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Federal Insurance Office urged to push climate risk disclosure

Treasury office seeks comment on policies to address climate change

The Alisal fire burns along Refugio Road near Goleta, Calif., on Oct. 13. Average insured losses in the past 10 years are more than twice as high as they were in the previous decade.
The Alisal fire burns along Refugio Road near Goleta, Calif., on Oct. 13. Average insured losses in the past 10 years are more than twice as high as they were in the previous decade. (Luis Sinco/Los Angeles Times via Getty Images file photo)

Corrected 10:32 a.m. | Federal and state regulators must push insurance companies to disclose more information on climate-related risk and their role in underwriting the fossil fuel industry, investors and advocates said in comment letters to the Treasury Department’s Federal Insurance Office.

Without such efforts, some investment advisers fear that regulators will lack the information needed to formulate and implement policies that would shield policyholders from skyrocketing claims due to extreme weather events exacerbated by climate change. They may also lack understanding of which market participants are making fossil fuel projects economically feasible amid the government and private sector’s push toward net-zero emissions.

“We have a difficult time assessing the proportion of premiums insurers receive from different sectors and therefore, we only have anecdotal data on what percent of insurers’ premiums come from the fossil fuel industry,” Leslie Samuelrich, president of Green Century Capital Management, said in a letter. “Nor do we have an insight into what types of fossil fuel operations and infrastructure these companies are insuring.”

Green Century Capital Management advises Green Century Funds, a sustainability mutual fund company based in Boston.

Established under the 2010 Dodd-Frank financial overhaul, the FIO monitors the U.S. insurance industry. It identifies gaps in current regulations that could lead to a systemic crisis in the insurance sector or the overall financial system. It also examines whether insurance products are available and affordable for minorities and low-income communities.

The FIO does not adopt regulations, but the office collects data and analyzes information on the insurance sector, coordinates federal efforts and develops policy on prudential aspects of international insurance matters, including climate change.

The FIO asked stakeholders for comments on actions it should take to tackle climate change as part of its efforts to implement President Joe Biden’s executive order in May directing federal agencies to develop “a whole-of-government approach” to mitigate climate risks to the U.S. financial system. The comment period for the request for information closed Monday.

In the letters, ESG investment advisers and progressive groups called on the FIO to work with states to gather information on insurance companies’ insured and financed emissions. This includes their underwriting premiums from and investment in fossil fuel companies and projects.

“FIO can use its convening and data collection authorities to encourage insurers to make and follow through on meaningful net zero commitments, including reductions to their financed and insured emissions,” Samuelrich said.

Liberty Mutual recommendation

Insurers and industry trade groups are less keen on such disclosure, calling on the government to instead focus on strengthening existing programs to mitigate the worst ramifications of climate change.

Liberty Mutual Insurance, one of the largest U.S. property and casualty insurance companies, recommended that FIO consider “an appropriate level of transparent disclosures to policyholders and investors relating to climate change risks that may materially affect a financial entity’s business” that are based on guidelines from the Taskforce on Climate-Related Financial Disclosures.

In a letter dated to FIO Director Steven Seitz, the company on Monday said the disclosure framework “provides a solid foundation if regulators decide to require disclosures for the insurance sector. However, we caution against requiring quantitative climate risk reporting until there is improvement in the area of climate data and modeling.”

The National Association of Mutual Insurance Companies, the largest property and casualty insurance trade group in the U.S., urged the FIO “to exercise restraint in collecting additional new data.”

Insurers have already taken steps to address climate change, NAMIC said in its response, and additional regulatory requirements, such as increased data collection, could become “burdensome to the point of counterproductivity.”

In particular, insurers operating in coastal, hurricane-prone states and in western, wildfire-prone states have struggled amid a surge of climate-related disasters in recent years.

Insurance providers have focused on the importance of mitigation to limit risk and tried, in places like California and Florida, to reduce exposure by exiting certain markets. Still, average annual insured losses from natural catastrophes in the U.S. skyrocketed in the last decade, to roughly $51.8 billion per year, according to Insurance Industry Association data. From 2000 to 2009 — a period that included Hurricane Katrina, the costliest natural catastrophe in U.S. history — average annual insured losses were roughly $20 billion.

The Hartford pledge

Coverage providers increasingly are relenting to the pressure and making new commitments. The Hartford this month pledged $2.5 billion over the next five years to address climate change and accelerate its exit from industries that harm the environment. European firms such as Lloyd’s of London and Axa SA have made similar commitments to curb emissions and transition their underwriting portfolios away from polluting industries. Still, the degree to which companies are involved in emissions-producing industries can be difficult to determine, observers said.

The Center for American Progress, a left-leaning public policy research and advocacy organization, noted in its comment letter that in states such as California, the National Association of Insurance Commissioners has made similar efforts to obtain climate-related information from insurance companies. Those initiatives either have been limited in scope or did not produce sufficiently granular information to compare insurers. 

“The FIO should step in to close this data gap and improve transparency surrounding the impact of climate-related risks on the insurance sector,” Todd Phillips, CAP’s director of financial regulation and corporate governance, and Andres Vinelli, vice president of economic policy, said in a letter Monday.

Phillips and Vinelli also urged the FIO to up the ante on state regulators by reviewing their current rules and making explicit recommendations on policy actions to mitigate climate-related risks.

The Insurance Information Institute, a New York-based business association whose members include more than 60 insurance companies, said that “the U.S. insurance sector is arguably the most heavily regulated industry in the world” and already has strong frameworks and practices in place for climate risks. 

In a letter sent Monday, CEO Sean Kevelighan and Chief Insurance Officer Dale Porfilio said what the sector needs to stay afloat is assurance that insurers can price coverage consistently with expected costs, including using residual market programs to cover areas such as California, Louisiana and North Carolina that are more prone to hurricanes, earthquakes and other risks.

Insurers are also increasingly concerned about a large portion of the U.S. housing market that is uninsured for flood risk, with homeowners caught by surprise when natural disasters bring in flooding. For example, the remnants of Hurricane Ida dropped up to 8 inches of rain, accompanied by tornadoes, in parts of Pennsylvania, New Jersey and New York. Areas most affected were ones in which 10 percent or less of properties had flood insurance.

“To the extent that FIO and other federal agencies can help keep a lid on losses and claims by helping to drive advances in pre-emptive mitigation and resilience, insurers and risk managers will be able to continue doing what they already are doing well,” Kevelighan and Porfilio wrote. 

This report was corrected to reflect Dale Porfilio’s title at the Insurance Information Institute.

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