Insurers

The Treasury Department's Federal Insurance Office (FIO) has released a report highlighting gaps in how states supervise and assess climate-related risks among insurers. In a press release, the FIO stated that current efforts to incorporate climate-related risks into state insurance regulation and supervision are "fragmented... and limited in several critical ways."

The 68-page report expands on the collection of data on climate-related risk within the insurance industry, particularly at the state level. It was conducted and issued in response to an executive order by President Joe Biden in May 2021.

The report identifies several key findings, emphasizing that physical, transition, and litigation risks present significant challenges that require oversight from state insurance regulators. It also recommends the creation of new tools and processes to track climate-related risks, such as scenario analysis and the National Association of Insurance Commissioners' (NAIC) Catastrophe Modeling Center of Excellence.

According to the report, there is a need for further work by regulators, policymakers, the private sector, and research communities to understand the implications of climate-related risks on insurance regulation, supervision, and the stability of the financial system. This includes considerations for housing markets and the banking sector.

The report includes 20 policy recommendations for state insurers to mitigate climate-related risks. These recommendations cover various categories, including supervision analysis, risk management and internal controls, corporate governance, reporting data and examinations, modeling, scenario analysis, macroprudential considerations, market conduct, and disclosure initiatives.

In terms of risk management and internal controls, the FIO recommends that state insurance regulators develop and adopt risk monitoring guidance suitable for their respective markets. The guidance should incorporate insurers' expectations of integrating climate-related risks into their financial planning and risk management processes.

Regarding corporate governance, the report suggests that state regulators and the NAIC encourage insurers to report the impact of climate-related risks on their strategic processes in a uniform manner.

Under disclosure initiatives, the FIO recommends that all state insurance regulators adopt the NAIC's climate risk disclosure survey, with revisions incorporating more prescriptive elements, such as quantitative financial impacts, scenario analysis, and consistent metrics and targets.

The FIO's report underscores the need for collaboration among regulators, policymakers, the private sector, and research communities to understand and address climate-related risks. By implementing the recommended measures, the insurance industry can enhance its ability to manage these risks effectively and ensure the stability and resilience of the sector

By fLEXI tEAM