U.S. Insurance Companies Are Deeply Invested in Climate Pollution
It’s no surprise that major U.S. insurers are getting hit with a large number of claims following the enormous damage from this year’s hurricanes and wildfires. But it will surprise many people that decades after the industry first recognized the gathering threat of climate change, most big insurance companies are still deeply invested in the very source of the problem — coal and other fossil fuels.
That’s the conclusion of a new scorecard published by the Unfriend Coal network, which evaluated the leading U.S. and European re/insurance companies’ climate-related policies and behavior.
The insurance companies were scored based on their commitments to a) divest from coal and other fossil fuels; b) cease underwriting dirty energy projects; c) invest in clean energy; and, d) lead the broader fight against climate change. Consideration was also given to how transparent the companies have been.
U.S. insurers — including AIG, Berkshire Hathaway, Liberty Mutual, Prudential and TIAA — scored poorly across the board, lagging behind their European competitors, including AXA, Allianz and others that have collectively divested $20 billion from coal. Some have also begun to limit insurance services for coal-related projects.
American insurers by contrast have taken no meaningful action to stop underwriting or investing in new dirty energy projects, including coal-fueled power plants, the biggest source of climate destroying carbon dioxide emissions.
Last year CERES reported that 40 U.S. insurers had a total of $459 billion in coal-heavy electric utilities and oil and gas companies. That included $1.8 billion held in coal company investments, which may seem a small stake until you consider that coal company stocks had plummeted precipitously. In fact, by the end of 2016, nearly half of U.S. coal was produced by companies that had already filed for bankruptcy.
CERES reported that the 40 US insurance groups had invested a median concentration of 12.1 percent of their bonds in fossil fuels companies, a much higher stake compared to the 6.7 percent of index bonds invested in fossil fuels at the same time.
Many U.S. insurers contacted for the Unfriend Coal report — including AIG, Liberty Mutual and Berkshire Hathaway — refused to participate or even respond to a questionnaire asking about their policies.
Investors have also been getting the brush-off. During Berkshire Hathaway’s 2016 shareholder meeting CEO Warren Buffett assured shareholders they have nothing to worry about — climate-related risks would be manageable and even profitable.
But a year later, after three hurricanes and the Mexican earthquake, Berkshire Hathaway reported $3 billion in natural disaster-related losses for its most recent quarter, and that it was on course for its first insurance underwriting loss in over 15 years.
A Bloomberg analyst suggested that an increase in extreme weather events should cause industry leaders to second-guess their assumptions: “Contrary to [Berkshire Hathaway CEO] Warren Buffett’s view that climate change will spur demand for coverage and boost profit at his insurance companies, the risk is the opposite unfolds as shifting weather patterns render disaster-prone areas uninsurable.”
Buffett has invested significantly in wind and solar, which are increasingly profitable. But his company has also joined attacks on solar-friendly policies in Nevada, and his BNSF railroad transports massive quantities of coal.
But Buffett is hardly alone. Many insurers hold large stakes in companies whose projects are hugely risky and controversial. Among the largest holders of bonds issued to Transcanada, the owner and developer of the Keystone XL pipeline, are major U.S. insurance companies such as New York Life, Guardian Life, John Hancock, Prudential and State Farm.
Since insurance companies’ underwriting activities are subject to weaker disclosure requirements, the magnitude of the risks they carry is less clear than their investments. But it’s a virtual certainty that U.S. insurers are underwriting many operations that have the potential to turn into “stranded assets,” as well as some of the most operationally risky parts of the oil and gas industry. In 2014, for example, AIG started insuring rail companies for up to $1 billion for shipping crude oil by rail in 2014, a little more than a year after a catastrophic derailment killed 47 people in Quebec. Watchdog groups like DeSmog describe the many derailments that happen each year as potentially catastrophic “oil bombs.”
Insurers manage a third of the world’s investment capital, which means that in the aggregate, their investments have an enormous influence on the direction and shape of the energy sector, along with their underwriting policies. Yet insurance companies pay even less attention to the climate impacts of their investments than other investors, according to a report published by the Climate Institute’s Asset Owners Disclosure Project in 2016. “As long as few insurers take action on climate risk, there is a danger of systemic failure which could have catastrophic effects on the wider economy,” the report noted.
Climate-related risks are so potentially large that Mark Carney, the Governor of the Bank of England and Chair of the International Financial Stability Board has repeatedly warned about systemic risks extending to the entire global economy.
The good news is that the climbing costs of extreme weather have started to compel some industry leaders to acknowledge the industry’s responsibility to start phasing out coal, oil and gas.
