The New York State Department of Financial Services ("NYDFS") issued final guidance on how domestic insurers should address material climate change-related financial risks.
The final guidance reflects NYDFS's consideration of stakeholder comments from its March 2021 proposal, and collaboration with domestic and international regulatory bodies.
In the guidance, NYDFS expressed, among other things, its expectation that insurers acquire the "new knowledge, expertise, and tools" to:
- incorporate into their governance structures, either "at the group or insurer entity level," climate risk considerations;
- assess current and future climate-related implications on their operations through "time horizons that are appropriately tailored" to their business;
- include in their financial risk management framework analyses of the effect of climate risks;
- employ scenario analyses when making business strategy decisions and conducting risk assessments; and
- disclose climate risks and consider climate-related financial disclosure initiatives, including those of NYDFS's eponymous Task Force, when determining their climate disclosure strategies.
While NYDFS requires insurers to satisfy the aforementioned organizational structure expectations by August 15, 2022, the state regulator stated its intention to provide additional guidance on timing for "the more complex expectations outlined in the guidance."
Commentary
Paragraph 65 of the guidance is titled "Reputational Risk." It reads as follows:
"Insurers should consider the negative publicity that may be triggered by insurers' underwriting or investing in sectors perceived as contributing to climate change. This is exemplified by social movements calling for divestment from fossil fuels and the cessation of underwriting of coal-fired power infrastructure. Furthermore, to the extent that individual insurers respond to climate risks by increasing rates or exiting markets, reductions in the affordability or availability of insurance coverage may also adversely impact insurers' reputations with some stakeholders."
In short, even if NYDFS is wrong about investment risk, the state regulator is discouraging insurance companies from insuring anything having do with fossil fuels because they might otherwise be made to look bad. Conversely, even if NYDFS is right about climate change making other risks greater (like insuring housing properties?), insurance companies should continue to do so and not raise their rates because they might otherwise be made to look bad.
While business executives clearly give consideration to reputational risks, should financial regulators be cautioning them that reputational risk may result from running their businesses in a way that is both economically rational and entirely legal? How will NYDFS enforce its reputational warnings? Should insurance companies refuse to insure New York utilities that rely on fossil fuels? Should insurance companies refuse to insure gasoline stations that allow automobiles to run on fossil fuels? If so, what is the effect on New York consumers?
Primary Sources
- NYDFS Press Release: Acting Superintendent Adrienne A. Harris Announces DFS Issues Final Guidance to New York Domestic Insurers on Managing the Financial Risks from Climate Change
- NYDFS Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change
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