US NAIC Climate and Resiliency Task Force Advances 3 Solvency-Related Measures

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)

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.