New York Department of Financial Services Announces New Climate Risk Division, Releases Guidance on Managing Climate Change Financial Risks | Eversheds Sutherland (United States) LLP
On November 3, 2021, the New York Department of Financial Services (DFS) announced the creation of a new Climate Risk Division (the Division) tasked with integrating climate risks into DFS oversight of regulated entities, supporting the sector growth in climate management. financial risks, coordination with international, national and state regulators, development of internal capacities on climate-related financial risks, support for capacity building of peer regulators on climate-related supervision and ensuring equitable access financial services. The division will be led by Dr Yue (Nina) Chen, Director of Sustainability and Climate Initiatives at DFS, who has been appointed Deputy Executive Superintendent.
With the announcement of this new division, DFS continues its efforts to be at the forefront of financial regulation related to climate change. DFS was one of the first states to participate in the NAIC Climate Risk Disclosure Survey (preceded only by California), and in recent years DFS has published a number of industry letters and hosted webinars on the financial risks presented by climate change.
More recently, on November 15, 2021, the DFS released final guidelines for New York’s national insurers on managing climate change financial risks (the Guidelines). With the announcement of the division and guidelines, New York’s national insurers can expect the DFS to focus more on climate change issues during reviews and during its review of cases, such as risk and solvency assessment files (ORSA), companies risk reports and annual corporate governance statements (CGAD).
Guidance on the management of financial risks linked to climate change
At a high level, the guidelines set out DFS’s expectations that every national insurer in New York City should:
1. Integrate the consideration of climate risks into its governance structure at the level of the group or the insurer, in particular that the board of directors is responsible for understanding climate risks and supervising their management within the risk appetite and organizational structure of the insurer.
- This includes (1) the adoption by the board of a written risk policy outlining how the insurer monitors and manages material climate risks in accordance with its risk appetite statement, and (2) the designation of a member of the board or of a board committee as responsible for controlling the management of climate risks by the insurer, as well as one or more members of the general management as responsible for the management of climate risks by the insurer.
- Insurers must implement these governance requirements before August 15, 2022.
2. When making business decisions, consider the current and future impact of climate-related factors on its business by using time horizons appropriately tailored to the insurer, its business and the decisions made.
- This includes documenting how its analysis feeds into its strategy setting process, its risk appetite framework, and its risk management and compliance processes.
3. Integrate climate risks into its existing financial risk management, in particular by integrating climate risks into its risk management framework, by analyzing the impact of climate risks on existing risk factors (in particular credit, legal, liquidity, etc. market, operational, pricing and underwriting, reputation and strategic risks) and the inclusion of climate risks in the company’s ORSA.
4. Extend current scenario analysis practices to take into account physical risks (i.e. risks associated with acute weather events such as hurricanes and chronic changes in weather patterns such as droughts) and risks. transition (i.e. risks associated with society’s transition to a low-carbon economy), multiple carbon emissions and temperature trajectories, and short, medium and long-term horizons. Scenario analyzes should inform business strategies and risk assessment and identification.
5. Publicly disclose its climate risks, including how risks are integrated into its corporate governance and risk management, and the processes used to assess whether those risks are considered material. Each insurer should consider the Climate-Related Financial Disclosure Working Group (TCFD) framework and other initiatives when developing its disclosure approaches.
The guidelines state that “over the next two to three years, insurers should begin to specify key considerations that inform their assessment of the materiality of climate risks to their business,” paying attention to internal and external factors. If an insurer determines that climate risks are intangible, the insurer must publicly disclose this assessment, as well as its qualitative or quantitative justification and the main underlying assumptions. If an insurer determines that climate risks are Importantly, the insurer is required to publicly disclose the related numbers, metrics and targets as well as the methodologies, definitions and criteria used to make this decision.
When assessing “materiality”, insurers can use materiality benchmarks in the NAIC Financial Condition Reviewers Handbook (p. Risks can also be considered “significant” when knowledge The risk could influence the decisions or judgment of an insurer’s board of directors, management, regulators or other relevant stakeholders Materiality assumptions should be reviewed at least annually.
The guidelines recognize that the identified actions of each insurer to mitigate climate risks should be proportionate to the nature, scale and complexity of the insurer’s business, but provide that all insurers, regardless of size , must analyze their climate risks. DFS expects that over time, an insurer’s climate risk analysis and materiality assessments will shift from a qualitative approach, using simple models and a small set of risk factors, to one. quantitative approach, based on sophisticated models and a wider set of risk factors. .
The guidelines follow the publication of the proposed guidance by the DFS in March 2021 and reflect revisions based on public comments from a range of stakeholders. Notable changes include:
- The Guidelines can be implemented at the group or entity level if: (1) the risks considered at the group level include those facing the insurer; (2) policies, procedures and processes developed at the group level are implemented at the insurer level; and (3) the insurer has appropriate access to climate-related resources and expertise, centralized at group level. If an insurer’s policies, procedures or processes differ significantly from those of the group, the insurer should document and justify these differences in its risk management reports.
- DFS has relaxed some of the more prescriptive corporate governance requirements from the proposed guidelines. For example, while the proposed guidance assigns responsibility for climate risk management directly to the board of directors, the guidelines allow the board to oversee a management team responsible for complying with climate risk management requirements.
- The guidelines contain a new section on uncertainty and data gaps, in response to industry comments on the difficulties insurers face in obtaining reliable data on future risks of climate change and how the company will react. In the new section, the DSF notes that many of the expectations of the guidelines (such as governance and organizational structure) are not affected by lack of certainty or gaps in data, while the implementation of other expectations, such as defining risk tolerance and limits, may require a more iterative approach, with insurers updating or refining their decisions as new information becomes available.
- The DFS also included information on the timeline for implementing the guidelines, indicating that insurers are required to implement board governance requirements and have specific plans in place to implement. implement the organizational structure requirements, before August 15, 2022. Other requirements may be implemented over time.
DFS is hosting a webinar on November 22, 2021, 9:30 a.m. to 10:30 a.m. EST to provide additional information on the changes reflected in the guidelines and DFS ‘rationale for the changes. Registration is available here with the password ClimChg112221.