Climate-related risks are becoming an increasing challenge for insurers, the U.S. Treasury Department said, urging state regulators to step up their so-far “limited” efforts to address the issue.
Insurers face a host of risks, from increased litigation to reputational harm, associated with climate change, but the response from regulators remains in its early stages, the Treasury Department’s Federal Insurance Office said in a report published Tuesday.
Efforts by insurance regulators to tackle climate risk should be “deepened and broadened,” Treasury Secretary Janet Yellen said.
Insurance in the U.S. is regulated at the state level, an approach that has led to a fragmented policy landscape nationwide.
More frequent severe weather events have made insurers’ climate-related policies a bread-and-butter issue for households across the country. State Farm recently stopped issuing new home insurance policies altogether in California, in reaction to wildfire risk and construction cost inflation. Allstate also paused the issuance of new policies in the state.
That kind of industry pullback is being seen across the U.S. American International Group is planning curbs on home-insurance sales to affluent customers in about 200 ZIP Codes at high risk of floods or wildfires, people familiar with the matter told The Wall Street Journal earlier this month. Farmers Group this year stopped offering new home insurance policies in hurricane-prone Florida.
After adjusting for inflation, eight of the 10 costliest U.S. wildfires have occurred since 2017, according to the FIO. The U.S. in 2022 saw 18 climate-related disasters that cost more than $1 billion each, the office said.
Though the FIO can’t force states to adopt its recommendations, it has an oversight role. The office urged state regulators to push insurers to expand their focus and look at the longer time horizon associated with climate-related risks.
The office said insurers face a number of climate-related risks, including their extensive exposure to real estate both through their investment portfolios and the policies they issue. It warned that increased claims payouts could present liquidity risks to some insurers.
The FIO also noted that insurers face a risk of increased litigation for alleged failures to address climate risks, and possible reputational damage for insuring or investing in carbon-intensive sectors. Financial institutions generally have faced pressure from activists and activist investors to withdraw their services from carbon-emitting industries.
The report added that some state regulators are taking meaningful steps to look at climate-related risks. New York state’s financial watchdog in 2020 urged insurers to better manage the risks they face from climate change.