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Insurers and reinsurers are facing escalating pressure to boost their sustainability efforts, including improving their disclosure of climate risks and divesting their investments in fossil fuels.
Climate change risks outweigh opportunities for property/casualty insurers and reinsurers, according to a recent Moody’s Investors Service Inc. report, but advocates of climate action encourage them to identify, disclose and pursue such opportunities.
“Insurers, and even more so reinsurers, need to take a long-term perspective,” said Peter Bosshard, San Francisco-based Unfriend Coal Campaign coordinator and director of the finance program at The Sunrise Project, which advocates for a quick transition from fossil fuels to renewable energy. “We know they are aware that climate change is not just a huge risk and threat for society at large, but to their business model. Already, insurers are losing part of their market to climate change. Coastal areas are becoming uninsurable.”
The property/casualty sector is facing climate risks such as negative credit impact and uncertainty related to the modeling of climate risks, which “could lead to companies underpricing what their actual exposures are,” said James Eck, New York-based vice president and senior credit officer with Moody’s. In addition, climate change litigation filed against oil companies and utilities that can affect liability insurance policies “still feels like a remote risk, but certainly there is a lot of exposure,” he said.
Recognizing climate change opportunities will be critical for property/casualty insurers, according to Moody’s.
“If the climate trends that we’ve observed over the past few decades continue to result in increased frequency and severity of weather-related (catastrophe) events, we think that could really be positive for demand for insurance and reinsurance as a way for entities to implement risk adaptation strategies against these type of events,” Mr. Eck said.
While many European insurers and reinsurers are voluntarily taking climate actions such as divesting from coal operations or refusing to continue to insure such assets, their U.S. counterparts generally fall behind in those areas — something that nonprofit organizations hope to change as they apply pressure to take sustainable action across the pond.
In 2015, the first large insurers began divesting from coal, led by Paris-based Axa S.A. and then Munich-based Allianz S.E. The Unfriend Coal Campaign says at least 16 insurers have pledged to divest from coal, with commitments valued at about $22 billion.
In 2017, the campaign began lobbying insurers and reinsurers to stop underwriting coal, with Axa again being the first to pledge to do so and continuing to incorporate “very strong policies both on divestment and underwriting,” Mr. Bosshard said.
Other European insurance sector entities can take stronger action, advocates say. Lloyd’s of London has implemented a coal exclusion policy as part of its responsible investment strategy for its Central Fund, which will affect 75% of the fund’s assets and is scheduled to take effect April 1. But this represents just 2.5% of assets in the £77.5 billion ($107.32 billion) market that Lloyd’s oversees, environmental law organization ClientEarth said in a Feb. 19 letter to Lloyd’s CEO Inga Beale.
The Central Fund policy would not affect Lloyd’s syndicates, but the corporation can influence their conduct, said Stephanie Morton, London-based insurance lawyer with ClientEarth.
“They have authority to make bylaws and also issue regulations … and they can require those syndicates to take certain risks into account and report on certain risks and to consider, identify and manage those risks when those syndicates are coming up with their own investment policies,” she said.
The United States has generally lagged on both climate disclosure and divestment, but California Insurance Commissioner Dave Jones launched the Climate Risk Carbon Initiative in January 2016 to require insurers with $100 million in annual premiums doing business in California to disclose investments in fossil fuels. He also asked all insurers operating in the state to divest investments in thermal coal out of concern that they would become stranded assets and adversely affect insurers’ abilities to pay claims. The initiative identified about $10 billion in insurance industry investments in thermal coal assets — a fraction of the $5.5 trillion in total investments — but insurers have agreed to divest about $5 billion worth of these assets.
European insurers and reinsurers and their domestic affiliates responded favorably to his initiative — in stark contrast to U.S. insurers, Mr. Jones said.
“I think there are some segments of the U.S. insurance industry that would prefer not to be asked these questions, which I think is a big mistake,” he said, adding the only “rational explanation” is political. “There is a contingent of politicians and industries who benefit economically from the status quo and don’t care about what’s happening to the planet.”
Insurers and brokers must make greater strides in evaluating, disclosing and incorporating climate risks and opportunities into their operations, says a report.