Federal Insurance Office Gently Turns Up the Heat On Global Warming
Created as part of the Department of the Treasury by Section 502 of the Dodd-Frank Act, the FIO acts essentially as the federal government’s clearinghouse for information on the insurance industry, and advises the federal Financial Stability Oversight Council (“FSOC”) which insurers, if any, should be subject to enhanced supervision by the Federal Reserve Board. The FIO, however, has no power itself to regulate the operations and financial condition of insurance companies. The agency has the specific statutory authority to request information from insurers, and can also, in rare instances, issue subpoenas provided that, first, its director make a written finding that the information is necessary for the FIO to execute its statutory functions and, second, that the data sought is not otherwise available from public or insurance regulatory sources. See 31 U.S.C. § 313.
The FIO has indicated its approach to implementing President Biden’s Executive Order 14,030, on Climate-Related Financial Risk to address its priorities, including evaluating insurance supervision and regulation, examining insurance markets and mitigation/resilience, and promoting insurance sector engagement on climate issues. The agency asked insurers to voluntarily provide information on the following topics, among others:
- How the FIO should assess and implement the action items set forth for it in the Executive Order, specifically “to assess climate-related issues or gaps in the supervision and regulation of insurers, including as part of the FSOC’s analysis of financial stability, and to further assess, in consultation with States, the potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change impacts”?
- How should 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?
- What specific types of data are needed to measure and effectively assess the insurance sector’s exposures to climate-related financial risks? If data is not currently available, what are the key challenges in the collection of such climate-related data?
- What are the key factors for the insurance sector in developing standardized, comparable, and consistent climate-related financial risk disclosures?
- How should FIO identify and assess climate-related issues or gaps in the supervision and regulation of insurers, including their potential impact on financial stability, taking into account: (a) prudential solvency concerns, (b) market conduct regarding insurance products and services, and (c) consumer protection?
- What factors should FIO consider when identifying and assessing the potential for major disruptions of insurance coverage in U.S. markets that are particularly vulnerable to climate change impacts, and what markets are currently or likely in the future to be facing major disruptions due to climate change impacts?
- To what extent, if any, are models (whether internal proprietary models, open-source models, or third-party vendor models) used in the underwriting process to consider the impact of climate change? How do these models affect pricing of insurance products and business decisions (e.g., level of catastrophe exposure, utilization of reinsurance)? What are the best practices for model validation?
As noted, the FIO request for information is completely voluntary, although it is not at all inconceivable that aggressive state regulators will evaluate the extent to which an insurer submitted a response to the FIO as part of a financial or market conduct examination of the insurer next year or the following year. Clients may well find that responding to the FIO’s request by November 15, 2021 is a relatively inexpensive way to show good corporate citizenship at a time when global warming is front page news.
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