In June, the Treasury’s Federal Insurance Office (FIO) released a report assessing climate-related risk and gaps in insurance supervision, Insurance Supervision and Regulation of Climate-Related Risks. The report represents another response to the Executive Order of President Biden back in May of 2021 with the objective to evaluate the challenges posed by climate-related risks to insurers and the regulatory efforts in place to help mitigate these challenges.
The FIO announced an initiative and a request for input from P&C insurers back in October for a proposed data call for climate-related data aiming to assess U.S. climate-related financial risks by collecting and analyzing data, specifically current and historical underwriting data on homeowners’ insurance at the Zip Code level.
The FIO’s recent report serves as a clarion call for a unified effort to address climate-related risks, fostering a more resilient insurance sector that can effectively safeguard individuals, businesses, and communities from the risks associated with a changing climate. It underlines the fact that climate-related risks are multi-faceted and ever-evolving, encompassing physical risks stemming from climate events, transitional-related risks related to shifts in technology and policies, and even litigation risks that could arise from these changes. As these risks become increasingly significant, insurance regulators are faced with the daunting task of ensuring the stability of the industry and its market in the face of environmental change and uncertainty.
By analyzing patterns in insurance claims, underwriting practices, and risk assessment, the FIO aims to better understand how climate-related factors are affecting insurance availability and affordability. This, in turn, will enable policymakers and regulators to make better-informed decisions to safeguard the financial well-being of Americans in face of climate change-related challenges and catastrophic losses. With consistent, standardized, granular, and comparable insurance market data, this will help assess the potential for major disruptions of private insurance coverage in vulnerable regions.
The P&C insurance industry plays a critical role in managing risk and providing financial protection to individuals, businesses, and communities. As climate change and its effects intensifies, insurers face the challenge of accurately assessing and pricing climate-related risks. The data collected by the FIO will contribute to a more comprehensive understanding of these risks, allowing insurers to refine their underwriting practices and develop products that address emerging risks. This initiative paired with industry participation and collaboration is likely to stimulate innovation within the industry as insurers seek new and impactful ways to manage and mitigate climate-related risks.
The report highlights the commendable efforts made by state insurance regulators and the NAIC to integrate climate-related risks into their regulatory practices. However, it also emphasizes that these efforts, while a promising start, remain in the early stages of development and will require the help and participation of regulators, carriers, technology providers, and other climate-related entities.
To better understand the implications of climate-related risks for the insurance industry, as well as for the broader financial system, these groups need to work together to develop comprehensive strategies and a collaborative approach will be essential.
Tools and Processes for Enhanced Oversight
Existing regulatory frameworks offer state insurance regulators tools that can be adapted to incorporate climate-related risks. The report encourages regulators to prioritize the integration of these tools into their practices and procedures. Additionally, it recommends the creation of new tools and processes, such as scenario analysis and the utilization of NAIC’s Catastrophe Modeling Center of Excellence, to better assess and manage climate-related risks.
As the FIO continues its work to assess and support efforts in the insurance industry, there’s hope that the collaboration and strategies implemented lead to a more robust and adaptive insurance landscape–one that can weather the storms of environmental change and emerge stronger on the other side. The result will provide a broader picture of the insurance market landscape in regions particularly vulnerable to climate change impacts.
Challenges – For Both Public and Private
The FIO states that access to high-quality, reliable, and consistent data will be necessary for accomplishing each of its initial climate-related priorities. The challenge is the mechanism and operation of this data exchange and access ability. In the FIO’s October announcement of the proposed data call for climate-related data from insurers, they stated seeking input from carriers on:
- Challenges to data collection, such as quality, consistency, comparability, granularity, and reliability
- Key factors for developing standardized and comparable disclosures, as well as assessments of the standards provided by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) and the NAIC Insurer Climate Risk Disclosure SurveySuch assessments will include supervisory practices and resources, including:
- data availability and integrity
- Structural barriers to assessing, managing, and integrating climate-related risks (e.g., accounting frameworks, other standards).
- Insurance Markets and Mitigation/Resilience – Assess the potential for major disruptions of private insurance coverage in U.S. markets that are particularly vulnerable to climate change impacts; facilitate mitigation and resilience for disasters.
“Such assessments will include examination of the insurability of disasters that are produced or exacerbated by climate change, including wildfires, hurricanes, floods, wind damage, and extreme temperatures.”Treasury’s Federal Insurance Office Takes Important Step to Assess Climate-related Financial Risk – Seeks Comment on Proposed Data Call
For carriers, there are clear risks and challenges associated with the implementation of the FIO’s initiative. First and foremost is their and their respective insureds’ data protection, security, and its level of exchange/utilization transparency.
HOW? Permissioned Open Governance Network Model & Strategy
For both insurance regulators’ and insurers’ needs to be met effectively and securely, a true non-proprietary and non-profit intermediary is necessary. Trust and transparency will be paramount in this never-before implemented collaboration among these stakeholders to come to agreement on standardizations, frameworks, processes, and implementation.
The Linux Foundation’s proven and historically successful Open Governance Model provides the foundation for this needed collaborative effort to emerge and be maintained with equal agency and decision power, enabling all parties and stakeholders to meet their ultimate goals.
With the openIDL framework built on trust, transparency, and security, the use of DLT ensures information is secure and exchange of data is efficient, standardized, actionable, and accurate. The framework
- enables insurance carriers to provide data to regulators in a standard and efficient manner while maintaining control over the data (their data never leaving their home)
- allows community generation of a standard data format to promote interoperability and future adoption
- stores the data in a cloud; each carrier has its own node, an analytics node, and an application for managing data calls (i.e. accept or reject calls for data)
The primary challenge openIDL solves is the growing data privacy issue faced by insurance carriers. Carriers want to keep their data private and in their control, but if they constantly send data to regulators and other entities, control is inevitably compromised. openIDL allows carriers to provide data to regulators in a standard way while keeping the raw data in their cloud and only accessible through their node.
openIDL implements data formatting, tokenization, and interoperability standards to ensure that multiple carriers can participate in the network. This will allow for future adoption and efficient data sharing, aggregation, and analytics applications.
openIDL provides an auditable process for carriers to share their data with regulators and other entities. This visibility and transparency ensures that the data is managed properly and that carriers understand what will be done with their data.
openIDL provides a secure and efficient solution for regulators to conduct data calls efficiently and securely. The carriers respond to the data calls, helping regulators better monitor the market activity, plan for future emergencies, and protect consumers by providing data, and the results of the data calls are visible to the regulator through an analytics node. The first step in a data call is for the carriers to load their data into the harmonized data store inside their cloud. The data is then put into a standard format and is only accessible through their node. The regulator can access the data call results through an application that is part of a Kubernetes cluster. The Hyperledger Fabric API is used to create transactions and manage the data on the ledger.
As the initiative progresses and the data is effectively and securely collected and analyzed, we can anticipate a more resilient insurance sector better equipped to navigate the market challenges of a changing climate.