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US Treasury looking at end 2022 to report on climate-related insurance gaps

03 March 2022 Amena Saiyid

The US Department of Treasury is eyeing the end of 2022 to deliver a report on federal supervison of climate-related insurance that also will identify potential gaps in regulatory practices.

At a 3 March virtual roundtable, US Secretary of Treasury Janet Yellen shared information about the steps the Biden administration is taking at the federal level to help state, local and tribal governments build resiliency against the increasingly frequent and costly climate-fueled weather impacts that are causing damages in excess of $1 billion.

Treasury's Federal Insurance Office (FIO) is looking at climate-related risk in the insurance sector, "trying to answer questions like whether climate-related weather events have impacted the availability of insurance coverage, especially in high-risk areas and for traditionally underserved communities," she said.

Insurance companies in the US are broadly regulated by states, but the FIO has limited oversight role in preventing otherwise unexpected risk, such as climate-related financial risk, from building up across the national insurance system.

Responding to President Joe Biden's 20 May 2021, order on climate-related financial risk that asked for more data to assess the climate risks faced by the insurance sector, the FIO asked the public to comment on how federal oversight of the insurance sector's response to climate-related risks and its impacts on marginalized populations can be improved.

The insurance sector plays a dual role as an investor and underwriter of risk in the financial market. 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.

Among the many comments FIO received in November, the agency was told that the US government currently lacks a systemic approach to assess whether insurance is available or affordable to its communities most exposed to climate risks.

Attorneys general of New York, Connecticut, Massachusetts, Maryland, and Oregon also told the FIO that the insurance sector's level of investment exposure in the carbon-intensive fossil fuel industry "creates risk of asset stranding and devaluation as the global economy decarbonizes, threatening those portfolios and the financial stability of the industry."

Insurance giant divesting from fossil fuels

A day before Yellen's panel discussion, New York-based American International Group (AIG), the 10th largest insurance firm in the US, announced that it would no longer underwrite or invest in new oil and gas exploration activities in the Arctic as well as construction of new coal-fired power plants, thermal coal mines, or oil sands. It also said it would phase out its existing commitments by January 2030 from companies that derive 30% of their revenues from coal mines, coal-fired power plants, and oil sands or 30% of their energy production from coal.

In 2020, AIG held 3.3% of the global market share in writing $11.88 billion in direct premiums for commercial lines of business, according to the Insurance Information Institute.

AIG's announcement to pull away from underwriting new oilsands projects follows MetLife, which announced divestment plans in July 2020, and The Hartford Financial Services Group that made a similar announcement in November 2021.

AIG is the first US insurance company to divest itself from underwriting new Arctic exploration activities, but it is a "climate laggard" when compared with European counterparts, such as the RSA Insurance Group and the Pension Insurance Corporation in UK, Zurich Insurance Group in Switzerland, and AXA and Natixis in France, according to the Institute of Energy Economics and Financial Analysis, which tracks oil and gas divestments.

State, local officials on frontlines of climate disasters

Fossil fuel combustion accounts for the lion's share of total US emissions. Despite the pandemic, fossil fuel generated 92% of total US emissions (4.33 billion mt) in 2020.

In 2021, 20 climate-fueled weather and disaster events recorded losses exceeding $1 billion each to affect the United States, according to the National Oceanic and Atmospheric Administration's National Center for Environmental Information which estimated the total damages at $145 billion.

"That's a fourfold increase from just two decades ago. And it was state and local officials—the mayors, city planners, county commissioners, and governors—who were on the frontlines of the response," Yellen said.

At Treasury, Yellen said, "We want to make sure there's enough federal funding. We know that federal dollars play a critical role in catalyzing state and local action, especially in an economic recovery."

She said a Treasury rule makes sure that the $350 billion in fiscal recovery funds that states and local governments received under the American Rescue Plan can also be put to use to ease the transition to net-zero and shore up climate resilience, such as improving water and wastewater infrastructure, expanding energy efficiency and weatherization.

"You see we cannot build back what was," said Former New Orleans Mayor Mitch Landrieu, who Biden appointed in November as White House senior advisor to oversee the implementation of the Infrastructure Investment Jobs Act.

Posted 03 March 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst

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.


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