Insurance Chiefs Told to Hike Scrutiny as Climate Risks Soar (1)

State insurance regulators aren’t doing enough to address and model climate-related risks amid mounting losses from storms, wildfires and other events stoked by global warming, a new Treasury Department analysis finds.

The assessment, released Tuesday by Treasury’s Federal Insurance Office, comes just weeks into a new Atlantic hurricane season, as blazes in Canada emphasize the potential financial consequences of extreme weather events and major insurers halt selling policies in some regions of the US.

“In response to rising insured losses, some insurers are raising rates or pulling back from high-risk areas,” Assistant Secretary for Financial Institutions Graham Steelesaid at a Brookings Institution event in Washington. Insurer withdrawals and insolvencies are happening across the country, he said, causing “more customers to turn to residual markets to find coverage or to go without insurance entirely.”

The pullbacks come as the insurance market strains to cover more severe and frequent climate-related disasters in the US — including 18 last year that individually caused more than $1 billion in damages. And there’s growing concern about the solvency of insurance companies that are underwriting, reinsuring or investing in high-risk regions. Steele noted that by one estimate, insurance covered only 60% of the $165 billion in total economic losses from climate-related disasters in 2022.

Read More: California Home Owners ‘Going Naked’ as Wildfires Hit Insurers

The gap risks spillover for the broader financial system, including housing markets and the banking sector, Steele said, with insurance changes potentially affecting property values, mortgages and other assets.

The Treasury Department analysis, ordered by President Joe Biden two years ago, finds that while state insurance regulators and commissioners are increasingly focused on incorporating climate-related risks into supervision and regulation, their efforts in most cases “remain at a preliminary stage.” According to the report, insurance regulators should prioritize the development and use of new tools to better assess and manage climate-related risks, including more scenario analysis and modeling.

Treasury Secretary Janet Yellen said in a news release that she was “encouraged” by the initial progress, but work “should be deepened and broadened so that it is both more fully integrated into oversight of insurers and adopted by more state insurance regulators.”

The report makes 20 recommendations, including urging regulators to adopt climate-related, risk-monitoring guidance so insurers can incorporate it into annual financial planning and risk-management processes. More robust supervision by state regulators can help protect the solvency of insurance companies and ensure that concerns around insolvency aren’t driving them to pull out of some markets, a Treasury official said.

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A primary focus is on state guaranty funds that can step in to cover claims after an insurer becomes insolvent, as well as residual market plans known as “insurers of last resort” in areas of especially high risk shunned by major providers. “As disasters become more frequent and more severe, US state guaranty funds may have an even larger role to play” and “may face new financial strains,” Treasury finds. That makes it critical for insurance regulators to work with state legislatures and guaranty associations to better understand their exposures from climate-related disasters.

The Federal Insurance Office, created by the 2010 Dodd-Frank Act, has limited reach; the business of insurance in the US is chiefly regulated by the states. However, the agency has proposed collecting underwriting data to better assess policy pricing and availability at the zip code level, supplementing more limited state and national information. “We’re simply not seeing the full picture of climate change’s impacts on our nation’s property insurance markets,” Steele said.

(Updates with comment from assistant Treasury secretary from third paragraph.)

To contact the reporter on this story:
Jennifer A. Dlouhy in Washington at jdlouhy1@bloomberg.net

To contact the editors responsible for this story:
Simon Casey at scasey4@bloomberg.net

Tim Quinson, Sophie Caronello

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