The following was a recent letter addressed to Beth Dwyer, director of the Rhode Island Department of Business Regulation, who is also vice chair of the Climate Risk Steering Group of the International Association of Insurance Advisors.

We write to you today from Climate Action Rhode Island, a local organization of over 3,000 Rhode Islanders combating the climate crisis, as you prepare for the International Association of Insurance Supervisors (IAIS) annual meeting, to express our deep concern that insurance supervisors and regulators are taking insufficient action to address climate change.

In 2021, the Financial Stability Oversight Council identified climate change as an “increasing and emerging threat” to the financial system. Insurance is “unique in that it both faces climate-related financial risk itself and plays a critical role as a manager of climate-related financial risk for other financial institutions.”

Insurance in the United States is also unique because it relies on a state-based system for regulation. Therefore, the responsibility for effectively integrating climate risk into insurance regulation falls to state regulators like you. As such, we urge you to exert leadership at the upcoming IAIS meeting.

Industry is failing to address climate risk

August marked 50 years since the insurance industry first warned about the increasing risks of climate change. Meanwhile, the climate crisis has become a grim reality for billions of people, as unprecedented heat waves, wildfires, and floods have ravaged countries around the world. This acceleration of the climate crisis is translating to more rapid and more chaotic dysfunction in the insurance market than many anticipated.

Since 2017, the insured losses from natural disasters (and mostly human-made climate disasters) averaged $110 billion per year, more than double the average amount in the previous five years. In response, reinsurance and primary insurance rates have increased rapidly, and growing parts of the United States, Australia, and other countries risk becoming uninsurable.

Greenhouse gas emissions from the energy sector reached a record amount in 2022. Yet in spite of its powerful role as a global risk manager, the insurance industry is not using its influence to accelerate the transition from fossil fuels to clean energy. Instead, it is adding fuel to the fire by underwriting the continued expansion of oil and gas extraction.

While corporate fossil fuel expansion is insured, everyday homeowners and businesses are not. Treasury Secretary Janet Yellen warned of a “protection gap” across the insurance industry, estimating that only 60% of $165 billion in damages from climate disasters in 2020 were covered by insurers. In addition to inflicting major burdens on households and businesses, this “protection gap” also further raises financial stability concerns because of the possibility that more frequent catastrophic climate events could trigger losses that spread throughout the economy through defaults, delays, underpayments, and so on.

Meanwhile, actuaries are sounding the alarm about the extreme inadequacies of current risk modeling and management practices. The Financial Stability Board and the Network on the Greening of the Financial System have also acknowledged the significant limitations of climate scenario analysis as it
currently stands.

Current insurance regulations are patchy

Despite the chaotic outcomes in the insurance market, there has been little in the way of a coordinated effort to get a handle on climate risk by regulators. The global regulatory environment on insurance and climate-related financial risk is patchy at best, and the United States is no exception. This points to the need for regulators to work together to create a level playing field. As the U.S. Treasury Department’s Federal Insurance Office (FIO) noted in its June report on the supervision and regulation of climate-related risks in the U.S. insurance industry, “there are nascent and important efforts to incorporate climate-related risks into state insurance regulation and supervision … efforts are fragmented across states and limited in several critical ways.”

We therefore call on the IAIS to:

Take a precautionary approach to addressing environmental risk. Environmental risks, including both climate- and nature-related risks, are still a regulatory blind spot. Too much reliance is placed on historical data in addressing the risk, whereas by definition climate change and biodiversity loss are forward-looking, non-linear, and irreversible phenomena. The IAIS must provide guidance to supervisors on how to include environmental risk into the supervisory framework, and reflect the risks in capital standards for the internationally active insurance groups.

Set expectations for credible transition plans. The IAIS should offer best practice guidance to ensure that insurance companies adopt transition plans with short-, medium- and long-term targets and aligned with credible 1.5°C pathways. Supervisors should review transition plans to understand an insurer’s levels of transition risk exposure. The guidance should follow the U.N.’s High-Level Expert Group standards on net-zero commitments by businesses, financial institutions, cities, and regions.

Steer the industry away from exacerbating climate risk. The IAIS should offer best practice guidance for supervisors to ensure that insurers consider climate-related risk implications for their solvency position. The IAIS work on capital standards should be based on a precautionary approach to capital requirements reflecting the “one-for-one” rule (a dollar of capital held per dollar invested) for any investments in the fossil fuel sector across all asset classes.

Don’t let contributors to the crisis get public support. The IAIS should propose rules to ensure that insurance companies that still underwrite or invest in new fossil fuel projects are excluded from managing or participating in any programs supported with public funds to insure climate risks and strengthen climate resilience.

Rely on climate science. The IAIS must ensure supervisors mandate the use of climate science when assessing possible impacts of the climate crisis, as opposed to the flawed prevailing economic models, which by design are not able to capture the consequences and non-linear complexity of climate change, and substantially underestimate its economic cost.

Given your role as the vice chair of the Climate Risk Steering Group, we ask that you raise these concerns and recommendations with IAIS leadership. Thank you for your attention and consideration.

The letter was signed by the members of Climate Action Rhode Island, in partnership with 36 national climate organizations.

Note: On Wednesday, Nov. 15, from 7-8 p.m. in the Salem Family Auditorium at the Barrington Public Library, 281 County Road, Climate Action Rhode Island will present “Who Benefits from Global Warming/Climate Change and What You Can Do About It.” The public is invited to attend the informational presentation by CARI members.