DFS Issues Final Climate Risk Management Guidance to Insurers

While we wait for further guidance from the federal government, some state regulators are forging ahead on climate risk management regulations. In April 2021, we wrote about the proposed guidance from the New York State Department of Financial Services (DFS) for New York-regulated insurers to take steps to manage climate change risks and develop meaningful diversity, equity, and inclusion initiatives. DFS recently issued the final guidance and provided an implementation timeline.  

Final Climate Change Guidance for Insurers

On November 15, 2021, DFS issued the report Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change. The report considers comments that DFS has received from a wide range of stakeholders, including industry trade groups, insurance companies, consumer advocates, climate experts, rating agencies, financial regulators, and individual citizens. It also considers DFS’s ongoing discussions with the insurance industry and international and US regulatory bodies.

As in the proposed guidance, DFS noted the unique position of insurers because the physical and transition risks of climate change affect both insurers’ assets and liabilities and because insurers are experts at pricing risk. DFS also reiterated that climate change disproportionately affects low income communities and communities of color and urged insurers to take steps to mitigate climate change’s role in social inequality.  

DFS noted that insurers have widely varying levels of maturity and sophistication with respect to understanding and managing climate risks and that some insurers have not begun to consider these risks. It also emphasized that it expects an increased level of sophistication over time and that it will eventually transition from supporting insurers in their implementation to active supervision.

Updates to Guidance

The primary components of DFS’s guidance remain the same. Specifically, DFS still expects insurers to assess and manage current and future risks, including:  

• Integrating climate risk into an institution’s governance structure
• Considering the impact of climate-related factors on the business environment in strategic and business decisions
• Incorporating climate risk into insurers’ risk management frameworks
• Using scenario analysis to inform business strategies and risk assessment and identification
• Disclosing climate risks

However, the final guidance expands on the proposed guidance and highlights what makes climate risks distinctive from other risks. These distinctions include the prediction difficulties, far-reaching breadth and magnitude of impacts, and uncertainty and data gaps associated with certain aspects of climate change. Other notable updates to the guidance include the following:

• A requirement that the board of directors oversees progress toward meeting announced climate commitments 
• Clarification that the guidance’s requirements can be executed at the group level rather than the insurer level in certain circumstances
• Additional details on DFS’s expectations for scenario analysis, including its expectation that long-term scenario analysis be conducted in the order of decades but may have a lower level of precision and take place less frequently than short-term assessments

Although DFS noted that it expects insurers’ ability to manage climate risks to become more sophisticated over time, New York-regulated insurers that have not already begun incorporating this guidance into their governance structure should act now. DFS expects regulated insurers to implement certain aspects of the guidance by August 15, 2022. DFS will issue further guidance on timing for some of the more complex requirements, but it encourages insurers to take steps toward implementing these requirements now.