At the beginning of the year, we published a short report on the surge in year-end insurance regulatory activity concerning climate change risks (available here). January was another busy month, and we report below on noteworthy developments in Bermuda, Canada and the United States.
As readers will know, outside of the United Kingdom and European Union, most insurance regulators are only now beginning to grapple with how to incorporate climate change risk into their regulatory frameworks. And in the European Union and the United Kingdom, debate continues about the scope and depth of climate change risk regulation. Anecdotally, it appears that many re/insurers in Europe are well advanced in formulating their sustainability policies and in moving toward decarbonizing their investment portfolios (particularly with respect to thermal coal investments), reducing/eliminating their own greenhouse gas emissions and managing climate change risk in their underwriting. While a few handfuls of US insurers, both property & casualty and life & health, achieve decent scores from the organizations that collect and analyze data and provide participants with carbon intensity (or equivalent) scores, most US insurers seem to be playing catchup. Meanwhile, the relatively rapid developments in the North American insurance regulatory sectors will be taking place against a larger backdrop—and while it is early days, change appears to be accelerating in Washington, DC.
Obviously, the Biden administration’s initial push on climate change during January, embodied in a raft of Executive Orders issued on “Climate Day,” was noteworthy after the prior administration’s four years of benign neglect at best and adding fuel to the climate change fire at worst. A number of McDermott colleagues recently published an authoritative recap of President Biden’s various climate change-related Executive Orders (available here). Taken together, these provide every executive branch department in Washington with the direction to put climate change at the heart of policymaking. Federal financial services regulators too will begin to put climate change issues front and center in the coming months. During the last two weeks alone we read of the Securities and Exchange Commission (SEC) appointing Satyam Khanna as the senior policy advisor for climate and environmental, social and corporate governance (ESG) (n.b., Mr. Khanna is a former McDermott colleague) and the Federal Reserve Bank taking Kevin Stiroh from the New York Fed to become the first chair of the new Supervision Climate Committee. And in seemingly every “readout” of Secretary of the Treasury Janet Yellen’s initial telephone calls with her opposite numbers around the world we read that she “forcefully raised climate change issues.”
Expect the climate change rhetoric and policymaking from Washington and other capitals to continue during the year. At the end of 2021, the UN’s 26th Conference of the Parties (COP26) is set to take place in Glasgow, with cohosts Italy and the United Kingdom also convening the ministerial planning meeting (Pre-COP) in Milan in September. With the United States re-engaging on climate change issues in a significant way and the imminent implementation (set for next month) of the European Union’s high-level financial disclosure regulations (designed to require more disclosures about how companies expect their approaches on ESG to impact sustainability), expect significantly more news in the months to come.
Insurance Regulatory Activity during January 2021
The Bermuda Monetary Authority (BMA) published its Annual Report last month and in it promised to release the results of its 2020 climate risk survey, announcing:
“…plans to run a stress test aimed at assessing the exposure and vulnerability of our (re)insurance market to climate change, including both physical and transition risks. Ultimately, the Authority hopes to integrate ESG, and climate risk explicitly, into our supervisory approach and will provide guidance to the (re)insurance sector on how to integrate ESG into their risk management and Own Risk and Solvency Assessments.”
Also in January, Canada’s federal insurance regulatory body—The Office of the Superintendent of Financial Institutions (OSFI)—published a consultation paper on climate change risk regulation for a three-month consultation. OSFI, like other financial services regulators, is seeking to better understand “potential implications of climate change for financial institutions, infrastructure and markets.” Development of climate stress tests, focusing on physical and transition risks, will be an early priority with comprehensive guidance to follow on full integration of climate risk management into regulated entities’ risk management and preparation of own risk solvency assessments (ORSAs). Comments are due by April 12, 2021.
National Association of Insurance Commissioners (NAIC)
The Climate Risk Disclosure Working Group (under the Climate and Resiliency Task Force) has begun holding weekly sessions to consider the NAIC’s own climate risk disclosure survey (eight qualitative questions; 38 optional sub-questions) that has remained essentially unchanged since it was introduced in 2009. Obviously, since then the industry-agnostic disclosure survey created by the Financial Stability Board-sponsored Task Force on Climate-Related Financial Disclosure (TCFD) (helmed by former Mayor Michael Bloomberg) has been developed. Only eight of the 1,000+ insurers that must respond to the NAIC survey (70% of the US market premium; all companies showing gross written premium (GWP) of $100 million or more on Schedule T of their Annual Statements) submitted responses using the TCFD format, as is now permitted. Will the NAIC reinforce and expand its survey format? Require responses to the 38 sub-questions? Use the TCFD format in the future? Blend the two? Require more companies to report? All yet to be answered.
