How Insurance Regulators are Forcing ESG on the Industry

Both international and domestic regulators are coercing the American insurance industry to disclose information about their exposure to climate-related risks. This information is difficult to quantify but is being used as a tool to control insurers’ operations and investments.  

This burdensome regulation distorts the insurance market and ultimately raises costs on consumers. 

The collection of climate risk data is widespread. The International Association of Insurance Supervisors (IAIS) is soliciting feedback for proposals to require insurers to disclose climate-related risks. Similarly, the Securities and Exchange Commission (SEC) finalized a rule to compel public companies to disclose Scope 1 and 2 emissions. The Federal Insurance Office (FIO) is also working with the National Association of Insurance Commissioners (NAIC) to force U.S. insurance companies to divulge information on their “climate-related financial risks.”  

This is a government-wide initiative to dictate the types of risks that the insurance industry must deem a material financial risk.   

In 2021, the NAIC stated that the organization “and its members actively participate in the IAIS to address climate related issues.” The NAIC also acknowledges they were “considering enhancements to the NAIC Climate Risk Disclosure Survey to align with international standards and encouraging broader participation.” The NAIC is using recommendations from the IAIS to instruct insurance regulation at the state level. International regulatory organizations should not be in the business of influencing state insurance regulations in the U.S.

Climate risk is difficult to quantify due to the subjectivity of what constitutes “material” risk. Even the Bank for International Settlements acknowledges there are “technical difficulties in coming up with a plausible stressed climate scenario and translating it into concrete stress factors.” 

Regulators largely use their discretion to dictate what constitutes material climate risk that needs to be reported. The SEC is a prime example of this. The IAIS and the Central Banks and Supervisors Network for Greening the Financial System are also using their influence to compel climate data disclosures. Ultimately, this misguided data collection is an exercise by government regulators to look under the hood of insurance companies and target purported operational or investment maladies they perceive as illiquid, opaque, or risky. 

Republicans in Congress introduced legislation to ensure regulators are not forcing insurers to focus on immaterial climate risks. Sen. Ted Cruz (R-Texas) introduced legislation to abolish FIO. Rep. Warren Davidson (R-Ohio) criticized FIO for collecting climate data. Rep. Davidson stated during a hearing that “ESG-like mandates have prevented insurers from charging actuarially sound rates.” Government regulations are preventing insurers from offering rates that are commensurate with material financial risk. 

Lawmakers are right to target FIO. However, more scrutiny of IAIS and the NAIC is also needed to comprehensively reform insurance regulation in the U.S. The IRS does not require the NAIC to file a 990 form, and it has no formal notice and comment process for stakeholders to deliberate it proposed rules. States should not be forced to adopt NAIC proposals until an independent third-party entity conducts a comprehensive quantitative impact study and cost-benefit analysis of each proposal. Arbitrary adoption of proposals so states can maintain their “accreditation” is a sloppy policymaking process. State lawmakers need a bigger say in the process as well. 

The FIO, NAIC, and IAIS need more accountability to elected officials and the public. Now is the time to enact reforms that enable a free market in the insurance sector that is based on hard data and not farcical proposals that enable ESG and raise costs for insurance policyholders across the country.