The greenhouse effect is not only changing global temperatures, but it is also changing how insurance regulators are thinking about risks arising from environmental catastrophes. The summer of 2022 had four separate 1-in-1,000-year rainstorms across the West and Midwest, including in Death Valley—the driest place in North America. Surprisingly, this year was also the 10th driest on record. There were 15 disasters through September that each created over $1 billion in damages. All but one of the costliest tropical storms to hit the U.S. occurred in the past 20 years, with five of the top seven occurring in the past five years.
Climate change is causing massive upheaval in the property insurance industry. In Florida, one of the epicenters of climate risk due to its position at the end of Hurricane Alley, insurers are leaving the market in droves, with many carriers declaring insolvency. Meanwhile, the carriers that do stay have been asking homeowners to pay significantly higher premiums for the same coverage. As property coverage is a condition of most mortgages, homeowners have little choice but to pay.
On October 18, 2022, the U.S. Department of the Treasury’s Federal Insurance Office (FIO) announced a proposal to collect data from property and casualty insurers at the ZIP Code level to assess climate-related financial risk across the United States. This action follows Executive Order 14030, calling for the FIO to “assess, in consultation with States, the potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change impacts.” The FIO’s proposal raises a critical question: what will the Federal Government actually do with this information?
Since the McCarran-Ferguson Act of 1945, Congress has delegated to the states the authority to regulate the “business of insurance.” While Congress could rescind this delegation to create a federal regulatory framework, it has shown little-to-no interest in undertaking such a monumental effort.
Instead, in 2010 Congress created the FIO to advise the Secretary of the Treasury on major domestic and international insurance policy issues. Created as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, the FIO has authority to monitor the insurance industry for gaps in regulation that could contribute to a systemic crisis in the insurance industry or the U.S. financial system; monitor access to affordable insurance products by traditionally underserved communities and consumers, minorities, and low- and moderate-income persons; and consult with States regarding insurance matters of national importance and prudential insurance matters of international importance. Importantly, one of its key functions is to collect and analyze insurance industry data and issue reports to serve its primary functions.
This is welcome news for everyone trying to address these risks. The increasing frequency and severity of climate disasters is not a risk that any single state regulator can effectively assess. The results of the FIO’s final report should provide critical information to allow state regulators to find and address coverage gaps in regions where climate catastrophes are most likely to strike.
Perhaps this report will catalyze action in Congress. The federal government has historically stepped in to re-underwrite national risks similar to those precipitated by climate change. Most recently in 2002, following the al-Qaeda terrorist attacks in New York and Washington D.C., Congress passed the Terrorism Risk Insurance Act to fill coverage gaps created by carriers’ exits. Similarly, flood and crop insurance has been overseen and subsidized by the federal government for decades.
We will see whether the FIO report will ultimately spur federal action on shared climate losses. But the data collected by the FIO is a necessary first step to ensure that homeowners are not left footing the bill for the next $100-plus billion hurricane that will inevitably hit.
