July 13, 2017 Read More →

IEEFA Op-Ed: To Avoid Heavy Losses, Insurance Companies Must Wake Up to Risks of Fossil Fuel Projects

Some Insurance Giants Have Divested from Coal, Yet Sector Continues to Underwrite Coal Projects and Fails to Ask the Right Questions

Insurance underpins our industrial society. Without prudent risk management by the insurance industry, no high rise can be built and no major factory can be operated.

Taking a long-term view on risk, insurance companies have warned about the impacts of global warming and encouraged climate action since the 1970s. Their far-sighted position is not purely altruistic: Catastrophic weather events are already hitting insurers’ bottom lines; the climate chaos that a temperature increase of 2 degrees Celsius would produce would make large parts of their market uninsurable.

After the rejection of the Paris climate agreement by the Trump administration, climate action by the private sector has become all the more important. Many insurance companies have come out in support of the Paris agreement, and are offering reduced rates for insuring climate-friendly products.

The blind spot of the insurance industry’s stance on climate change is its continued support for the coal sector as underwriters and investors. Most property and casualty underwriters continue to insure the serious risks of coal mines, transport infrastructure and power plants. Without such insurance, existing coal mines and new projects could not continue.

MANY COAL PRODUCERS IN THE UNITED STATES ARE EMERGING FROM BANKRUPTCY. Government officials pressured companies to end the practice of self-bonding for reclamation costs. The government was driven by the fact that company balance sheets overvalued assets and hid liabilities. Third-party insurers eagerly jumped into the market and now are collecting premiums based plans that are highly dubious business that for their overly optimistic outlooks demand.

Managing almost one-third of the world’s institutional assets, insurers also play an important role as investors. Ceres and Profundo, two research institutes focusing on finance and sustainability, found that 55 leading insurance companies have invested more than $590 billion in fossil-fuel assets. U.S. insurers are more heavily exposed to fossil-fuel bonds than the typical index fund is.

Leading companies like ExxonMobil Corp. have lagged broad stock indexes for the last several years having led those same indexes for decades. Broader oil and gas index performance is similarly lagging. Coal stock performance remains dismal, and there is far more coal being claimed as reserves than is economically available for mining. This contradiction can be seen, for instance, in Peabody Energy’s assertion that the Powder River Basin of Montana and Wyoming will see an increase in production through 2021—an outlook at blunt odds with the U.S. Energy Administration’s expectation of further declines in that region.   Insurance companies should ask if the valuations that are being reported to them are valid.

According to the latest report of the Asset Owners Disclosure Project, insurers perform worse in addressing the climate risk of their investments than any other class of investors. Investing in fuels that have no future hurts the climate and is not a prudent way to manage the premiums of insurance customers.

So far, eight insurance companies — including sector giants such as Allianz, Aviva, AXA and Swiss Re — have decided to divest their assets from coal companies. In April, AXA was the first insurer to stop underwriting coal companies in the interest of its climate credibility.

By adopting a sectorwide position to stop underwriting the coal industry—by making coal uninsurable—insurance companies can follow their most fundamental mandate: to protect the world from catastrophic risk.

Tom Sanzillo is IEEFA’s director of finance.  

A version of this piece first ran in Pensions & Investments.

RELATED POSTS:

IEEFA Update: Peabody’s Recovery Plan Overstates the Market for Coal

IEEFA U.S. Coal Outlook 2017: Short-Term Gains Muted by Prevailing Weaknesses in Fundamentals

 IEEFA Report: Red Flags on ExxonMobil: Core Financials Show a Company in Decline

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