Examples of shifts in attitude toward climate change in the U.S. regulatory landscape.
Domestic insurers have until August 2022 to begin complying with two specific action steps related to the recent New York Department of Financial Services (NY-DFS) Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change.1 These two steps are:
- Implement the company’s expectations related to board governance
- Have specific plans in place to implement the company’s expectations relating to organizational structure
Previously, I wrote an article2 primarily focused on providing background and context leading up to this guidance, which largely drew from collaborative and strategic global alliances and recent best practice efforts in the United Kingdom (UK) and European Union (EU).
New York domestic insurers have several organizational and operational actions to consider regarding the guidance. After summarizing the various NY-DFS expectations for board governance and organizational structure,3 this article offers some best practice implementation examples and practical advice for U.S insurers as the NY-DFS’s August deadline draws nearer.
The NY-DFS guidance specifically references how the National Association of Insurance Commissioners (NAIC) Financial Condition Examiners Handbook lays out an effective corporate governance program. Organizations in the UK and EU have begun implementing similar programs in a variety of ways.4,5 We believe that board governance guidance is centered on ensuring that functions and controls are in place and that the financial and operational considerations surrounding risks imposed by climate change are prevalent when decisions are made. Below are four areas of consideration for integrating climate risks into your board governance.
I. Board ownership and responsibility
The DFS expects the board of each insurer to understand relevant climate risks, including their distinctive nature and long-term impact. The insurer should designate a member of the committee(s) of its board as being responsible for the oversight of the management of the insurer’s climate-related risks.
II. Management ownership and responsibility
NY-DFS expects each insurer to designate one or more members of its senior management as responsible for the insurer's management of climate risks.
III. Board and management understanding
The board and senior management should stay abreast of evolving climate risks, and regularly assess the assumptions and materiality of, and the company’s exposure to, those risks.
IV. Board oversight and commitments
The insurer’s board should also oversee management’s progress toward meeting any announced climate commitments and ensure that related strategies are being employed and evaluated for effectiveness. Material climate risk mitigation commitments that would meaningfully impact capital spending should be built into the insurer’s risks and controls systems. These commitments should be clearly reflected in the insurer’s financial statements and budgets and overseen by the insurer’s board or audit committee.
Ultimately, an organization must be structured in a manner conducive to making effective decisions. In this regard, the NAIC Handbook indicates that an organization must strike a proper balance of being able to monitor the company’s decisions, but not be so complex as to inhibit such decisions. While it may be implied by the risk management framework, a company must now ensure that its decision-making explicitly considers climate change risks in practice. The following three items are necessary considerations for implementation:
I. Risk management structure
Climate risks are managed through existing enterprise risk functions.
II. Roles and responsibilities across the organization
Ensure that the organizational structure clearly defines and articulates roles, responsibilities, and accountabilities, and is reinforced by a risk culture that supports accountability in risk-based decision-making in setting climate risk limits and overseeing their implementation.
III. Risk management processes
The NY-DFS guidance on risk management processes requires a multifaceted approach. After noting NY-DFS guidance below, we follow each with a recommended best practice:
Implement reliable risk management processes across lines of business, operations, and control functions.
Explicitly consider climate risks in enterprise risk reports and Own Risk and Solvency Assessment (ORSA) summary reports.
Conduct objective, independent, and regular internal reviews of the functions and procedures for managing climate risks. Report the findings of the reviews to the board.
Develop the skill, expertise, and knowledge required for the assessment and management of climate risks at the level of the board and employees.
Consider implementing remuneration policies to align incentives with the strategy for managing climate risks and with performance against climate risk metrics.
We will continue to monitor NY-DFS climate change pronouncements and offer further insights related to risk management expectations set out for its domestic companies.
1NY-DFS (November 15, 2021). Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change. Retrieved February 8, 2022, from https://www.dfs.ny.gov/system/files/documents/2021/11/dfs-insurance-climate-guidance-2021_1.pdf.
2DiCenso, S.R. (December 16, 2021). U.S. Insurers and Climate Change: The Longer-Term Horizon Is Getting Shorter. Milliman Insight. Retrieved February 8, 2022, from https://us.milliman.com/en/insight/US-insurers-and-climate-change-the-longer-term-horizon-is-getting-shorter.
4Lehane, O. & Clarke, S. (January 28, 2022). Climate-Related Risk: What Are the Expectations for Irish (Re)insurers? Milliman Insight. Retrieved February 8, 2022, from https://us.milliman.com/en/insight/climate-related-risk-what-are-the-expectations-for-irish-re-insurers.
5Cantle, N., Chaudhry, A., Clarke, S. et al. (November 2021). Climate Risk Management for Life Insurers. Milliman Report. Retrieved February 8, 2022, from https://us.milliman.com/-/media/milliman/pdfs/2021-articles/11-29-21-climate-risk-management-for-life-insurers-a.ashx.