Insurers face energy exposure risks from climate change (Calvert)

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By Brendan McCarthy, ESG Research Analyst at Calvert Research and Management

Investments that are heavily dependent on fossil fuels face the greatest uncertainty from the energy transition to renewable sources. While individual fossil fuels’ demand (i.e., coal vs. oil) is projected to diverge, the overall sector trend shows a reduction in long-term demand growth and the erosion of economic advantage over renewable alternatives.

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Insurers are exposed to fossil fuels and nuclear energy companies in two ways: policy coverage and investment portfolios. Insurers who underwrite policies to companies exposed to the energy transition face a dwindling customer and revenue base. This exposure is largely concentrated among property and casualty (P&C) insurers who write policies covering property damage, business interruption and other impacts. Many of these polices are short term, allowing those insurers to transition their customer focus beyond companies reliant on these energy sources over time.

The greater risk to insurers comes from their exposure to these companies through the insurer’s investment portfolio. Insurance companies collect regular premiums and must invest them prudently to ensure they exceed expected policy claim payouts. Furthermore, they must be able to maintain this asset-liability parity over the long run to remain solvent and to generate profits. Portfolio exposure to fossil fuels and nuclear energy companies adds unmitigated risk, which could negatively impact the asset-liability parity over time, hurting the insurer’s profitability.

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