Climate Change Risks Should Push U.S. Regulators To Redesignate AIG as ‘Systemically Important’

American International Group (AIG)’s contribution and exposure to climate risk in the face of market-wide insurance disruptions poses a significant and structural risk to the U.S. financial system, according to a letter sent today to members of the Financial Stability Oversight Council (FSOC) by Public Citizen.

In the letter, Public Citizen urges regulators to designate AIG a systemically important nonbank, which would subject the insurer to a deeper evaluation of the company’s operations by the Federal Reserve. While AIG was designated as “systemically important” after the 2008 financial crisis and the passage of the Dodd Frank Act, FSOC rescinded the designation in 2017.

Hurricane Helene has demonstrated that no community is safe from climate disasters. The ongoing economic fallout from the hurricane has further highlighted the need for a federal regulatory response to the climate-driven insurance crisis impacting communities across the country. This disaster bolsters the need for regulators to use all available authorities to manage this crisis, including designating large insurers as systemically important.

“In examining AIG’s suitability for designation, FSOC should consider the risks AIG has taken on in the absence of regulatory scrutiny, following its dedesignation in 2017,” writes Public Citizen in the letter to FSOC. “AIG has not abandoned its role as an outsized risk taker. It has simply swapped one set of risky activities for another. Instead of threatening its own financial viability and creating risks to the financial system through credit default swap exposure and securities lending, AIG is creating risks for its own business model and threatening financial stability through its underwriting and investment in fossil fuel projects and assets.”

Each year, AIG receives approximately $550 million in premiums from insuring fossil fuel projects, and AIG is the largest insurer of U.S. coal, the most carbon-intensive source of energy and the largest contributor of carbon dioxide emissions, insuring at least 30% of U.S. production, according to estimates from Insure Our Future.

“While AIG contributes to the climate crisis through both its underwriting activities and its investments, the company has failed to mitigate the risks the climate crisis will have on its own solvency and long-term viability,” Public Citizen argues. “To date, AIG’s primary strategy to address the physical risks of climate change has been to transfer them back to the consumer by increasing rates and withdrawing coverage. (…) But this practice has its limits. AIG and other insurers can erode their market share only so much before they sacrifice their long-term viability; destroying and retreating from one’s own markets is an inherently perilous practice.”

In 2023, property insurance rates increased by 11% nationwide. In May 2023, State Farm announced that it would stop selling new property insurance policies to home and business owners in California. That same month, AIG announced it would stop selling property insurance in 200 ZIP Codes across the United States, including in New York, Delaware, Florida, Colorado, Montana, Idaho, and Wyoming.

“FSOC must use its full authority to address the growing financial stability threats present in the insurance industry, including by moving to designate AIG and other large U.S. insurers contributing to and impacted by the climate crisis as systemically important,” the letter concludes. “Failure to address climate-related risks in the insurance industry will threaten numerous financial sectors and markets, creating a cascade of risks that will negatively impact property values, tax revenues, and local economies.”