The Treasury Department has called on state regulators to craft policies to identify and mitigate
In a report released Tuesday morning, Treasury's Federal Insurance Office, or FIO, rolled out a 20-point action plan for addressing
The report calls for state regulators to require insurers to conduct risk modeling and
In a speech delivered Tuesday at an event hosted by the Brookings Institution, Assistant Treasury Secretary for Financial Institutions
"Impacts on the insurance market can have potentially significant consequences for homeowners and their property values that we are seeing, which can spill over to other parts of the interconnected financial system," Steele said. "For example, financial institutions and investors hold assets like mortgages and securities that are directly or indirectly affected by insurance coverage."
The report outlines three categories of supervisory and regulatory oversight for state insurers to focus on: prudential, to ensure individual insurers can meet the needs of their policyholders; macroprudential, to make sure groups of insurers are addressing sector-wide risks; and market conduct, aimed at issues of fairness.
Steele said state insurers already have many tools at their disposal for handling these issues, but the report serves as a reminder of what those capabilities are and outlines potential new policy instruments that regulatory bodies might consider. These include incorporating climate readiness into accreditation standards and creating climate stress testing, similar to the initiative
"All state insurance regulators should develop and adopt climate-related risk monitoring guidance appropriate for their markets, which should include expectations for insurers to incorporate climate-related risks into their annual financial planning, as well as their long- and short-term risk management processes," Steele said, noting that some states have already done this.
Steele also pointed to the NAIC Catastrophe Modeling Center of Excellence as an already available resource that insurance regulators can turn to when developing their own oversight mechanisms.
The report also puts a heavy emphasis on improving data gathering nationally. Steele pointed to FIO's proposal to gather more data on current and historical homeowners insurance policies from certain insurers as part of the effort to make data more abundant and comparable.
"Assessing climate-related insurance market disruptions requires comprehensive assessments that pair high quality socioeconomic and real estate information with granular insurance data," he said. "Developing a thoughtful, coordinated approach will be a more long-term, iterative effort for FIO as it partners with state and federal colleagues in this endeavor."
Steele said more information about this data gathering effort will be announced later this year.
The report also urges more state regulators to adopt the annual NAIC Climate Risk Disclosure Survey, through which insurers can provide information about how they assess and manage climate-related threats. It also urges the organization to beef up the survey to gather more information to quantify the financial implications of insurers' risks and readiness.
Tuesday's report was compiled in response to a 2021 executive order from the White House calling for financial regulators to assess the various implications of climate change risk and craft policies to address them. Despite the Biden administration's focus on climate change, the subject has been noticeably absent from recent legislative efforts related to national insurance issues, including a bill last year to
In his remarks, Steele noted that there has been a fivefold increase in the number of $1 billion-plus natural disasters during the past five years compared to the 1980s, even after being adjusted for inflation. The report also notes that nine of the 10 costliest hurricanes in the U.S. have occurred since 2005 and eight of the costliest wildfires have occurred since 2017.
The recommendations also come as insurance premiums in climate-sensitive areas such as Florida are soaring and as some insurers stop offering homeowner policies in major markets, including California. Steele said these developments underscore the need for a national approach to improving best practices.
"Climate change affects our entire planet. It does not respect the distinctions between different zip codes, state lines or national borders," he said. "That means we all have a role to play and a duty to work together to address the threats posed by climate change."
