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

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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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