The Department of Financial Services (DFS) held two climate change seminars in January. The first session featured industry representatives from Allstate, AIG and QBE describing the climate change journeys of each company—focusing on the TCFD categories of governance, strategy, risk management and metrics and targets. One common theme was the length of time and difficulty each company representative experienced in educating colleagues about each company’s sustainability goals and climate change risk management strategies. The speakers addressed physical and transition risks each company faces. Allstate mentioned that it writes two million fewer policies in catastrophe-exposed US locations than it did 15 years ago. All the speakers summarized their company’s climate change investment strategies—both exclusive (e.g., phasing out thermal coal industry investments) and inclusive (e.g., QBE increasing its “impact” investments from $960 million today to $2 billion by 2025) were mentioned. One of the speakers, representing CERES (Coalition for Environmentally Responsible EconomieS; Ceres being the Roman goddess of fertility and agriculture), stressed that investors are increasingly interested in whether and how boards of directors drive sustainability and climate change risk management advances within their organizations. Do boards have the necessary environmental expertise? Are they setting appropriate goals, assigning management responsibilities and holding management accountable?
The second DFS seminar held in January addressed the impact of climate change on investments by insurers, featuring speakers from Swiss Re, New York Life, Transamerica and Utica National. The key themes? Insurer investment strategies, whether executed in-house or by external asset managers, increasingly mandate and measure how well (or not) companies address sustainability and climate change risks. Another key theme—insurers are beginning to allocate modest amounts to “green” investments, with one insurer mentioning an investment in a recent debt instrument issued by Duke Energy. We have a long way to go, however, before there is common agreement on whether particular investments are “light” or “dark” green or how to tell when a particular issuer is engaged in “greenwashing.”
A real-world illustration of the trends mentioned by all of the speakers? BlackRock CEO Larry Fink’s most recent CEO letter urged that boards of directors “position climate change for front-and-center strategic consideration.” BlackRock asset managers are worrying about the impact of climate change on asset values, whether companies are allocating capital to support sustainable technologies and transitioning to a net-zero carbon emissions status (and since BlackRock manages $8.67 trillion, they care). The kinds of climate change risk disclosures that BlackRock will apparently be asking managements to provide and the confirmations that boards and senior management are engaged will likely be replicated both by other institutional investors and by individual investors. (For more detail, see the helpful report authored late last month by a McDermott colleague, available here.)
Another real-world illustration from Europe—Societe Generale (SocGen) has published a lengthy report on EU re/insurers’ ESG performance, with a stress on each company’s coal-related investments and underwriting of coal-related risks. The scores assigned by SocGen translate into target price upgrades for some. Naming names and citing work from “Insure Our Future,” Axa and Swiss Re scored the best on underwriting policies; both groups no longer insure coal projects. SCOR, Munich Re, Allianz and Zurich still provide insurance for some coal operations and are marked down as a result. But US insurers such as AIG and Travelers continue to underwrite coal-related operations.
The next DFS seminar will address ESG/climate change metrics and targets. It will be interesting to see whether DFS regulators or the NAIC as a whole are able to make sense of the proliferating number of organizations with similar but by no means identical ESG-related reporting standards and analytical frameworks and can tailor a survey for the insurance sector. What may be helpful, at least as a starting point, is the World Economic Forum’s (in collaboration with the Big Four accounting firms) September 2020 whitepaper addressing “common [ESG] metrics and consistent reporting,” building on the TCFD reporting framework known to US insurance regulators and with which some regulators seem comfortable. As to climate change or “the planet,” the whitepaper describes the following measurements, particularly valuations of such activities:
Land use/ecological diversity—number and land area of sites owned/leased/managed in or adjacent to protected sites or key biodiversity areas
Paris-aligned greenhouse gas (GHG) emissions
Water consumption or withdrawal, particularly in water-stressed areas