On September 22, 2020, the New York State Department of Financial Services ("NY DFS") issued a Circular Letter to all New York domestic and foreign insurance companies regarding "Climate Change and Financial Risks". The Circular Letter (which can be found here) sets forth NY DFS's expectations for the insurance industry regarding beginning to identify and manage financial risks from climate change. The NY DFS is concerned about such risks because "[c]limate change poses wide-ranging and material risks to the financial system, especially for the insurance industry, as physical and transition risks resulting from climate change affect both sides of insurers' balance sheets-assets and liabilities-as well as their business models."
The Circular Letter calls on insurers to begin integrating consideration of climate change and resulting financial risks into their governance frameworks, risk management processes and business strategies, such as by "designat[ing] a board member or a committee of the board, as well as a senior management function, as accountable for the company's assessment and management of the financial risks from climate change." In addition, the NY DFS expects insurers' "enterprise risk management function and the Own Risk and Solvency Assessment process [to] address climate change as a reasonably foreseeable and relevant material risk and should consider how it impacts risk factors such as investment risk, liquidity risk, operational risk, reputational risk, strategy risk, and underwriting risk." Finally, the NY DFS expects insurers to address financial risks from climate change in their disclosures, for which the NY DFS recommends that insurers look to the disclosure frameworks established by the Task Force for Climate-related Financial Disclosures and other established initiatives.
The NY DFS stated that it will publish guidance consistent with international best practices on climate-related financial supervision and will seek input from the industry in developing such guidance in the near future. In addition, the NY DFS's examination process for insurers will incorporate financial risks from climate change starting in 2021.
US state regulators in states like New York and California have tried to take a more active role in climate change issues as the US federal government has moved towards a more limited role (such as by withdrawing the US from the 2015 Paris Agreement). As the Circular Letter makes clear, the NY DFS is looking at efforts of non-US financial regulators and international bodies-ranging from regulators in particular countries such as France's Autorité de Contrôle Prudentiel et de Résolution to the International Association of Insurance Supervisors and the Sustainable Insurance Forum-in formulating its approach to assessing and addressing climate change risks for insurers licensed in New York. That is consistent with the NY DFS previously having joined in international efforts of financial and insurance supervisory authorities to address climate change such as the Sustainable Insurance Forum, a global network of insurance supervisors, and the Network of Central Banks and Supervisors for Greening the Financial System, a global network of banks and supervisory authorities of which the NY DFS is the only US financial regulator member.
In addition to the Circular Letter, the NY DFS has taken various other steps to try to address climate change issues as they pertain to the financial services industry. It recently hired its first Director of Sustainability and Climate Initiatives to engage with the industry and develop expert guidance. Also on September 22, 2020, the NY DFS announced that it has entered into a Memorandum of Understanding with the New York State Energy Research and Development Authority to, among other things, work towards establishing "nation-leading efforts to support New York financial institutions and the nation's financial sector more broadly to better assess and manage financial risks associated with climate change" as well as to "leverage the financial sector to address and mitigate the effects of climate change". These recent developments follow upon prior action taken by the NY DFS to incorporate climate considerations into its regulatory oversight; for example, the NY DFS participates in the National Association of Insurance Commissioners Climate Risk Disclosure Survey (see our prior article regarding the survey here).
As the NY DFS notes in the Circular Letter, the NY DFS regulates "1,500 banking and other financial institutions with assets totaling more than $2.6 trillion, and nearly 1,800 insurance companies with assets of more than $4.7 trillion". As such, although it is a state and not a federal regulator, the NY DFS clearly has significant regulatory reach and heft nationally and globally, and its approach to addressing financial risks of climate change has the potential to have far-reaching consequences for insurers.
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