Industry Issues | ERM & Emerging Risks

California Commissioner to Subject U.S. Insurers to European Climate-Related Stress Test

Climate Change

In a CDI press release, California Insurance Commissioner Dave Jones announced that he will take the unprecedented action to conduct climate-related stress tests on insurance company investments. 

Despite concerns raised by industry, fellow state insurance regulators, state attorneys general and one governor, Commissioner Jones continues his attack on the fossil-fuel industry sector.

"The climate-related financial risk to insurers' investments in thermal coal, other fossil fuels and fossil fuel enterprises should not be ignored," said Commissioner Jones. "As a financial regulator, I want insurers to consider climate-related financial risks, including risks to their investments. In order to make sure they are considering these risks, we have undertaken an analysis of the climate-related risk to insurers' investments."

The CDI announced that it has engaged 2° Investing Initiative, a think tank based in France with ties to European financial regulators, to conduct this analysis for U.S. insurers in California's insurance market with over $100 million in annual premiums. A comprehensive financial stress test will analyze the reported $500 billion in fossil fuel-related securities, issued by power and energy companies, $10.5 billion of which consists of investments in thermal coal enterprises.

According to the press release, individual insurer reports will be made available to all 672 insurance companies with more than $100 million in annual premiums. The top 100 insurance companies (by size of their investment portfolio) operating in California, representing over 80 percent of the assets that were analyzed, will be expected to file a response to the CDI. These reports intend to explain how investment plans align with different climate scenarios, where the individual insurer ranks among its peers, and which securities are driving the climate risk exposure of their investment portfolios. This initiative is intended to get insurance companies to apply the recommendations of the international Financial Stability Board's task force on climate-related financial risks chaired by Michael Bloomberg.

Commissioner Jones states that he is the first financial regulator to ask that a financial sector-in this case insurance companies-divest from thermal coal and to publicly disclose their holdings in oil, gas, coal and utilities, due to potential climate-related risks. In April 2018, a group of financial supervisors and central banks including the central banks of England, France, Germany, the Netherlands, Sweden, Singapore, China and Mexico announced their cooperation to conduct similar climate stress testing on insurance companies and other regulated financial institutions.

Links to Climate Risk Scenario Analysis, Data Survey, and Disclosure Survey Results

Climate Risk Scenario Analysis Results
The goal of the scenario analysis was to assess California insurers' exposure to transition risk, individually and as a whole, based on the evolution of production and assets in the real economy. This analysis compares the currently planned production from physical assets allocated to a portfolio (for example, the projected number of barrels of oil produced by an oil well owned by a company that has issued a security held in an insurer's portfolio) with future production levels defined in a 2°C scenario. To ensure comparability across results, this analysis uses the 'Energy Technology roadmaps' published by the International Energy Agency (IEA).

Climate Risk Data Survey Results
The published database reflects information as it was reported by the insurers, or (where indicated) as reported by an independent consultant which reviewed financial reports from insurers. The database is current as of November 15, 2016 and will be updated as the CDI collects more data from insurers. Under the Reports tab, the database can be queried by company name, premium volume, total investment holdings, percentage of fossil fuel investments, or other categories. Users can generate reports of the top 10, 20, 50 or 100 companies measured by fossil fuel or coal holdings, coal divestment, premium, and other criteria.

Climate Risk Disclosure Survey Results
The CDI announced that the Reporting Year 2017 Climate Risk Disclosure Survey (9th Annual) Notice to Insurers will be sent in July 2018. The e-mail notification will be sent to the insurance company contact which was provided on the most recent NAIC Annual Report (Schedule T).

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This initiative goes to the heart of implementing Principle 1 of the PSI: "We will embed in our decision-making environmental, social and governance issues relevant to our insurance business". It builds on studies since 2007 on the relevance of ESG issues to the insurance business that led to the development of the PSI, and subsequent studies and activities after the PSI was launched in 2012.

This initiative was one of the main outputs of the international PSI market event, "Insuring for sustainable development: Making it happen", which was held at the Allianz headquarters in Munich in October 2016.

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The report drills into the implementation of the TCFD recommendations for the banking industry, though many of the elements are considered relevant to asset owners, asset managers, insurers, and corporates in general.

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