Highlights
The International Association of Insurance Supervisors (IAIS) issued its Application Paper on the Supervision of Climate-Related Risks, aiming to offer guidance to insurance supervisors worldwide related to climate risks. While the IAIS frames its document as nonbinding, the practical impact in the U.S., where insurance regulation remains firmly in state hands, could be considerably more burdensome than advertised. This is just the most recent example of the coercive nature of non-governmental entities such as the IAIS that blur the line between advocacy and coordination.
The State-Based Regulatory Model
The IAIS has been clear about its intent to “promote a globally consistent approach to addressing climate-related risks,” which raises potential concerns. With respect to U.S. insurance regulation, which is fundamentally state-based, such global uniformity is likely to be incompatible with states’ differing views on climate risks.
A clear example comes from states like Texas, where legislators explicitly prohibited the use of ESG models or climate-risk scoring in setting insurance rates. Such state-level policy choices reflect local preferences and are a feature of the U.S. insurance regulatory framework. Yet the IAIS’s recommendations directly contradict these decisions by urging insurers to deeply embed climate considerations across their entire business model.
Advocacy as Advice
Specifically, the IAIS calls for the incorporation of a number of measures that include proposals related to business practices that fall well outside the considerations of consumer protection and insurer solvency. For example, in section 3.5 of the paper, IAIS encourages the consideration of aligning executive compensation with progress on climate and broader sustainability goals. Boards are advised to incorporate climate metrics, such as portfolio emissions or sustainability training progress, into executive pay structures. Such prescriptions extend far beyond financial prudence, delving into overt policy advocacy that is at odds with some states’ regulatory frameworks.
Further, the IAIS recommends that supervisors insist insurers adopt climate risk modeling over extremely long horizons – up to five decades into the future – to assess risk. Given the inherent unreliability of forecasting over such a long period, layered over the legitimate concern over the soundness of climate modeling, this viewpoint poses significant concern. As climate models are often produced externally by advocacy-oriented institutions, they carry significant uncertainty and limited empirical grounding.
In another example, the IAIS asserts that insurers should actively manage investments with an “outward perspective,” meaning they should consider not merely how climate change affects their investments, but how their investments impact climate change. Given the IAIS institutional perspective on climate change, this recommendation is laden with subtext and appears to cross the line from prudential oversight into outright policy advocacy.
Lastly, supervisors are encouraged to update their public disclosure requirements to conform to international frameworks like the International Sustainability Standards Board (ISSB), which was developed by a non-profit organization. Given the heated domestic debate over SEC climate disclosure rules, such recommendations risk bypassing democratic deliberation within the U.S. regulatory environment.
Safeguarding State Prerogatives
The IAIS’s paper largely couches its recommendations as non-binding, but the aim and the underlying assumptions of the paper are clear. In the U.S., state regulators face implicit pressures from the National Association of Insurance Commissioners (NAIC) to maintain accreditation and uphold perceived supervisory standards. Given this, the IAIS may well insinuate its advocacy efforts on climate through the NAIC.
The IAIS Application Paper threatens the state-based regulatory model by quietly imposing a set of assumptions about climate risk and ESG standards as regulatory orthodoxy. U.S. state regulators – and particularly the NAIC – should clearly articulate that IAIS recommendations remain advisory and refrain from embedding them implicitly in accreditation standards or model laws. Meanwhile, elected officials should scrutinize the role such NGOs play in the regulatory process, and pursue reforms that increase transparency and accountability on these organizations.