Stockholm (NordSIP) – Insurance companies are in an unusual position when it comes to the climate crisis. They have a dual exposure to climate-related risk via their investment portfolios and their property and casualty underwriting activities. This throws up a complex mix of potential conflicts, but also interesting opportunities. Insurers’ in-house resources and experience of evaluating physical risks to property and other assets should stand them in good stead when facing up to climate-related challenges. However, studies of insurance investment portfolios appear to indicate that many firms are neglecting to take an enterprise-wide approach to managing climate risk.
The Network for Greening the Financial System (NGFS) has been encouraging central banks and regulators to conduct scenario-based climate stress testing of insurance companies. However, the methodology used varies considerably from region to region and this remains a nascent process. Research by S&P Global revealed that the U.S. insurance industry held $582 billion in fossil fuel-related investments. At the same time, many of these firms are offering insurance cover to oil and gas companies’ onshore and offshore assets and projects.
Voluntary climate initiatives failing
Faced with a somewhat adverse loss history, many insurance companies are re-evaluating their relationship with the fossil fuel sector. This process is being accelerated by a concerted campaign by 27 environmental organisations. Under the common banner of “Insure our Future,” they have identified the insurance sector as a crucial link in the oil industry value chain that needs to be broken. Without insurance cover, new exploration and extraction projects cannot proceed. Despite net-zero commitments having been made by 32 insurers as members of the Net Zero Insurance Alliance (NZIA), none of these have published any plans to phase out fossil fuel underwriting with a view to maintain 1.5-degree pathways. The voluntary NZIA is rapidly losing credibility with the departure of certain member companies and the announcement in July 2023 by its sponsor the UN Environment Programme (UNEP) that it will no longer require its members to set and publish targets for reducing their insured emissions.
With insurers free to follow their own climate strategies outside such collaborative initiatives, some companies such as Allianz, Munich and Hannover Re have indeed stated that they will no longer cover new oil and gas fields. AXA is also moving in that direction, although they specify that they will still cover oil and gas companies with a transition plan in place. Environmental campaigners argue that insurance companies can shift their business to the rapidly growing global renewable energy sector. There remains a very heterogeneous approach to climate change among insurance companies, with significant differences across regions.
An industry chasing its own tail
There appears to be a fundamental contradiction in an industry heavily contributing to the climate crisis via its fossil fuel investments and underwriting activities, with the resulting weather extremes vastly increasing claims and potentially rendering many assets uninsurable. The activist environmental NGO ShareAction is calling for better regulation of the insurance industry within the European Union (EU). It is calling for mandatory net-zero plans and much higher capital requirements for fossil fuel investments, arguing that the latter would help protect insurance companies from unforeseen risks while encouraging a gradual move towards more cost-effective and less harmful sectors.
If insurance companies implement coherent firm-wide net-zero strategies, they may not only be able to mitigate their climate-related risks but also potentially benefit from their in-house physical risk expertise by actively investing in climate adaptation and resilience themes. Coastal infrastructure or nature restoration projects can provide investment returns while helping to maintain the insurability of assets. The higher incidence of extreme weather events is pricing many homeowners in the effected regions out of the insurance market. Some may benefit from cheaper state-sponsored cover or simply opt out of insurance cover altogether. Insurance companies are well placed to have a significant positive impact of the global response to the climate crisis, but there remains much work to be done by regulators and the industry itself to bring all the elements in line with a net-zero pathway.