Climate change continues to preoccupy the public and policymakers, and a number of legal and regulatory initiatives in the US, UK, and elsewhere are currently underway that may affect insurers. This report provides a high-level summary of climate change-related developments at the National Association of Insurance Commissioners (NAIC), the New York Department of Financial Services (NYDFS), US federal agencies, the Prudential Regulatory Authority (PRA), the Financial Conduct Authority (FCA), Lloyd’s in the UK, and the International Association of Insurance Supervisors (IAIS).

1. US developments

State Survey of Insurer’s Assessment of Financial Risks from Climate Change. The NAIC formed a Climate and Resiliency (EX) Task Force in 2020 to coordinate the NAIC’s discussion and engagement on climate-related risk and resiliency issues. At its December 2021 meeting, the Task Force received reports from each of its working groups, with a particular focus on the financial risks of climate change. The Climate Risk Disclosure Workstream, led by Oregon Insurance Commissioner Andrew Stolfi, updated the Task Force on the proposed redesign of the NAIC Climate Risk Disclosure Survey (NAIC Survey). The NAIC Survey, created in 2010, was initially designed to be an annual, publicly available insurer reporting mechanism to provide state insurance regulators a window into how insurers across all lines of insurance assess and manage climate-related risks. More recently, in 2017, the Financial Stability Board’s Task Force on Climate Related Financial Disclosures (TCFD) developed the TCFD Survey, a similar annual questionnaire that provides a framework for public companies and other organizations to disclose climate-related risks and opportunities. Since its introduction, the TCFD Survey has become a global standard, with both international supervisors and domestic regulators moving toward TCFD reporting. For additional information regarding the TCFD and climate-related reporting, see our Legal Alert.

Recognizing the trend in favor of the TCFD Survey, the Workstream decided to update the NAIC Survey to align with the TCFD Survey, with additional, insurance-specific content incorporated into the questions. The basic framework of the Proposed Redesign is a series of closed-ended and narrative questions organized around the TCFD’s four topics: Governance, Strategy, Risk Management, and Metrics and Targets.

The Workstream’s decision to align the NAIC Survey with the TCFD Survey comes after the NAIC Center for Insurance Policy and Research (CIPR) released an analysis of the NAIC Survey based on a review of data from over 1,000 companies that participated in the NAIC Survey in 2018. Among other things, the CIPR analysis found that:

• While few insurers report altering their investment strategy in response to considerations of the impact of climate change on their investment portfolio, more than half of all companies report at least some engagement in enterprise-wide climate risk management. 
• A majority of insurers across every line of business reported similar levels of engagement with internal greenhouse gas management. 
• Opportunity exists to bring the NAIC Survey into alignment with the TCFD Survey to increase the NAIC Survey’s usefulness. 

Insurers choosing to submit the TCFD Survey will not be required to answer the narrative questions in the NAIC Survey. The Task Force met on February 28 to hear comments on and discuss revisions to the proposed NAIC Survey redesign based on comments that were received during the public comment period. As of December 2021, 15 states (which, according to Commissioner Stolfi, account for 80% of premiums collected) require insurers to submit either the TCFD Survey or the NAIC Survey. 

NAIC Climate Stress Test and CAT Modelling Center of Excellence. The Climate Risk and Resiliency (EX) Task Force also received an update in December from the Solvency Workstream led by Commissioner Kathleen Birrane (MD). The Solvency Workstream reported that it exposed for public comment a series of questions regarding the best way to enhance climate risk financial surveillance to prevent climate-related insolvencies, including whether the NAIC should develop an asset and underwriting stress test for use by regulators or whether the NAIC should incorporate public disclosure into annual statements. Responses to the exposed questions are currently being analyzed by the Workstream, which expects to publish its recommendations in the first quarter of 2022. 

The Task Force also received a recommendation from its Technology Workstream to establish a catastrophe modeling “Center of Excellence” (COE) within CIPR. As proposed, the COE would facilitate state insurance department access to commercial catastrophe modeling data and provide technical training to regulators on how to use the data. The COE would not have any regulatory authority but instead would provide fact-based information to regulators and vendors.

New York Department of Financial Services (NYDFS). In November 2021, NYDFS announced the creation of a new Climate Risk Division that is tasked with integrating climate risks into NYDFS’ supervision of regulated entities. NYDFS also issued final guidance for New York domestic insurers on managing financial risks from climate change. For additional information on the NYDFS guidelines and Climate Risk Division, see our Legal Alert.

Much of the current agency-level work of the US federal government is focused on implementation of the Biden Administration’s May 20, 2021 Executive Order on Climate-Related Risk in the Financial Sector. 

