Following up on proposed guidance released in March, the New York Department of Financial Services (“DFS”) on November 15 released “Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change”. Describing climate change as “one of the most critical risk management issues of our generation” the guidance sets forth expectations of the State of New York that domestic insurers will identify, mitigate and report the financial risks associated with climate change. The guidance does not include a specific time line for implementation but does state that the DFS expects insurers to implement its expectations regarding board governance and implementation of management techniques by August 15, 2022.
Key elements of the guidance are:
- an approach to climate risks that is proportionate to the insurer’s size, complexity, geographic distribution, business lines, investment strategies and other factors;
- materiality thresholds for climate risk taken from the NAIC Financial Condition Examiner Handbook 2020 (“Handbook”) including five percent (5%) of surplus or one half of one percent (0.5%) of total assets, subject to adjustment based on professional judgement;
- an expanded time horizon for assessing climate risks starting with medium term view (e.g. five to ten years) and ultimately a long term approach (e.g. ten to thirty years);
- initially identify qualitative financial risks from climate change but move to quantify risks as quickly as possible;
- designate a board member or committee responsible for the insurer’s management of climate change risks;
- designate one or more members of its senior management as responsible for the insurer’s management of climate change risks;
- develop a written risk policy adopted by the board describing how the insurer monitors and manages material climate risks in line with its risk appetite statement;
- implement various management techniques to ensure material climate change financial risks are assessed and managed through the existing enterprise risk management functions;
- use scenario analysis and stress testing in addition to key principles of an effective risk management framework from the Handbook to assess climate risks. The guidance explicitly states that capital adequacy assessments in relation to climate risks are not required;
- integrate climate risks into enterprise risk management. Specifically, DFS expects that all insurers that are required to perform Own Risk Solvency Assessments (“OSRA”) to include climate risk in such assessments;
- regularly reassess determinations that climate change risks are not material; and
- publicly disclose climate change risk exposures and risk management processes. Disclosure may be made through responses to the NAIC Climate Risk and Disclosure Survey (mandatory for insurers with annual country-wide premiums above $100 million), on the insurer’s web site, or though augmenting public general-purpose financial reports with relevant climate information.