US NAIC Climate And Resiliency Task Force Advances 3 Solvency-Related Measures – Climate Change

On June 8, 2022, the Climate and Resiliency (EX) Task Force
(C&R TF) of the US National Association of Insurance
Commissioners (NAIC) exposed three measures that have been adopted
and referred to the C&R TF by its Solvency
Workstream.¹ The measures are expected to be
received by the C&R TF at the upcoming annual Summer National
Meeting of the NAIC in August and to be further referred to the
relevant Financial Condition (E) Committee Working Group/Technical
Group/Subgroup for exposure and comment before any revisions to the
measures are considered for adoption.

The three measures are the following:

1. The first measure suggests that the Financial
   Analysis Solvency Tools (E) Working Group consider modifications to
   incorporate particular concepts as they pertain to climate risk and
   offers high-level principles to consider and develop, as
   appropriate, for inclusion in the NAIC’s Financial
   Analysis Handbook.




2. The second measure proposes a list of
   enhancements to the Financial Condition Examiners
   Handbook for consideration by the Financial Examiners
   Handbook (E) Technical Group.




3. The third measure offers a list of possible
   enhancements to the ORSA [Own Risk Solvency
   Assessment] Guidance Manual, which are presented as
   high-level principles for the ORSA Implementation (E) Subgroup to
   consider and develop, as appropriate. These possible enhancements
   would:
   

   • Provide guidance indicating that an insurer should include a
     description of how climate change risk is addressed through the
     risk management framework (e.g., driver for credit, market and
     underwriting risks)

   
   

   • Provide guidance indicating that, if climate change has the
     potential to materially impact an insurer’s asset portfolio,
     the exposure of assets to transition/physical risks should be
     presented, discussed, and assessed in a quantitative and
     qualitative manner, noting that a qualitative assessment may be
     appropriate if quantitative methods are not well established

   
   

   • Provide guidance indicating that, if climate change has the
     potential to materially impact an insurer’s insurance
     liabilities, the exposure of liabilities to transition/physical
     risks should be presented, discussed, and assessed in a
     quantitative and qualitative manner, noting that a qualitative
     assessment may be appropriate if quantitative methods are not well
     established
     

     • Clarify that the assessment of the impact to an insurer’s
       near-term asset portfolio and insurance liabilities should be
       performed over the time horizon covered in the ORSA (i.e., current
       business plan)

   
   

   • Provide guidance encouraging qualitative discussion of the
     material medium- and long-term impacts of climate change risk on an
     insurer’s near-term risk appetite, asset management,
     underwriting, and business strategy, as well as efforts to limit
     the impact on near-term solvency (e.g., diversification efforts,
     use of enhanced modelling in ratemaking and underwriting, increased
     incentives for policyholder mitigation efforts)

Footnote

1 See our February 17, 2022, Legal Update “
US NAIC Retains Climate Resiliency as 2022 Regulatory
Priority” for the current regulatory priority afforded to
the work of the C&R TF and its initial workstreams, including
the Solvency Workstream, and our prior, February 16, 2021, Legal
Update “
US NAIC Prioritizes Climate Risk and Resilience with a Focus on
Related Disclosure” regarding the formation of the C&R
TF.

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