“It’s a big concern of Swiss Re that there’s such a huge gap between the economic losses and what is insured,” said Peter Zimmerli, the head of atmospheric perils at Swiss Re, the world’s second-biggest reinsurer. “Some of the signals of global warming are just there — they can’t be debated any more.”
“We’re living in a world where risk is growing exponentially,” Tom Herbstein of ClimateWise, an industry-backed insurance project at the University of Cambridge, told Bloomberg. “Climate change fundamentally challenges the existing insurance business model because it is rendering actuary analysis in many places obsolete.”
If climate risks are beginning to concern some industry executives, shareholders and policyholders, the threat of insolvency should be of greater concern to U.S. taxpayers, given that they are the “ultimate insurers” of too-big-to-fail financial institutions, like AIG, which was already bailed out less than a decade ago.
In fact, the onus of bearing the expense of rebuilding after hurricanes, floods and earthquakes already falls disproportionately on taxpayers — through increasingly expensive government programs such as the National Flood Insurance Program, which was already underwater before this year’s hurricanes nearly bankrupted it.
Insurers are only on the hook for about 10 percent of the estimated $75 billion in damages caused by flooding after Hurricane Harvey in Texas, according to AIR Worldwide. That’s because most standard U.S. home insurance policies don’t cover flooding. And with government programs weak and dysfunctional, the damage is especially significant for the minority and low-income communities that were hit hardest.
It is these communities along with taxpayers, not insurance companies, that will ultimately foot most of the bill for the fifteen catastrophes that resulted in over $1 billion in federal and private insurance claims within the first nine months of 2017, according to the National Oceanic and Atmospheric Administration’s (NOAA) National Centers for Environmental Information.
“We expect these costs will continue to rise in the future due to both an increase in exposed properties in harm’s way and the increase in the frequency and intensity of some types of extreme weather that leads to costly disasters,” said NOAA spokesperson Brady Phillips.
While the Trump administration and Congress continue to stick their heads in the sand and push for corporate tax cuts, leading U.S. fiscal authorities have been issuing a steady stream of warnings about these economic impacts. In a report released on Oct. 23, the Government Accountability Office concluded that extreme weather and fire events cost the federal government $350 billion over the last decade, including the expense of disaster assistance, and flood and crop insurance losses. This doesn’t include damages from this year’s hurricanes and fires, or the cost to private insurers, such as the companies surveyed in the new report.
These costs will only continue to climb as climate change intensifies. A year ago, the Office of Management and Budget warned that climate change related damages from extreme weather events would cost U.S. taxpayers an additional $12 to $35 billion per year by 2050.
While the federal government shares responsibility with states for disaster recovery efforts, it is state governments that bear primary responsibility for regulating the U.S. re/insurance industry. For that reason, it will largely fall upon them to begin to connect the dots and question the re/insurance industry’s climate-related investments. That has already begun to happen. In early 2016, for example, California Insurance Commissioner Dave Jones called on the industry to voluntarily divest from coal and further disclose their climate-related policies.
While U.S. insurers have been slow to respond to such calls, leading European companies have already taken steps — some of them significant — to sever their connection to the fossil fuel industry. This November Zurich announced that it will divest from and cease offering insurance to companies that depend on coal for more than 50 percent of their business. Zurich has some of the strongest policies on the new insurance company report card, which rates 25 of the world’s biggest insurers on their action around coal and climate change.
Swiss Re and Lloyd’s have informed Greenpeace and Unfriend Coal that in the coming months they will also announce new detailed underwriting and investment policies. In all, 15 insurers with over $4 trillion in assets have now taken, or are planning action, on coal — divesting an estimated $20 billion in equities and bonds or ceasing to underwrite projects.
This $4 trillion only includes assets covered by coal divestment decisions, not all assets managed by the re/insurance companies. Thus, while it’s encouraging to see the growing shift away from coal, these early movers still need to do more, and most insurers have yet to do anything to address the dangerous risks surrounding climate change.
So far, no insurer has taken steps to cease underwriting or divest from ALL fossil fuels. Some — such as Swiss Re — have adopted policies that avoid underwriting projects that pose enormous environmental risks, such as tar sands extraction and Arctic drilling. But as a rule, the insurance sector continues to be utterly non-transparent regarding the underwriting of specific transactions.
It’s particularly disturbing that no U.S. insurer has pursued meaningful action, while industry giants such as Berkshire Hathaway, AIG, Liberty Mutual and Chubb remain completely silent about the catastrophic climate risks affecting their clients.
This inaction by U.S. insurers, along with their near total silence when it comes to advocating for climate action — especially at a time when President Trump is trying to drag the country into the dark depths of climate denial — is completely unacceptable and reeks of complicity.