Analysis | Insurers' Failure on Climate Disasters Imperils Financial ... - The Washington Post
Insurers’ Failure on Climate Disasters Imperils Financial System - The Washington Post
Faced with year-over-year multibillion dollar losses, insurers are struggling with the increased frequency and destruction of climate change-induced weather events. Many companies have responded by raising premiums, exiting risky areas or reneging on their pledges to decarbonize by 2050. This has serious implications for US households, businesses and financial companies that rely on insurers as a vital backstop against disasters.
While insurance companies are regulated at the state level, the fact that climate-related events often affect many states at once highlights the need for greater federal involvement in overseeing markets.
The state-by-state regulation model has fallen short. In particular, efforts to require the disclosure of information from insurers related to climate have been piecemeal, likely forcing state regulators to work off of incomplete information when supervising and regulating firms.
Fortunately, a federal agency that is charged with monitoring all aspects of the insurance industry can play an important role in helping fill climate-related data gaps: the Treasury Department’s Federal Insurance Office, created after the 2007-08 financial crisis. Last year, the FIO took the important step of proposing data collection from property and casualty insurers regarding past and current underwriting to assess climate-related financial risk across the country.
Insurers are major players in the US economy, often serving as the main line of defense against losses when disaster strikes. But the risk from climate events extends well beyond insurance companies. In a recent publication, Federal Reserve Board economist Benjamin Dennis described how risk flows from insurers to households to banks, using the example of Miami residential real-estate damage caused by hurricanes: “In the event of a hurricane in Miami, insurance companies take the first loss” but “when insurance coverage does not exist or is insufficient, losses spill over to homeowners. If homeowners default for whatever reason, losses accrue to mortgage originators or purchasers depending on their exposure.”
Now, as insurance becomes increasingly unaffordable or unavailable, the pressure on consumers and other financial intermediaries grows. Given the interconnectedness of the sector, more holistic oversight by federal agencies is needed.
While states often coordinate on insurance regulation, these efforts are completely voluntary. The inadequacy of the voluntary approach is evident in the fact that only a third of states participate in the National Association of Insurance Commissioners’ Climate Risk Disclosure Survey, which was created over a decade ago. Even with full participation, the survey data by itself would have limited usefulness without understanding its relationship to data on the broader financial system and economy.
Federal agencies have a role to play in closing these information gaps. The proposed data call from the FIO would be the first systematic, nationwide collection of climate-related insurance data, and could shed light on how an industry that operates on proprietary information and modeling is assessing climate-related risks.
As a member of the Financial Stability Oversight Council, the FIO can work alongside federal financial regulators to develop research and policy recommendations that better address the breadth of risks insurers assume and create within the financial system.
In addition, the data provided by the FIO could help the oversight council as it assesses whether and when to designate certain nonbank financial companies, including insurance companies, as systemically important financial institutions. The FSOC recently proposed ways of improving its process for using this important designation, which subjects these firms to enhanced supervision and oversight by the Federal Reserve. Following the 2007-2008 financial crisis, “systemically important” designations were critical in reigning in insurance giant AIG, whose risky activities exacerbated the crisis.
The Financial Stability Oversight Council needs timely and reliable data to determine major risks to the financial system, and nationwide data collected by the Federal Insurance Office could improve its ability to monitor and act before dangers flowing through the system lead to cascading defaults. Such a precautionary approach, based on increased federal oversight, is essential as climate events become increasingly frequent and severe.
More From Bloomberg Opinion:
• $200 Trillion Is Needed to Stop Global Warming. That’s a Bargain: Mark Gongloff
• Once-Bold UK Is Now a Laggard in Climate Fight: Lara Williams
• To Beat the Heat, We’ll Need to Turn Our Homes Into Batteries: David Fickling
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Lilith Fellowes-Granda is a senior policy analyst for financial regulation and corporate governance at the Center for American Progress.
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Related Knowledge Center: Climate economics
Climate change is now a driver of the world’s economy. The impact is profound:
- Catastrophic weather events — hurricanes, floods, droughts, high temperatures — are more frequent and more extreme. The cost can be measured in both the initial damage caused and the longer-term impact on the economy.
- Vulnerable communities are increasing climate-related investments, hardening infrastructure and taking other protective measures.
- Investment in carbon capture and storage technologies is increasingly rapidly.
- Governments are making investments and crafting regulations to reduce emissions of carbon dioxide and other greenhouse gases.
On top of all of this is the cost of uncertainty. As the Fourth National Climate Assessment, released in 2018 by the U.S. Global Change Research Program, says, “The assumption that current and future climate conditions will resemble the recent past is no longer valid.”