What You Need to Know
- The FIO says an assessment of how climate-related risks might affect the insurance sector should include a look at the potential impact on life insurers' investment activities.
- The office contends that one obstacle to conducting those reviews is a lack of relevant data.
- The questions in a new FIO request for information appear to focus more on underwriting and benefits than on insurers' investments.
The Federal Insurance Officer — an arm of the U.S. Treasury Department — wants to know how well U.S. insurers are prepared to handle the effects of climate change.
The FIO says one concern is how climate-related risk might affect life insurers’ investment portfolios.
But, in a new request for information, the FIO appears to focus on benefits, underwriting and product availability issues related mainly to property and casualty insurance lines, rather than life insurance and annuity issuers’ investment portfolios.
The FIO published the request for information Tuesday, in the Federal Register.
Comments are due Nov. 15.
The Financial Stability Board’s Report
In 2020, a group for the wealthiest countries’ financial services regulators, the Financial Stability Board, suggested that climate-related risks include the possibility that extreme weather events could hurt insurers by eroding the value of financial assets, as well as by increasing claim costs.
Natural disasters tend to have only modest effect on life and annuity issuers’ benefits costs.
But life and annuity issuers tend to be much more vulnerable to fluctuations in financial asset values than typical health insurers or P&C insurers are, because life and annuity issuers make more use of investment earnings to pay benefits.
The Financial Stability Board’s report indicates that an assessment of climate-related financial risk “should include how the life and property & casualty (P&C) insurers’ business models (including their underwriting activities, market activities, and investment activities) are affected by each category of risk,” according to the FIO.
The FIO notes that life and annuity issuers could suffer from the effects of climate-related economic shifts as well as from disasters hurting the value of mortgages and mortgage-backed securities.
“U.S. life insurance sector is one of the largest investors in the U.S capital markets, with over $4.7 trillion in investments held in general accounts at year-end 2020,” the FIO says. “As owners of significant amounts of assets, insurers could be vulnerable to potential decreases in asset values arising from the transition towards a low-carbon economy.”