Federal Insurance Office (FIO). In August 2021, the FIO issued a request for information (RFI) on FIO’s future work on climate-related financial risks and how best to implement the Executive Order. The RFI states that FIO will focus on three initial climate-related priorities when considering the adequacy of the existing regulatory framework for evaluating climate-related risks:

• physical risks (i.e., the economic cost of climate change-related extreme weather decreases the value of financial assets and increases liabilities)
• transition risks (i.e., risks that arise from the technological, market, and policy changes needed to transition to a low-carbon economy
• liability risks (i.e., legal liability for losses related to environmental damage caused by a company) 

In November, the FIO released some of the over 5,000 letters received pursuant to the RFI, including a letter from the NAIC asserting that the state-based insurance regulatory system and the NAIC have already established a foundation for addressing climate-related risks as a result of the NAIC’s focus on (i) climate financial risk disclosure and analysis, (ii) availability and affordability of insurance, and (iii) stakeholder risk awareness and engagement. The NAIC letter notes that while the NAIC “appreciate[s] the FIO’s charge to ‘assess climate-related issues or gaps in the supervision and regulation of insurers’ we hope both FIO and the [Biden] Administration use this as an opportunity to recognize and further empower the critical work being done at the state and local level.” 

Six days after submitting the letter to FIO, the NAIC published a report titled Adaptable to Emerging Risks: The State-Based Insurance Regulatory System is Focused on Climate-Related Risk and Resiliency. 

Financial Stability Oversight Council (FSOC). The Executive Order called on the FSOC to issue a special report detailing: 

• the efforts of FSOC member agencies to integrate consideration of climate-related financial risks in their policies and programs, including a discussion of any actions to enhance climate-related disclosures of regulated entities to mitigate climate-related financial risks to the financial system or assets and a recommended implementation plan for taking those actions
• any current projects to incorporate the consideration of climate-related financial risks into their respective regulatory and supervisory activities and any impediments they face in adopting those approaches 
• recommended processes to identify climate-related financial risks to the financial stability of the United States 
• any recommendations on how identified climate-related financial risks can be mitigated, including through new or revised regulatory standards

The FSOC report was published on October 21, 2021. The report contained over 30 recommendations, but in broad terms, the FSOC recommends its member agencies update existing regulations to address climate risk (particularly for vulnerable populations), build up staff and data resources to assess climate risk on both sides of the balance sheet, develop mechanisms to share data and information between FSOC members, and develop scenario analysis tools. 

US Securities and Exchange Commission (SEC). The SEC is working on a mandatory climate change disclosure rule that may be modeled after the TCFD Survey. The proposed disclosure rule is expected to be released on March 21.

     2. UK Developments

In light of the increasing focus on sustainability, the PRA and the FCA are taking a more proactive stance to ensure that firms are resilient to the risks arising from climate change. The aim is to increase transparency on climate-related risks and opportunities and to implement the recommendations of the widely recognized and supported TCFD, as well as to embed climate change in their supervisory approach. In addition, the regulations and guidance aim to address climate change by embedding environmental, social, and governance (ESG) frameworks and principles within insurance firms and across both underwriting and investment practices. Lloyd’s of London has also published guidance for managing agents as it looks to put in place ESG governance frameworks.
 
PRA Supervisory Expectations. In April 2019, the PRA published its Supervisory Statement 3/19 and became the first supervisor to set out its supervisory expectations for insurers on the management of climate-related financial risks. In sum, the PRA expects firms to take a strategic approach to managing climate-related financial risks, identify current risks and those that can arise in the future, and take appropriate actions to mitigate those risks. The PRA states that the financial risks from climate change arise from two primary channels: physical and transition risks. There is also a third risk factor for insurers — liability risks — arising from parties that have suffered loss or damage from physical or transition risk factors and seek to recover losses from those they hold responsible.

The PRA outlined four key areas of focus for insurers, which relate to governance, risk management, scenario analysis, and disclosure. Firms are expected to:

• embed the consideration of the financial risks from climate change into their governance arrangements 
• incorporate the financial risks from climate change into existing financial risk management practices 
• use (long-term) scenario analysis to inform strategy setting and risk assessment and identification 
• develop an approach to disclosure on the financial risks of climate change

Firms were expected to have fully embedded their approach to managing financial risks by the end of 2021.
 
