Taking the Wheel on Climate Change


· 4 min read
With 50 states and as many insurance regulators in the US, the existence of a Federal Insurance Office (FIO) almost sounds implausible. But thanks to climate change, an assertive US Department of the Treasury is nudging the FIO into action.
Moody’s believes the credit impact of “a delayed and disorderly carbon transition” is the greatest threat to financial firms, as the increasing frequency of catastrophic weather events will lead to loan defaults and rising insurance claims. The task on hand for the FIO, therefore, is to identify and assess climate-related issues or gaps in the supervision and regulation of insurers, including their potential impact on financial stability.
The Dodd-Frank Act grants the FIO certain financial stability, monitoring and international responsibilities. The FIO advises the Secretary of the Treasury on major domestic and prudential international insurance policy issues, and it serves as a non-voting member on the Financial Stability Oversight Council (FSOC). Among other things, it is also specifically authorised to monitor all aspects of the insurance profession, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance profession or the US financial system.
President Joe Biden’s 20 May 2021 Executive Order on Climate-Related Financial Risk emphasises the important role that the insurance sector can play in combatting climate change. It instructs the Secretary of the Treasury to task the FIO “to assess climate-related issues or gaps in the supervision and regulation of insurers, including as part of the FSOC’s analysis of financial stability, and to further assess, in consultation with states, the potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change impacts”.
The FIO intends to initially focus on the three following climate-related priorities, in particular:
How should the FIO identify and assess climate-related issues or gaps in the supervision and regulation of insurers, including their potential impact on financial stability? In seeking answer to this, the FIO wishes to address:
(a) Prudential concerns
(b) Market conduct regarding insurance products and services
(c) Consumer protection.
The FIO also wishes to assess the effectiveness of US state insurance regulatory and supervisory policies in addressing and managing climate-related financial risks with regard to the threat they may pose to US financial stability. This would include identifying:
In the process, identifying and assessing:
Bloomberg Green recently noted: “The clock is ticking for banks, insurers and asset managers [that are] still providing support to oil, gas and coal producers. It’s not just the moral imperative – that fossil-fuel use is destroying the atmosphere and life on Earth with it. It’s that their financial health requires leaving such companies behind.”
Meanwhile, Sonia Hierzig, head of financial sector research at ShareAction, warned: “It is baffling that most insurance companies still seem happy to invest in companies or provide insurance for projects that continue to fuel this crisis. Insure Our Future’s most recent scorecard on insurance, fossil fuels and climate change found that insurers in the US, east Asia and the Lloyd’s market, particularly, continue to support this sector with few restrictions – despite its clear incompatibility with the goals of the Paris Agreement.”
The US is the world’s largest historic greenhouse gas emitter. Now, standing on the verge of running out of carbon budget, US insurers need to abandon their fossil-fuel fixation. Would the FIO be able to make that happen? The intent seems right and as of now, it appears to be getting into the driver’s seat.
This article is originally published by the JOURNAL, Chartered Insurance Institute. Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.
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