On June 8, 2022, the Climate and Resiliency (EX) Task Force (C&R TF) of the US National Association of Insurance Commissioners (NAIC) exposed three measures that have been adopted and referred to the C&R TF by its Solvency Workstream.1 The measures are expected to be received by the C&R TF at the upcoming annual Summer National Meeting of the NAIC in August and to be further referred to the relevant Financial Condition (E) Committee Working Group/Technical Group/Subgroup for exposure and comment before any revisions to the measures are considered for adoption.
The three measures are the following:
- The first measure suggests that the Financial Analysis Solvency Tools (E) Working Group consider modifications to incorporate particular concepts as they pertain to climate risk and offers high-level principles to consider and develop, as appropriate, for inclusion in the NAIC's Financial Analysis Handbook.
- The second measure proposes a list of enhancements to the Financial Condition Examiners Handbook for consideration by the Financial Examiners Handbook (E) Technical Group.
- The third measure offers a list of possible
enhancements to the ORSA [Own Risk Solvency
Assessment] Guidance Manual, which are presented as
high-level principles for the ORSA Implementation (E) Subgroup to
consider and develop, as appropriate. These possible enhancements
- Provide guidance indicating that an insurer should include a description of how climate change risk is addressed through the risk management framework (e.g., driver for credit, market and underwriting risks)
- Provide guidance indicating that, if climate change has the potential to materially impact an insurer's asset portfolio, the exposure of assets to transition/physical risks should be presented, discussed, and assessed in a quantitative and qualitative manner, noting that a qualitative assessment may be appropriate if quantitative methods are not well established
- Provide guidance indicating that, if climate change has the
potential to materially impact an insurer's insurance
liabilities, the exposure of liabilities to transition/physical
risks should be presented, discussed, and assessed in a
quantitative and qualitative manner, noting that a qualitative
assessment may be appropriate if quantitative methods are not well
- Clarify that the assessment of the impact to an insurer's near-term asset portfolio and insurance liabilities should be performed over the time horizon covered in the ORSA (i.e., current business plan)
- Provide guidance encouraging qualitative discussion of the material medium- and long-term impacts of climate change risk on an insurer's near-term risk appetite, asset management, underwriting, and business strategy, as well as efforts to limit the impact on near-term solvency (e.g., diversification efforts, use of enhanced modelling in ratemaking and underwriting, increased incentives for policyholder mitigation efforts)
1 See our February 17, 2022, Legal Update " US NAIC Retains Climate Resiliency as 2022 Regulatory Priority" for the current regulatory priority afforded to the work of the C&R TF and its initial workstreams, including the Solvency Workstream, and our prior, February 16, 2021, Legal Update " US NAIC Prioritizes Climate Risk and Resilience with a Focus on Related Disclosure" regarding the formation of the C&R TF.
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