New York Department of Financial Services (DFS) released its climate change guidance New York domestic insurers for comment on March 26, 2021. The Guidance, found here, seeks to support domestic insurers in managing the financial risks associated with climate change. DFS hopes their proposed guidance will serve as a basis for supervisory dialogue, will help insurers familiarize themselves with climate risks, and develop their capacity and processes for managing them. The guidance covers the proportionality of the approach, the materiality of the risks or exposure, governance and organizational structure, business models and strategy, risk management, scenario analysis, and public disclosure.
For example, the DFS expects each insurer to take a proportionate approach to managing climate risks that reflects its exposure to climate risks and the nature, scale, and complexity of its business. All insurers are expected to analyze their climate risks on both the underwriting and investment side of their balance sheets.
With respect to risk culture governance, the DFS expects an insurer’s board of directors or governing entity to understand and assess relevant climate risks, and to address and oversee these risks within the insurer’s overall business strategy and risk appetite. The DFS also expects insurers to have a written risk policy adopted by its board describing how the insurer monitors and manages climate risks in line with its risk appetite statement. The policy should include the insurer’s risk tolerance levels and limits for financial risks, and consider factors such as:
a. long-term financial interests of the insurer, and how decisions today affect future financial risks;
b. results of scenario analysis and potentially stress testing for short-, medium-, and long-term horizons;
c. uncertainty around the timing and channels through which climate risks may materialize; and
d. sensitivity of both sides of the balance sheet to changes in key climate risk drivers and external conditions.
Insurers will also be expected to create an organizational structure that includes risk assessment, compliance, internal control, internal audit, and/or actuarial functions to manage climate risks.
The DFS expects insurers to be aware of potential changes in their business environment and to address these risks strategically. Insurers should consider questions such as:
a. which business areas are exposed to a climate-related physical or transition risk; the materiality of the risk;
b. whether affected areas should be continued, scaled back, or adapted; and
c. whether climate risks require consideration across all business areas and processes on the basis of their materiality, or only those business areas and processes that are particularly exposed.
In addition, for insurers and other entities that are required to have enterprise risk management (“ERM”) functions, they will be expected to:
a. address climate risks through their existing ERM functions and in line with their board approved risk appetites;
b. identify, assess, monitor, manage, and report on their exposure to these risks in a manner that is appropriate for the nature, scale, and complexity of the risk and their businesses;
c. document in their written ERM and board risk reports the climate risks considered, including their transmission channels, and their impact on existing risk factors, and where appropriate, update existing risk management policies to reflect climate risks; and
d. manage and monitor these risks over a sufficiently long-term horizon and review their analysis on a regular basis.
Finally, insurers should enhance the transparency of their approach to managing climate risks, consistent with the expectations set out in the guidance. Specifically, the guidance provides that all insurers should publicly disclose how climate risks are integrated into their corporate governance and risk management, including the processes used to assess whether these risks are considered material. Information disclosed should go beyond operational issues and address how physical and transition risks (including liability risks) might impact insurers’ underwriting, investment, and strategies.
DFS will host a webinar on Thursday, April 8, 2021 at 11:00 a.m. EDT to provide an overview of the guidance. To register for the webinar go to NYS Information Technology Service WebEx Enterprise Site with password ClimChg040821
The deadline for submitting comments is Wednesday, June 23, 2020. Information and instructions for the comment process can be found on NYDFS’s website.
We will continue to monitor the development of this Proposed Guidance.