Treasury report recommends stricter supervision of insurers’ climate risks

The 68-page report expands upon efforts to collect data on climate-related risk in the insurance industry, specifically at the state level. The report was conducted and released in response to an executive order by President Joe Biden in May 2021.

Some states already have policies in place to incorporate climate-related risks into state insurance regulation and supervision, but these efforts are “fragmented … and limited in several critical ways,” the Treasury said in a press release.

The report recommended state insurance regulators and the National Association of Insurance Commissioners (NAIC) continue building resilience. Key findings included:

• Physical, transition, and litigation risks present increasingly significant challenges and require oversight by state insurance regulators.
• The creation of new and effective tools and processes to track climate-related risks, like scenario analysis and the NAIC’s Catastrophe Modeling Center of Excellence, can help states adapt.
• More work is needed by regulators, policymakers, the private sector, and research communities to understand climate-related risk implications for insurance regulation; supervision; and the stability of the financial system, including for housing markets and the banking sector.

The report also included 20 policy recommendations for state insurers to implement to help mitigate climate-related risks. The recommendations were broken down into categories including supervision analysis, risk management and internal controls, corporate governance, reporting data and examinations, modeling, scenario analysis, macroprudential, market conduct, and disclosure initiatives.

Under risk management and internal controls, the FIO recommended state insurance regulators develop and adopt risk monitoring guidance appropriate for their respective markets. The guidance should include expectations for insurers to implement “climate-related risks into their annual financial planning, as well as into their long- and short-term risk management processes,” per the report.

For corporate governance, the report recommended state regulators and the NAIC should encourage insurers to report, “in a uniform manner,” the impact of climate-related risks on their strategic processes.

Under disclosure initiatives, the report recommended all state insurance regulators adopt the NAIC’s climate risk disclosure survey, which should be revised to “incorporate more prescriptive elements, including around quantitative financial impacts, scenario analysis, and consistent metrics and targets.”