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The Future of Climate Change Risk Regulation for Insurers in America?
Friday, March 12, 2021

In the few short weeks since our last report on climate change and the US insurance industry, the volume of climate change news has been extraordinarily high. The range of developments has been broad to say the very least—from fund managers announcing new offerings said to be green and sustainable, to critics denouncing fund managers falling short on sustainability, to Aviva, Citibank and Generali (and others) publishing sustainability achievements or new targets to achieve net-zero emissions, to advances by developers and providers of climate change standards and metrics (e.g., the Geneva Association, Moody’s), to China reiterating goals to reduce its emissions over the next five years, to the politically charged debate within the US Securities and Exchange Commission (SEC) as to which comes first—a new global framework of common metrics and standards to help regulators analyze climate change risk disclosures or stepped-up enforcement efforts. And these are just a few examples.


Have US insurance regulators been as active? Not so much, at least not in public. The National Association of Insurance Commissioners (NAIC) Climate Change and Resiliency Task Force’s “Disclosure Workstream” met briefly on March 10 to announce that because of timing constraints, it would not recommend to its parent Task Force (which will meet during the NAIC’s Spring National Meeting on April 9) that the NAIC change its climate risk survey format for 2021. Insurers will continue to be able to submit either the NAIC survey or a Task Force on Climate-Related Financial Disclosures (TCFD) report. More states will be encouraged to require their domestic insurers to submit survey responses. And, finally, the “Innovation Workstream” has just scheduled its first 2021 meeting for late March to listen to presentations on, among other things, parametric insurance policies.

The New York Department of Financial Services (DFS) has finished its series of climate change seminars, with the most recent in mid-February addressing metrics and standards. What is next? The DFS has promised “detailed guidance on insurers’ approaches to managing the financial risks from climate change “by April 1,” with a further 90 days for interested parties to submit comments. Thereafter, the DFS plans to convene an “industry roundtable” with the goal of publishing final guidance in the third quarter this year.

What will the DFS guidance look like? Well, back in September 2020 the DFS noted that “[i]nternational regulators have been incorporating climate considerations into macro- and micro-prudential supervision for years” and that “[w]hile the United States is behind our European counterparts in terms of climate-related supervision, we have learned from their experience, can take advantage of the supervisory tools that they have developed and will continue collaborating with them in this area going forward.” Accordingly, the DFS said it would “publish detailed guidance consistent with international best practices on climate-related financial supervision.” Perhaps now would be a good time to take a quick look at what international regulators have been saying and doing with respect to climate change regulation.


Jonathan Dixon, the secretary general of the International Association of Insurance Supervisors (IAIS), said in his opening statement published in the IAIS’ February/March 2021 Newsletter that this year climate change is a “key strategic theme” for the IAIS—a judgment confirmed by a “strong consensus” of the members of the organization’s Executive Committee its early March meeting. As we mentioned in our November 2020 inaugural report on climate change and the insurance industry, the IAIS’ “Application Paper” on integrating climate-related risks into daily supervision of re/insurers, to be published in the near future, will confirm the IAIS’ view that a globally consistent supervisory approach is desirable. The IAIS will be publishing an “outcomes study” on climate-related risks embedded in insurers’ investment portfolios later this year and will be pursuing a climate change gap analysis of the organization’s Insurance Core Principles (ICPs). And during the balance of the year, the IAIS will continue to work on climate change issues with both the Financial Stability Board and the Network for Greening the Financial System.



Per the “Interim Report of the UK’s Joint Government-Regulator TCFD Taskforce,” published in November 2020, all UK-regulated re/insurers subject to Prudential Regulation Authority (PRA) supervisory expectations are expected to have embedded TCFD disclosure standards for climate-related financial risks by the end of 2021, and presumably such re/insurers will be submitting TCFD disclosures during 2022 based on year-end 2021 results. UK re/insurers have had some time to prepare for these mandatory climate risk disclosures; the PRA’s Supervisory Statement SS3/19, published in April 2019, reminded insurers of their obligations under both Solvency II and the UK Companies Act to disclose material risks and encouraged insurers at a minimum to “consider disclosing how climate-related financial risks are integrated into governance and risk management processes”—and specifically expected insurers to engage with the TCFD framework. Also in 2022, beyond the insurance sector, UK-listed companies and large asset owners will also be required to disclose using the TCFD framework. By 2025 the process of extending mandatory TCFD disclosures to all UK companies will have concluded.

