“As the global public-health pandemic of Covid-19 has made clear, preparation is key to addressing systemic risks. By the time a crisis occurs, it is simply too late,” said Linda Lacewell, superintendent of the New York State Department of Financial Services, in a letter sent to New York-based insurance companies on Tuesday.
Formed in 2011 as a merger between the New York State Insurance Department and New York State Banking Department, the DFS regulates nearly 1,800 insurers with assets totaling more than $4.7 trillion. It also regulates around 1,500 banks and other financial groups managing more than $2.6 trillion in assets.
The department’s warning comes amid fears of severe weather fueled by climate change spurring more losses for insurance companies. Insurance payouts for natural disasters globally stood at a record two-year total of $219 billion for 2017 and 2018, although insured losses fell last year to $50 billion from $84 billion in 2018, according to Swiss Re AG .
Other financial watchdogs outside the U.S. are also zeroing in on climate change. In the U.K., regulators have moved to require disclosures from pension funds and the largest companies on how climate change is hitting their investments and businesses.
“While the U.S. is behind our European counterparts in terms of climate-related supervision, we have learned from their experience, can take advantage of the supervisory tools that they have developed, and will continue collaborating with them in this area going forward,” Ms. Lacewell said.
She said insurers should take steps across their governance, risk management and business strategy to better prepare for climate change.
These include putting a board member or committee and a senior official in charge of reviewing financial risks from climate change, addressing climate change in internal risk and solvency assessments and disclosing related data through frameworks like the Michael Bloomberg-backed Task Force on Climate-related Financial Disclosures, which has been cited by other regulators.
The DFS said it would start asking insurers in 2021 what steps they have taken as part of its examination process, but didn’t threaten any repercussions.
Despite expecting all insurers to take some action, the DFS acknowledged that the insurers it regulates, ranging from small family-run businesses to large publicly traded companies, should tailor their approach to the scale of their business.
“Many insurers have expressly recognized the impact of climate change on their loss costs,” Ms. Lacewell said. “While DFS commends these initiatives, the industry needs to do more to manage the financial risks from climate change.”