The New York Department of Financial Services (DFS) has issued Insurance Circular Letter No. 15 (2020) (Circular Letter) relating to the impact of climate change on insurers. Among other things, the Circular Letter outlines new climate-related expectations for New York-licensed insurers and DFS’s plans for facilitating the changes it expects insurers to make. The Circular Letter is the latest climate-related guidance from DFS, which issued a circular letter in 2017 urging insurers to manage resources prudently and incentivize policyholders to adopt environmentally friendly practices. DFS is also participating in the National Association of Insurance Commissioners (NAIC) climate risk survey, which directs insurers to answer questions relating to how they incorporate climate risks into their mitigation, risk management, and investment plans.
The Circular Letter states that DFS “expects” all New York insurers (domestic and foreign) to start integrating the consideration of the financial risks from climate change into their governance frameworks, risk management processes, and business strategies. For example, the Circular Letter notes that “insurers should designate a board member or a committee of the board, as well as a senior management function, as accountable for the company’s assessment and management of the financial risks from climate change.” New York-domiciled insurers should consider making such a designation in advance of December 1, 2020, which is the first time corporate governance annual disclosure (CGAD) filings are due in New York. For more information on the CGAD filing requirement in New York, see our Legal Alert: New York Department of Financial Services Proposes Trio of Corporate Governance and Oversight Rules for Insurers.
The Circular Letter also outlines DFS’s expectation that insurers address climate change as a “reasonably foreseeable and relevant material risk and should consider how it impacts risk factors such as investment risk, liquidity risk, operational risk, reputational risk, strategy risk, and underwriting risk” as part of their Own Risk and Solvency Assessment (ORSA) and as a function of enterprise risk management (ERM). New York Insurance Regulation 203 requires New York domestic insurers to maintain a formal ERM function that “identifies, assesses, monitors, and manages enterprise risk,” and to conduct an ORSA at least annually. ORSA summary reports and enterprise risk reports are also required to be filed with DFS annually. Insurers domiciled in other states are subject to comparable requirements under laws and regulations in their states of domicile based on the NAIC Insurance Holding Company System Regulatory Model Act (#440) and the NAIC Risk Management and ORSA Model Act (#505).
The Circular Letter maintains that insurers should start developing their approach to climate-related financial disclosure and advises insurers to consider engaging with the Financial Stability Board’s (FSB) Task Force for Climate-related Financial Disclosures (TCFD) framework and other established initiatives when doing so. For its part, DFS intends to publish detailed guidance “consistent with international best practices on climate-related financial supervision and welcomes input from industry in that process.” DFS also intends to organize a series of global knowledge exchange webinars to allow industry participants to share their goals, experiences, and lessons learned in their efforts to manage the financial risks from climate change.
Questions pertaining to an insurer’s approach and activities related to the financial risks from climate change will be integrated into DFS’s examination process starting in 2021. Notably, the Circular Letter states that “each insurer should take a proportionate approach [to climate change risk] that reflects its exposure to the financial risks from climate change and the nature, scale, and complexity of its business,” and that DFS “understands that climate change affects each insurer in different ways and to different degrees depending on the insurer’s size, complexity, geographic distribution, business lines, investment strategies, and other factors.”
The Circular Letter, and an associated DFS Press Release, were issued in coordination with Superintendent Linda Lacewell’s keynote speech at Insurance ERM’s Insurance Risk & Capital Americas 2020 virtual event held on September 22, 2020, and coincide with Climate Week NYC, a climate-change summit bringing together international business, government, and civic leaders with the purposes of driving climate action. DFS also recently became a supporting institution of the United Nations Environment Programme Finance Initiative Principles for Sustainable Insurance, and announced on September 22, 2020, the execution of a Memorandum of Understanding with the New York State Energy Research and Development Authority in order to “leverage the state’s financial sector to address the effects of climate change, support the implementation of New York’s ambitious climate goals, and enhance New York communities’ climate resilience.”
It is possible that DFS will take additional climate-related action in the future, with Superintendent Lacewell noting in a September 22 tweet that there is “more to come” on the issue. We will continue to monitor these developments.