Exploratory climate scenario exercise: The Bank of England (the Bank) announced in November 2020 that it will restart the Climate Biennial Exploratory Scenario (BES) for selected large banks, life and non-life insurers and 10 Lloyd’s Managing Agencies. Per the PRA “[t]he 2021 BES is the first climate stress test in which participants in both the banking and insurance sectors would do bottom-up counterparty-level modeling of climate-related financial risks.” The stress test scenario(s) will be based on those developed in 2020 by the Network for Greening the Financial System, an organization composed of 60+ central banks and supervisors (including the DFS).

Next Steps

As to the BES exercise, per the PRA website:

  • February 2021: The Bank will release a set of draft data templates, as well as a draft qualitative questionnaire for feedback from participants.

  • April 2021: The Bank will release a finalized set of data templates and a qualitative questionnaire.


  • June 2021: Official launch—scenarios published

  • End September 2021: Participants’ initial submissions due

  • December 2021: Bank to announce decision on whether to run a second round of the exercise

  • Q1 2022: Results of the BES published (in the event of a second round, the Bank will publish results at the end of Q1 2022)

During 2022, the PRA will also be reviewing re/insurers’ TCFD filings and may be publishing more detailed guidance, perhaps including specific “metrics, targets and scenarios.” The PRA preference, however, is apparently to utilize internationally developed disclosure standards, particularly with respect to investment portfolios, but these are unlikely to be agreed in 2022.

A “developing science”?

Interestingly, in a speech given on February 17, the Bank of England’s deputy governor for markets and banking, Dave Ramsden, touched on the subject of climate change—and the uncertainties inherent in measuring climate change risk in a portfolio of investments—in discussing the Bank’s own TCFD report and corporate bond holdings accumulated by the Bank in the course of its Quantitative Easing operations:

“Measuring the climate impact of this market portfolio remains a developing science, and our disclosure report shows a range of possible metrics, including the commonly reported weighted average carbon intensity (WACI). More experimental metrics under development, are ‘portfolio warming potential’ metrics, which attempt to assess alignment with international climate targets. One estimate suggests this is 3.5°… and so not aligned with the long-term goals of the Paris Agreement. Again that is, unsurprisingly, broadly consistent with the wider market. Other approaches lead to a wide range of different results for our portfolio, ranging from less than 1.75° to 4°, illustrating the considerable degree of uncertainty.”



Most of the climate change regulatory activity in Europe has been centered on the development and rollout of the Sustainable Finance Disclosures Regulation that came into force on March 10, 2021. This Regulation applies to life insurers offering investment and savings products, along with many other participants in the fund management sector, in all cases with a minimum of 500 employees. Smaller market participants are subject to a “comply or explain” regime. Aiming to harmonize “precontractual” and ongoing disclosure requirements for the benefit of “end investors,” participants will be required to provide “specific information regarding their approaches to the integration of sustainability risks and the consideration of adverse sustainability impacts.”

The principal European financial services regulators (the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Market Authority (ESMA)) have jointly developed draft regulatory technical standards for disclosure of climate and other environmental-related adverse impacts. These were published in late February 2021. It is worth noting the European approach of having regulators from the banking, insurance and securities sectors working together to develop regulatory guidance. Given the US financial sector regulatory silos (with exceptions in states that marry some combination of bank, insurance and/or securities regulatory functions in one agency, e.g., in New Jersey, New York, Rhode Island and Vermont) it will be interesting to see if there is cross-disciplinary cooperation to the degree seen in the European Union and in the United Kingdom. Again, however, the Sustainable Finance Disclosures Regulation does not apply to non-life re/insurers.

In contrast, the EU’s Taxonomy Regulation, published in 2020, does apply to non-life re/insurers. This regulation sets out criteria for determining whether an economic activity qualifies as environmentally sustainable. The theory here is that once investors understand what environmentally sustainable economic activities are, financial market participants can explain to investors whether and how a fund’s investments advance environmental objectives. Again, in theory, investors should be able to more easily compare different financial products, as to whether they are, and the degree to which they are, environmentally sustainable. The goal is “ultimately to remove barriers to the functioning of the internal market.”

