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New York Wants Life Insurers to Analyze Portfolio Climate Exposure

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What You Need to Know

  • The New York State Department of Financial Services has proposed guidance that could affect all insurers domiciled in the Empire State.
  • The department wants insurers to think about hurricanes, floods, wildfires, droughts and chronic shifts in weather patterns.
  • All insurers, regardless of size, would have to have a written climate risk management policy.

The New York State Department of Financial Services is preparing to require all insurers operating in the state to develop detailed, written plans for managing climate risk.

The department has proposed guidance that would require life, health and annuity issuers to analyze how hurricanes, floods, wildfires and droughts could affect their investment portfolios.

The public comment period for the guidance is set to end June 23.

New York department officials say they would let smaller insurers start out preparing simpler analyses.

“However, all insurers regardless of size, are expected to analyze their climate risks,” officials say in the proposed guidance. “Smaller insurers are not necessarily less exposed to climate risk, because they may have concentrated business lines or geographies that are highly exposed to climate risks without the benefit of the diversification available to larger insurers.”

Life Insurers’ Real Estate

Life insurers invest by owning real estate; writing mortgages; buying mortgage-backed securities; and buying bonds issued by real estate developers and mortgage lenders.

New York department officials say one kind of risk an insurer could discuss in its climate risk analysis is “the percentage of real estate investments exposed to climate-related flood risk.”

An insurer also should address how different types of climate risk could affect its ability to get cash by selling assets, officials say.

“Insurers that are not ready to conduct a comprehensive and quantitative scenario analysis should start with a qualitative assessment and consider how various scenarios might impact their businesses and balance sheets,” officials say.

“Given that a large portion of insurers’ investments are in fixed income products, insurers are encouraged to consider the timeframe in which climate risks might manifest relative to the maturity of their investments, including the possibility of sudden changes in asset values and credit ratings,” officials say.

Risk Management and Controls

New York officials want to see each insurer create an “organizational structure” for managing climate risk.

The structure should include risk assessment, compliance, internal control, internal audit and actuarial functions, officials say.

The structure should get information about “all reasonably foreseeable and relevant material risks” and report information about this risks to senior management, officials say.

If an insurer faces concentrated exposure to climate risk, then it should show how it will manage that exposure, officials add.

(Photo: lunamarina/Shutterstock)