A few weeks ago, the Federal Insurance Office (FIO), a branch of the US Treasury, made some ominous noises about becoming more active in regulating the insurance industry due to climate change. Now, in mid-July, the Wall Street Journal published an article about mounting political pressure due to risks that are changing with more weather volatility. Wildfires, flooding, hurricanes, heat domes and tornadoes are causing increased losses due to climate change.
David Sampson, the President of the American Property Casualty Insurance Association, was quoted in the WSJ saying, one of the biggest challenges facing insurers is the political weaponization of the business of insurance by both sides of aisle in response to climate change. Insurers are in the Hot Seat on Climate Change was the title of July 13th article in the Wall Street Journal.
The Treasury Department is less political than Congress, but Graham Steel’s speech coincided with the release of a 68 page report on climate-related risks, and how these perils relate to insurance regulation and supervision. Mr. Steel is Assistant Secretary for Financial Institutions at the US Treasury and was spreaking at the Brookings Institute. He leads the Federal Insurance office (FIO).
Insurance Supervision and Regulation of Climate-Related Risks was released in late June. The report highlights significant gaps in the state regulations to assess the increasing risks from climate change. Climate-related risks, including transition, physical, and litigation risks, present new and increasingly significant challenges for the insurance industry. The oversight of climate-related risks is therefore an increasingly critical topic for state insurance regulators
Steel is also responsible for the Treasury’s policy views on banks, credit unions, consumer protection, access to capital, and financial sector cybersecurity matters. Insurance is usually presumed to be a more stable financial sector than the banking, therefore regulatory affairs have generally been left to states.
FIO has a unique statutory mandate to monitor all aspects of the insurance industry and consult with state regulators. FIO’s Director is also a member of the Treasury’s Financial Stability Oversight Council (FSOC), which provides advice regarding insurance matters to FSOC and its committees.
This makes a speech addressing the changing perspective on the financial health of insurers, related to changing climate, and a call for more oversight and regulation by the states, quite interesting.
In Congress, insurers have been criticized for hiking up rates to compensate for extreme weather-related losses. While this sounds like political grandstanding, you can also observe carriers leaving states where they can’t raise rates, leaving unprofitable business behind.
This seemed like an opportune time to remind everyone that wildfire risk is the only catastrophic risk which can be effectively modeled and planned for. Wildfires only occur where land conditions and fuel make burns possible, and these conditions can be foreseen 12+ months in advance.
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