The Taxonomy Regulation builds on the 2014 Non-Financial Reporting Directive (NFRD) and 2013 the Accounting Directive (which the NFRD amended) to require re/insurers to provide certain non-financial disclosures relating to the following matters:

  • Environmental matters

  • Social and employee-related matters

  • Respect for human rights

  • Anticorruption

  • Bribery matters

The NFRD also requires re/insurers to include “key performance indicators ‘relevant to the particular business.'” Article 8 of the Taxonomy Regulations sets out the two high-level ratios, subject to review, translation to the re/insurance sector and elaboration by EIOPA—which EIOPA has just published on March 1, 2021:

  • The proportion of revenue from products or services associated with economic activities that qualify as environmentally sustainable (per Article 3 of the Taxonomy Regulation)

  • The proportions of capital expenditures (CAPEX) and operating expenditure (OPEX) related to “assets or processes associated with economic activities that qualify as environmentally sustainable”

Three additional ratios are then considered by EIOPA:

  • Proportion of total assets invested in taxonomy-compliant economic activities

  • Proportion of total non-life insurance underwriting exposure associated with taxonomy-compliant activities

  • Proportion of total reinsurance underwriting exposure associated with taxonomy-compliant activities

Next Steps

The draft regulatory technical standards relating to climate change and other environmental matters should be approved by the European Commission within approximately three months and should be finalized by the end of 2021, for use in 2022.  Detailed guidance on social and employee matters, human rights, anti-corruption and anti-bribery matters will be delayed into 2022. It remains uncertain when the Taxonomy Regulation’s required disclosures, particularly for the key performance indicators, will require re/insurers to comply. Several commenters urged EIOPA to hold off until 2023 (allowing re/insurers to set up reporting protocols in 2022).


As work advances to develop a set of global, more or less universal, sector-agnostic, standards and metrics to measure climate risk, many financial services regulators and supervisors have pledged support for such efforts. The International Business Council of the World Economic Forum published a comprehensive whitepaper in September 2020 (“Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation”) in which it mentions continuing joint efforts with other prominent standard setters, including the Sustainability Accounting Standards Board, the Global Reporting Initiative, the Carbon Disclosure Project and others in the run-up to the 2021 United Nations Climate Change Conference (COP 26) summit meeting later this year. It is helpful that, so far, US insurance regulators involved with the NAIC’s climate risk surveys continue to accept TCFD disclosures rather than the NAIC’s own first-generation climate risk survey template.

Some in the United States could be minded to speed up the creation of a US-specific climate risk regulatory framework for re/insurers—something that has taken the European Union four years to build (and it is still a work in progress). To the extent that regulators insist on developing and mandating compliance with their own sets of climate risk metrics and standards, compliance complexity and costs will increase, of course. Could we have a repeat of the ongoing regulatory competition between the European Union and the United States with respect to capital standards? If so, that kind of outcome could be unfortunate. This is an area in which leadership by governments and international organizations of national financial services regulators—by the IAIS, among others—is needed and hopefully we will see that in the months to come before the November 2021 COP 26 meeting in Glasgow.

Another consideration that should probably not be overlooked completely is that it is by no means certain that all state insurance regulators will fall into line to support the expansion of the NAIC’s climate risk survey efforts—or any other efforts on a national level to integrate climate risks into state insurance solvency regulation. Keep in mind that a few short years ago, in June 2017, Oklahoma’s attorney general (joined by AGs in 11 other states and by Kentucky’s governor) and insurance commissioner (joined by five other commissioners) were threatening California’s Commissioner Jones with lawsuits if he persisted with calls for insurers to voluntarily divest investments in thermal coal-related enterprises. How will politicians and regulators react when companies, perhaps big employers, based in their states experience difficulties finding insurance coverage and want to keep confidential the names of insurers, as has been reported this week by Trans Mountain Pipeline in Canada? As in many other areas these days, it is conceivable we could see a divergence in states’ willingness to implement and support climate risk disclosures and related regulatory efforts.

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