“Dear CEO” Letter 2022. In January 2022, the PRA published its Dear CEO Letter, providing an update on the PRA’s priorities for UK life and general insurers, which included risks arising from climate change. In this letter, the PRA highlighted that: 

• Progress from its 2019 Supervisory Statement was not consistent across firms and further work was required to meet expectations.
• Supervision of the financial risks posed by climate change are to be incorporated into the PRA’s core supervisory approach this year.
• Firms should take a forward-looking, strategic, and ambitious approach in managing climate-related financial risks across their business, including in both underwriting and investment, proportionate to the scale of the risks and the complexity of a firm’s operations.

PRA Climate Change Adaption Report (October 2021). This report sets out the response of the PRA to the risks posed by climate change to its operation and policy functions. After 2022, the PRA will switch its supervisory approach on its climate-related supervisory expectations from one of assessing implementation to actively supervising against them. Where progress is insufficient and assurance or remediation is needed, the PRA will require clear plans and, where appropriate, consider exercise of its powers and use of its wider supervisory toolkit. This might include the use of risk management- and governance-related capital scalars or capital add-ons and the appointment of a Skilled Person under Section 166 of the Financial Services and Markets Act 2000. In addition, a key part of the regulator’s toolkit is regulatory capital requirements, which help ensure that firms have sufficient resources to absorb future financial losses. A significant finding in the report is that current capital regimes likely do not yet capture the full extent of climate-related financial risk. The PRA will continue to contribute to international efforts in this area and will also explore improvements to the parts of the capital framework that are specific to the UK. 

FCA Reporting. In December 2021, the FCA published Policy Statement PS21/24, which supports the TCFD’s recommendations and ambitions for disclosures related to sustainability. 
 
In particular, there are new rules and guidance for life insurers in relation to insurance-based investment products and defined contribution pension products to make mandatory disclosures consistent with the TCFD’s recommendations on an annual basis at: 

• Entity level: Firms must publish an annual entity-level TCFD report setting out how the company takes climate-related matters into account in managing or administering investments on behalf of clients and consumers. This must be published in a prominent place on the firm’s main business website.
• Product level: A firm must make disclosures on its products and portfolios, including a core set of climate-related metrics. These should be made in a prominent place on the firm’s main business website and be included or cross-referenced in an appropriate client communication or made available upon request to certain eligible institutional clients. 

The new climate-related disclosure rules will apply beginning January 1, 2022, for the largest in-scope firms and one year later for smaller firms. The first public disclosures in line with the FCA’s requirements must be made by June 30, 2023. In addition, in February 2022, the FCA published the ESG Sourcebook, which provides rules and guidance on a firm’s approach to ESG matters. 

Lloyd’s of London Guidance. Lloyd’s published its first ESG Report in 2020, setting out its commitments and ambitions in ESG matters, which include: 

• Encouraging managing agents to allocate 2% of annual premiums on innovative and sustainable products by 2022.
• Ending investment in thermal coal-fired power plants, thermal coal mines, oil sands, and new Arctic energy exploration activities. This would include a first phase where managing agents would be asked to no longer make such investments beginning January 1, 2022, and then in the second phase, Lloyd’s will ask the market to phase out of existing investments in companies with business models that derive 30% or more of their revenue from either thermal coal-fired power plants, thermal coal mines, oil sands, or new Arctic energy exploration activities by the end of 2025. 
• Managing agents will also be asked to no longer provide new insurance cover for thermal coal-fired power plants, thermal coal mines, oil sands, or new Arctic energy exploration activities after January 1, 2022. To enable the market to support their customers as they transition their businesses, the target date for phasing out the renewal of existing insurance cover for these types of businesses is January 1, 2030.

In October 2021, Lloyd’s published a guidance paper on its expectations of managing agents for addressing climate change. The guidance is designed to encourage managing agents to embed ESG principles in their business by providing directional guidance and best practice with respect to three key areas: 

• Establishing and embedding an ESG framework to enable managing agents to make robust decisions about their strategy and approach to driving sustainability across all of their business activities. Managing agents have been asked to submit an ESG strategy as part of the 2023 business planning process.
• Developing a sustainable underwriting approach by identifying an appropriate policy on sustainable insurance and taking advantage of new opportunities that come with an increasingly green economy as well as considering product innovation.
• Setting a responsible investment strategy, which will typically cover strategy and governance, ESG integration, stewardship, voting, communication, and reporting.

     3. International Association of Insurance Supervisors (IAIS) 

IAIS Climate Report. In September 2021, the IAIS published a special report assessing how insurance sector investments are exposed to climate change. The IAIS found that more than 35% of insurance company investment assets are subject to climate-related risks and that scenario projections confirm the importance, from a financial stability perspective, of a uniform transition to internationally agreed-on climate targets. 

[View source.]