Climate-related financial risk in the insurance industry

Treasury request for information

Amy S. Matsuo

Amy S. Matsuo

Principal and National Leader, Regulatory Insights, KPMG US

+1 919-244-0266

The increased frequency and severity of climate-related disasters, as well as the magnitude of associated insurance losses, highlight the significance of climate-related financial risks and the role of insurers in responding to them. FIO engages with the NAIC and state insurance regulators as well as with the members of the FSOC (including the SEC) on their work directed toward assessing and disclosing climate-related financial risk. NAIC’s Climate and Resiliency Task Force is currently looking at regulatory approaches to climate risk and resiliency, climate risk disclosures, and predictive modelling to better assess and evaluate climate risk exposure.

The Federal Insurance Office (FIO) of the Department of the Treasury has published a request for information (RFI) soliciting public comment on the insurance sector and climate-related financial risks. The RFI directly responds to the May 2021 Executive Order on Climate-Related Financial Risks, which instructed the FIO to assess climate-related issues or gaps in the supervision and regulation of insurers and to examine the potential for “major disruptions” of private insurance coverage in regions particularly vulnerable to climate change. (See KPMG Regulatory Alert here). Responses to the RFI are intended to help the FIO:

  • Assess the implications of climate-related financial risk for the insurance sector
  •  Better understand data needs, including:
  • Which data elements are necessary to accurately assess climate risk
  • Which data elements are unavailable
  • How FIO could collect this data and make it available to stakeholders.

To that end, the RFI seeks input on:

  • Challenges to data collection, such as quality, consistency, comparability, granularity, and reliability
  • Key factors for developing standardized and comparable disclosures, as well as assessments of the standards provided by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) and the NAIC Insurer Climate Risk Disclosure Survey
  • Advantages/disadvantages of a verified, open-source, centralized data base of climate information.

The FIO states that access to high-quality, reliable, and consistent data will be necessary for accomplishing each of its initial climate-related priorities, which follow.

Climate-Related Priorities

  • Insurance Supervision and Regulation – Assess climate-related issues or gaps in the supervision and regulation of insurers, including their potential impacts on U.S. financial stability.

Such assessments will include supervisory practices and resources, including examination policies and procedures, solvency assessment and techniques, data availability and integrity, public disclosures, modeling, and forward-looking assessments (e.g., scenario-analysis, stress testing).

RFI questions address:

  • Prudential concerns, market conduct, and consumer protection
  • Channels through which climate-related risk may impact financial stability and/or business models
  • Structural barriers to assessing, managing, and integrating climate-related risks (e.g., accounting frameworks, other standards).
  • Insurance Markets and Mitigation/Resilience – Assess the potential for major disruptions of private insurance coverage in U.S. markets that are particularly vulnerable to climate change impacts; facilitate mitigation and resilience for disasters.

Such assessments will include examination of the insurability of disasters that are produced or exacerbated by climate change, including wildfires, hurricanes, floods, wind damage, and extreme temperatures. The assessments will also look at the availability and affordability of insurance coverage in high-risk areas, particularly for traditionally underserved communities and consumers, minorities, and low- and moderate-incomes persons.

RFI questions address:

  • Markets facing or at risk for major disruption from climate change
  • Actions taken in response to the threat of economic losses, and strategies for incorporating mitigation and resilience considerations
  • Whether and how underwriting models consider climate change impacts or affect pricing and/or business decisions
  • Availability and affordability of climate-related insurance in vulnerable markets, including traditionally underserved communities and consumers, minorities, and low- and moderate-income persons
  • Role of public-private partnerships and state and local collaboration.
  • Insurance Sector Engagement – Increase engagement on climate-related issues; leverage the insurance sector’s ability to help achieve climate-related goals.

Such engagement will include assessment of how to achieve national climate-related goals, including mitigation, adaptation, and transition to a lower carbon economy through consideration of underwriting activities, investment holdings, and business operations . It will also consider ways to address the lack of common methodology and standardization in measuring financed emissions, particularly those of non-public companies in which the insurance sector underwrites and invests.

RFI questions address:

  • How to assess efforts to achieve net-zero emissions
  • States’ role or actions to encourage transition to a low-emissions environment, such as new products or underwriting activities.

The FIO requests responses to the RFI be submitted by November 15, 2021.

About FIO. The Federal Insurance Office was established within the Department of the Treasury by the Dodd-Frank Act. It has the authority to monitor all aspects of the insurance sector, monitor the extent to which traditionally underserved communities and consumers have access to affordable non-health insurance products, and to represent the United States on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors (IAIS). FIO also serves as an advisory member of the Financial Stability Oversight Council (FSOC).

Related actions. In May 2021, the "IAIS" published a paper clearly stating that the insurance industry needs to embed climate risk across all facets of risk management. The recommendations in this paper are likely to influence the US NAIC and individual state insurance supervisors and they may adopt components going forward as they continue efforts to understand the financial and nonfinancial risks posed by climate change. See KPMG Regulatory Alert on the IAIS paper here.

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