June 10, 2021
Superintendent Lacewell Announces New DFS Report on New York Domestic Insurers’ Exposure to Financial Risks Arising from the Low-Carbon Transition
Follows DFS’s Issuance of Proposed Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change
Supports New York Insurers’ Efforts to Manage their Exposure to Low-Carbon Transition Risks
Superintendent of Financial Services Linda A. Lacewell today announced that the New York Department of Financial Services (DFS) has issued a new report analyzing New York domestic insurers’ exposure to the financial risks arising from society’s transition towards a low-carbon economy. The report is the result of a collaboration between DFS and the 2° Investing Initiative (2DII), an independent, non-profit think tank working to align the financial sector with international climate goals, and furthers DFS’s efforts to support New York insurers in managing the financial risks from climate change.
This report follows DFS’s proposed Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change. The guidance was issued on March 25, 2021 and will be finalized following a 90-day public comment period expiring on June 23, 2021. DFS was the first U.S. state or federal regulator to establish a holistic set of expectations for the insurance industry on managing the financial risks from climate change. DFS appreciates the continuing collaboration of the insurance industry, as well as international and U.S. regulatory bodies, in addressing climate-related financial risks.
“The transition to a low-carbon global economy is both inevitable and accelerating, and will have a material impact on insurers’ investments,” Superintendent Lacewell said. “We are grateful for 2° Investing Initiative’s collaboration, and hope that insurers will use this report to guide their work on managing their exposure to climate-related financial risks.”
“It has been an absolute pleasure to work with DFS on such an important topic. Following last year’s industry guidance in which DFS outlined the expectations that all regulated entities must integrate climate-change related financial risks, with this report DFS takes an important next step to help New York insurers assess their alignment with the Paris Agreement,” said Maarten Vleeschhouwer, Head of PACTA at 2DII.
As a general matter across the industry, the impact of climate change on insurers’ investments receives less attention than the impact of climate change on insurers’ liabilities, and low-carbon transition risks are less understood than climate-related physical risks. The report is intended to provide insurers with an example of a tool that can help them analyze their transition risks and inform actions to mitigate them. Working with DFS, 2DII analyzed the transition risks of New York domestic insurers by assessing the alignment of their equity and corporate bond portfolios using their 2019 Schedule D data against different climate scenarios. The exposure and scenario analysis used in 2DII’s analysis is based on the open-source Paris Agreement Capital Transition Assessment (PACTA) model, which has been used by more than 3,000 financial institutions, governments, supervisory authorities, and industry associations.
The report’s findings include:
- New York domestic insurers’ investments had meaningful exposure to carbon intensive sectors. The U.S. recently rejoined the Paris Agreement, which seeks to keep global temperature rise in this century to well below 2°C above pre-industrial levels. The five-year forward-looking capital plans of most companies in these sectors in which insurers had invested were not aligned with the Paris Agreement, with the exception of natural gas production, natural gas-fired power generation, and electric vehicle production. In many cases, insurers’ portfolios were less Paris-aligned than market benchmarks.
- Life insurers generally had greater exposure to carbon intensive sectors than P&C and health insurers. Exposure to high-carbon technologies also varied dramatically among individual insurers. While most insurers had single-digit exposures to the fossil fuel sector as a percentage of their corporate bond and equity portfolios, several P&C insurers and a few life insurers had exposures that were significantly higher. When insurers underinvest in low-carbon technologies, they are exposed to greater transition risks and miss out on many of the opportunities that arise from the low-carbon transition.
In addition, the report outlines investment-related strategies that insurers can consider to mitigate their transition risk exposure, including divestment, investment, exclusion, engagement, and setting climate-related investment conditions. As stated in DFS’s proposed guidance, DFS is focused on the financial stability of insurers in the face of climate change. While insurers are expected to understand and manage their exposure to climate-related financial risks, DFS does not dictate insurers’ investment activities. In addition, each insurer should take a proportionate approach to managing these risks that reflects its unique exposure and the nature, scale, and complexity of its business.
To help insurers assess and develop strategies to mitigate their exposure to transition risks, DFS also requested that 2DII generate individual reports for insurers included in 2DII’s analysis, which will be shared with such insurers. Insurers not included in 2DII’s analysis can use the open-source PACTA model and upload their equity and bond positions to create their own reports.
DFS and 2DII will hold two webinars for New York domestic insurers. The first one will be held on June 21, 2021 and will provide an overview of the aggregate report. The second one will be held on July 12, 2021 and will discuss how insurers might use their individual reports. Registration information for the webinars will be sent directly to insurers.
In addition to the proposed guidance and today’s report, DFS has taken several actions to bolster DFS’s commitment to addressing financial risks from climate change. DFS became the first U.S. state banking regulator to join the Network for Greening the Financial System (NGFS), a leading international coalition of nearly fifty bank supervisors dedicated to mobilizing the financial industry to address climate change. In addition, DFS joined the Sustainable Insurance Forum (SIF), an international network of insurance supervisors seeking to find collaborative ways to help the global insurance industry meet the challenges posed by climate change. DFS also became a supporting institution of the United Nations Environment Programme Finance Initiative (UNEP FI) Principles for Sustainable Insurance (PSI) to publicly demonstrate its support for sustainable insurance aims.
Read a full copy of the report on the DFS website.