Treasury Unit Asks About Climate-Related Insurance Supervision Gaps

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.”

In May, the Biden administration issued an executive order that told the FIO to look at the effects of climate change on insurers.

The FIO says in the new request for information that one obstacle to conducting climate risk reviews is a lack of relevant, detailed data.

The FIO’s Questions

The FIO put 19 numbered queries in the request for information. Many of those queries include two or more questions.

Some of the questions could apply to commenters with an interest in life insurance or annuities as easily as to commenters with an interest in P&C lines.

The first question, for example, is, “Please provide your views on how FIO should assess and implement the action items set forth for FIO in the Executive Order on Climate-Related Financial Risk.”

Many of the other questions appear to be written with properties such as windstorm insurance and fire insurance in mind.

The only queries that refer directly to insurers’ investments are the 17th and the 18th questions.

“How should [the] FIO assess the efforts of insurers, through their underwriting activities, investment holdings, and business operations to meet the United States’ climate goals, including reaching net-zero emissions by 2050?” the FIO asks in the 17th query.

In the 18th query, the FIO asks commenters whether state efforts to “promote sustainable investment and underwriting activities” at insurers could help reduce use of carbon-based fuels.

(Photo: Michael A. Scarcella/ALM)