NY regulator: Carriers must weave climate risks into governance frameworks
New York insurers must include climate change risks in governance frameworks, strategies, risk management and scenario analysis, as well as improve disclosure of those risks, the New York State Department of Financial Services (DFS) says.
In its final guidance for insurers in the state, published on November 15, the DFS detailed its expectations for carriers based on dialogue with carriers and international regulators.
The DFS said it received comments from 45 parties, including trade bodies, insurers, consumer advocates, climate experts, ratings agencies, financial regulators and individuals, following proposed guidelines issued in March.
Within the guidance, the DFS said insurers will be expected to integrate the consideration of climate risks into their governance structures at group or insurer entity level.
Carriers’ boards should understand climate risks and maintain oversight of the management team responsible for managing them.
Carriers must also consider, when making business decisions, the current and future impact of climate-related factors on their operations using time horizons appropriate for that insurer.
The DFS said carriers must incorporate climate risk into their existing financial risk management practices, including by embedding climate risks into their risk management frameworks.
The regulator also said insurers should use scenario analysis to inform their business strategies and risk assessment. Scenario analysis should consider physical and transition risks, multiple carbon emissions and temperature pathways, and short-, medium- and long-term horizons.
Insurers should also disclose their climate risks and engage with the Task Force on Climate-Related Financial Disclosures and other initiatives when developing their disclosure approaches, the DFS said.
Carriers’ analysis of climate risks should move from a qualitative approach to an approach that is both qualitative and quantitative where possible.
Where an insurer’s policies or procedures differ meaningfully from those of their peers, that carrier should provide a justification for those differences in its risk management reports, the DFS said.
The regulator added that insurers should also consider whether their model vendors and third-party investment managers deal with uncertainty and data gaps.
Acting superintendent of financial services Adrienne Harris said: “Climate change is an urgent issue that poses wide-ranging and material risks to the financial system.
“Insurers, which are uniquely impacted as climate change affects both sides of their balance sheets, also play a critical role in managing climate risks.
“The guidance is intended to support insurers’ efforts to manage the financial risks from climate change, bolstering the safety and soundness of the industry and the protection of consumers.”