New York State Department of Financial Services Issues 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 of this year, we wrote about the New York State Department of Financial Services’ (DFS) proposed guidance to New York-regulated insurers to take steps to manage climate change risk and develop meaningful diversity, equity, and inclusion initiatives. DFS recently issued the final guidance and provides a timeline for implementation.

Final Climate Change Guidance for Insurers

On November 15, 2021, DFS issued its final Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change. The guidance considers comments it 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 takes into account 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, not only because the physical and transition risks of climate change affect both insurers’ assets and liabilities, but also because insurers are experts at pricing risk. DFS also reiterated the disproportionate affect climate change has on 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 the level of maturity and sophistication with respect to understanding and managing climate risks varies widely among insurers and that some insurers have not yet begun to consider climate risk. It emphasized that it expects an increased level of sophistication over time and that, at some point in the future, it will transition from supporting insurers implementing its expectations 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 both current and future risks, including:  

• Integration of climate risk into an institution’s governance structure
• Consideration of the impact of climate-related factors on the business environment in strategic and business decisions
• Incorporation of climate risk into insurers’ risk management frameworks
• Use of scenario analysis to inform business strategies and risk assessment and identification
• Disclosure of climate risks

The final guidance, however, expands on the proposed guidance, highlighting what makes climate risk distinctive from other risks, such as its difficulty to predict and far-reaching breadth and magnitude, and acknowledging the uncertainty and data gaps associated with certain aspects of climate change.

Other notable updates include:

• A requirement that the board of directors oversees progress toward meeting announced climate commitments
• Clarification that in certain circumstances, the guidance’s requirements can be executed at the group level, rather than the insurer level
• Additional detail 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

While 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 to incorporate 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 in the guidance, but encourages insurers to take steps toward implementation of these requirements now.