There are ‘important’ efforts by US regulators to incorporate climate-related risk into insurance supervision and regulation, but these efforts are ‘fragmented’ across states, according to the country’s federal government.

In a report that assesses climate-related risk in the insurance sector, the US Department of the Treasury’s Federal Insurance Office said these existing efforts are commendable, but are “limited in several critical ways” and remain at a preliminary stage.

“The current regulatory framework provides state insurance regulators with tools they can adapt to better consider climate-related risks. Some are beginning to do so, but more state insurance regulators should prioritise these efforts,” said the FIO among the findings of the report.

Graham Steele, assistant secretary for financial institutions at the US Department of the Treasury, said insurance markets in the US are regulated at the state level but climate change affects the  entire planet and does not respect the distinctions between different zip codes, state lines or national borders. 

Speaking at an event hosted by the Brookings Institution on Tuesday to coincide with the report’s release, Steele said: “That means we all have a role to play in a duty to work together to address the threats posed by climate change.”

The FIO report encouraged state regulators and the National Association of Insurance Commissioners, the nation’s standard-setting and regulatory body, to build on its progress to incorporate climate risk in supervision and regulation. 

Secretary of the Treasury Janet Yellen said: “This effort should be deepened and broadened so that it is both more fully integrated into oversight of insurers and adopted by more state insurance regulators.”

The report also proposed areas of focus for future work by the NAIC and insurance regulators and made 20 policy recommendations on improving supervision of climate-related risks across areas such as risk management and internal controls, governance, modelling and scenario analysis. 

In response to the FIO’s report, Chlora Lindley-Myers, NAIC president and director of the Missouri Department of Commerce and Insurance, said many of the recommendations align with initiatives that are underway at the NAIC and are backed by the ongoing work of the association’s Climate Risk & Resiliency Task Force, which serves as a coordinating body for the discussion and the engagement on climate-related risk and resilience issues.

She added: “The NAIC is reviewing the key findings of the report and FIO’s recommendations as they pertain to actions state insurance regulators can take or are already taking to address climate risks and resiliency.”

Also speaking at the event, Scott White, commissioner of the Virginia Bureau of Insurance and secretary-treasurer of the NAIC, highlighted the strength of the country’s state-based system by describing how the different states focussed on risk reduction through better property resilience. 

“You have this built-in flexibility that the states have in the system, where they kind of function as laboratories. We can see these innovative approaches that some states are using and take those back to our own states and see if they work for our own particular markets,” he said.

As an example, White said some states have been making homes more resistant to damage through IBHS Fortified, a construction and re-roofing standard designed to strengthen homes and commercial buildings against specific types of severe weather such as high winds, hail, hurricanes and tornados.

“You have a number of states that provide grants funding to help folks retrofit properties based on what's called the IBHS Fortified standard. Alabama has really been the leader in this regard, but you also have South Carolina and Florida.”

Another approach to improve property resilience is either through product design or premium incentives, said White. 

“You've seen states like California and Oregon, [they] provide premium incentives to harden homes against wildfire risks.”