Regulators Should Identify and Mitigate Climate Risks in the Insurance Industry

Overview

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The report outlines the risks posed by climate change to the insurance sector, emphasizes the ongoing and potential impact on companies and policyholders, and advocates for increased government supervision.

Key recommendations for state insurance regulators:

• Issue Guidance: State departments should provide nonbinding supervisory guidance to insurance companies, incorporating climate risks into governance, business decisions, risk management, and conducting scenario analyses.
• Collect Comprehensive Data: Regulators should mandate insurance companies to participate in climate risk disclosure surveys, collecting qualitative and quantitative data. They should use this data to conduct scenario analyses at the statewide level.
• Utilize Existing Tools: Incorporate climate risks into existing tools like risk-based capital requirements to protect against potential financial losses.
• Develop Market Stability Strategies: State regulators should analyze climate risks to insurance markets, consider integrating climate risks into regulations, and develop strategies to prevent market issues resulting from climate-related events.
• Explore Innovative Products: Study the feasibility of innovative insurance products like parametric insurance and community-based catastrophe insurance to provide affordable and efficient coverage against climate risks.

Key recommendations for the Federal Insurance Office (FIO) to address climate risks in the insurance industry:

• Collect Data: Use FIO's authority to gather nationwide data on climate-related risks from large insurance companies, including information on exposure, strategies, coverage, and pricing policies.
• Conduct Research: Collaborate with the Treasury Department to produce comprehensive research on climate risks, assessing severity, conducting scenario analyses, and identifying vulnerable regions and sectors.
• Advise State Regulators: Guide state insurance departments on integrating climate risks into their supervisory practices, influencing local policymakers and encouraging consistent expectations nationwide.
• Collaborate with FSOC: Work within the Financial Stability Oversight Council to incorporate climate risk factors into the Systemically Important Financial Institution designation process for nonbanks, advocating for consideration of climate-related risks.
• Coordinate Internationally: Use FIO's authority to coordinate federal policy on international insurance matters to advocate for effective climate risk policies globally, supporting the development of supervisory frameworks.