With 50 states and as many insurance regulators in the US, the existence of a Federal Insurance Office (FIO) almost sounds implausible. But thanks to climate change, an assertive US Department of the Treasury is nudging the FIO into action.
Moody’s believes the credit impact of “a delayed and disorderly carbon transition” is the greatest threat to financial firms, as the increasing frequency of catastrophic weather events will lead to loan defaults and rising insurance claims. The task on hand for the FIO, therefore, is to identify and assess climate-related issues or gaps in the supervision and regulation of insurers, including their potential impact on financial stability.
The Dodd-Frank Act grants the FIO certain financial stability, monitoring and international responsibilities. The FIO advises the Secretary of the Treasury on major domestic and prudential international insurance policy issues, and it serves as a non-voting member on the Financial Stability Oversight Council (FSOC). Among other things, it is also specifically authorised to monitor all aspects of the insurance profession, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance profession or the US financial system.
President Joe Biden’s 20 May 2021 Executive Order on Climate-Related Financial Risk emphasises the important role that the insurance sector can play in combatting climate change. It instructs the Secretary of the Treasury to task the FIO “to assess climate-related issues or gaps in the supervision and regulation of insurers, including as part of the FSOC’s analysis of financial stability, and to further assess, in consultation with states, the potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change impacts”.
The FIO intends to initially focus on the three following climate-related priorities, in particular:
- Insurance supervision and regulation: Assess climate-related issues or gaps in the supervision and regulation of insurers, including their potential impacts on US financial stability.
- Insurance markets and mitigation/resilience: Assess the potential for major disruptions of private insurance coverage in US markets that are particularly vulnerable to climate change impacts, and facilitate mitigation and resilience for disasters. Also, assess the availability and affordability of insurance coverage in high-risk areas, particularly for traditionally underserved communities and consumers, minorities and low/moderate-income persons.
- Insurance sector engagement: Increase its engagement on climate-related issues and take a leadership role in analysing how the insurance sector may help mitigate climate-related risks.
Insurance supervision and regulation set for a sea-change
How should the FIO identify and assess climate-related issues or gaps in the supervision and regulation of insurers, including their potential impact on financial stability? In seeking answer to this, the FIO wishes to address:
(a) Prudential concerns
(b) Market conduct regarding insurance products and services
(c) Consumer protection.
The FIO also wishes to assess the effectiveness of US state insurance regulatory and supervisory policies in addressing and managing climate-related financial risks with regard to the threat they may pose to US financial stability. This would include identifying:
- The major channels through which climate-related physical, transition, and/or liability risks may impact the stability of the US insurance market
- The degree to which insurers’ business models could be affected by each category of risk and the relevant time horizons for such effects.
In the process, identifying and assessing:
- The key structural issues that could inhibit the ability of insurance supervisors to assess and manage climate-related financial risk in the insurance sector (for example, accounting frameworks and other standards).
- The barriers that could inhibit the integration of climate-related financial risks into insurance regulation.
- The efforts of insurers – through their underwriting activities, investment holdings and business operations – to meet the US’s climate goals, including reaching net-zero emissions by 2050.
- What role or actions states might take to encourage the insurance sector’s transition to a low-emissions environment and an adaptive and resilient economy?
The scorecard urgency
Bloomberg Green recently noted: “The clock is ticking for banks, insurers and asset managers [that are] still providing support to oil, gas and coal producers. It’s not just the moral imperative – that fossil-fuel use is destroying the atmosphere and life on Earth with it. It’s that their financial health requires leaving such companies behind.”
Meanwhile, Sonia Hierzig, head of financial sector research at Share Action, warned: “It is baffling that most insurance companies still seem happy to invest in companies or provide insurance for projects that continue to fuel this crisis. Insure Our Future’s most recent scorecard on insurance, fossil fuels and climate change found that insurers in the US, east Asia and the Lloyd’s market, particularly, continue to support this sector with few restrictions – despite its clear incompatibility with the goals of the Paris Agreement.”
The US is world’s largest greenhouse gas emitter. Now, standing on the verge of running out of carbon budget, US insurers need to abandon their fossil-fuel fixation. Would the FIO be able to make that happen? The intent seems right and as of now, it appears to be getting into the driver’s seat.