UPDATE: Most US insurance companies to be required to report climate-related risks by November

Nearly 80% of US insurance companies will be required to disclose how they assess and manage climate-related financial risks and liabilities from November using a revamped standard that is aligned with international reporting standards.

Unveiled 8 April, the National Association of Insurance Commissioners (NAIC), which represents state insurance regulators, said the revised reporting standard will apply to insurance companies with at least $100 million in premiums that are licensed to operate in the 15 states that have committed to adopting the reporting requirements.

This standard, which reflects the 2017 guidelines established by the Task Force on Climate-Related Disclosures (TCFD), will require companies to complete and submit surveys annually about how climate-related risks are folded into their governance, strategy, and risk management.

Following President Joe Biden's May 2021 directive to mandate climate-related financial risk disclosures, the US Financial Stability Oversight Council also recommended last October that companies be urged to disclose risks in line with TCFD guidelines.

The NAIC standard comes in the wake of the US Securities and Exchange Commission's much-awaited proposal to require publicly traded companies including insurance firms to disclose climate-related financial disclosures in annual and quarterly financial reports. The SEC's rule, however, won't be finalized at least until the end of the year.

Dual role: investor and underwriter

Insurance companies, which play a dual role as an investor and underwriter of risk in the financial market, are regulated by states.

The federal government, through the Department of the Treasury, plays a limited role in ensuring that unexpected risk, such as that arising from climate impacts on property and casualties, does not build up across the national insurance system.

The Treasury's Federal Insurance Office (FIO) is currently working on a report to establish where it can provide guidance to states on how to improve insurance availability for climate-affected populations.

Describing the TCFD guidelines as the "international benchmark for climate risk disclosure," NAIC said that the 15 states will require companies licensed in their respective jurisdictions to have the same standard for reporting climate risks and liabilities as do regulators in France, Switzerland, and UK.

Forward-looking statements with focus on climate impacts

The TCFD recommended the reports contain forward-looking statements with a strong focus on climate-related risks and liabilities associated with transitioning to a net-zero future. It said disclosures should center around governance, risk management, strategy and GHG targets.

The NAIC survey will ask companies to identify and assess climate-related risks on their insurance and reinsurance portfolios by geography, business division, or product segments, and to include the following risks:

• physical risks from changing frequencies and intensities of weather-related perils;
• transition risks resulting from a reduction in insurable interest due to a decline in value, changing energy costs, or implementation of carbon regulation; and
• liability risks that could intensify due to a possible increase in litigation.

Developed over a 14-month process by an NAIC task force led by insurance commissioners Ricardo Lara of California and David Altmaier of Florida, the new reporting standard revamps the 2010 Insurer Climate Risk Disclosure Survey.

"We have all been affected by climate-related events, including wildfires, floods, and increased extreme weather. The first NAIC climate risk survey, created more than 10 years ago, led the way at the time, and it's great to see the NAIC lead again by being the first US financial system regulator to adopt TCFD-aligned disclosure requirements," said Oregon Insurance Commissioner Andrew Stolfi who also was involved in the NAIC task force efforts to coordinate public input.

15 states commit to disclose climate risks

Until 2020, just six states—California, Connecticut, Minnesota, New Mexico, New York, and Washington—were collecting this type of information from insurance companies.

Now, NAIC said Delaware, Maine Maryland, Massachusetts, Oregon, Rhode Island, Vermont, and the District of Columbia have adopted the same practice. These jurisdictions represent nearly 80% of insurance companies.

"While 28 insurance companies provided TCFD-compliant reports in 2021, this list will grow to nearly 400 insurance companies and groups as a result of the consensus demonstrated today," the NAIC said in an 8 April release.

An S&P Global Sustainable1 analysis showed that the insurance sector maintains significant investments in carbon-intensive and climate-vulnerable industries, while at the same time facing liability risks from underwriting property and assets that are damaged by climate-fueled wildfires, hurricanes, droughts, and flooding.

The US insurance industry wrote net premiums totaling $1.28 trillion in 2020, with premiums recorded by property and casualty insurers accounting for 51%, and life-annuity insures responsible for the remainder, according to S&P Global Market Intelligence.

Moreover, the Insurance Information Institute notes that property-casualty insurers paid out $74.4 billion in property losses related to natural catastrophes in 2020, according to Aon, compared with $38.7 billion in 2019, and $60.4 billion in 2018, including losses from the National Flood Insurance Program.

Clear picture

The NAIC's revamped standard is seen among international insurance regulators as well as institutional investors as a positive step in moving the global insurance sector towards a standardized reporting regime.

"With insurance companies' investments and underwriting reaching around the globe, it is critical that insurance regulators speak the same language as we seek to protect markets from climate risks," said Anna Sweeney, who supervises the UK's insurance sector and serves as Chair of the UN Development Programme Sustainable Insurance Forum.

Tom Sanzillo, financial analysis director for the global nonprofit Institute of Energy Economics and Financial Analysis, described the NAIC action as a "very important move" for global integration of the US insurance sector, especially as the US remains behind most of the world on tackling climate.

He said it is more important than the SEC's proposal on climate disclosure, which could get tied up for years in litigation. "The steps that the NAIC is taking will result in action that is taken pretty soon," Sanzillo added.

Steven Rothstein, managing director of Ceres' Accelerator for Sustainable Capital Markets, called the revamped NAIC survey a "vital first step" in capturing climate impacts on the US insurance industry. Ceres represents sustainable institutional investors.

As the Treasury learned through comments on its efforts to improve federal oversight, the US government currently lacks a systemic approach to assessing whether insurance is available or affordable to communities' most exposed to climate risks.

In March, US Secretary of the Treasury Janet Yellen said the FIO is eyeing the end of 2022 to deliver a report on federal supervision of climate-related insurance that also will identify potential gaps in regulatory practices especially among marginalized populations that are most vulnerable to climate impacts.

Unlike others, Yevgeny Shrago, policy counsel for nonprofit Public Citizen, was less enthusiastic about the revamped NAIC survey.

In a 13 April tweet, Shrago said: "I had a slightly less rosy view of how effective this will be at actually sussing out climate risk. A lot depends on whether the Scope 3 disclosure is a dead letter or not."

He acknowledged that the survey asks a lot of the right questions, but "getting the answers will be challenging."

For instance, Shrago said, the survey asks insurance companies to disclose Scope 3 emissions if they deem it appropriate. "What happens if the insurers don't agree?" he asked.

--Article updated with comments from IEEFA's Tom Sanzillo and Public Citizen's Yevgeny Shrago.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.