The insurance industry appears to be becoming a political tool for politicians and advocates of popular causes.

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San Francisco has become the first American city to urge insurers to divest from the fossil-fuel industry.

Insurance leaders contend that using the industry to achieve political aims sets a dangerous precedent.

If the movement is taken to its extreme, could the insurance industry be compelled not to insure or invest in other industries deemed unacceptable?

First there was pressure from New York Gov. Andrew Cuomo and Maria Vullo, New York’s financial services superintendent, on the industry to dump the National Rifle Association as a client—even fining brokerage Lockton Affinity and insurer Chubb for selling and underwriting an NRA insurance policy.

Now, insurers are being asked to take sides on the climate change debate. It began with an epiphany, the realization that all fossil fuel companies shared a common feature—they bought property and casualty insurance. What if their insurers could be pressured to no longer underwrite the companies’ risk exposures or invest in their securities? The answer was obvious—the companies would flounder. 

It was a brilliant concept, one that its originator—The Sunshine Project—has since set in motion. In July, the San Francisco Board of Supervisors became the first municipal body in the United States to call upon insurers to stop insuring and investing in the coal, oil and tar sands industries. The board also urged the city and county of San Francisco to screen insurers’ underwriting of and investments in these industries and to formally cut ties with those carriers that did not comply with its wishes. 

“Cities have nothing to gain from collaborating with insurance companies that prioritize dirty energy companies over communities,” said Aaron Peskin, a San Francisco supervisor, in announcing the decision.

The decision was a major early victory for The Sunrise Project, the Australia-based organization that devised the idea of using the insurance industry as a battering ram to clear the world of harmful emissions produced by oil, coal and other fossil fuel businesses. “Pretty much any business in the world, if they don’t have insurance, they can’t operate,” says Ross Hammond, Sunrise Project’s senior campaign advisor in the United States.

For people fretting that humanity is at the brink of extinction from global warming, the modus operandi of The Sunshine Project is a stroke of pure genius, and it has arrived just in time. For insurance leaders, even those who support a transition away from fossil fuels, there is concern that using the industry as a blunt instrument to achieve political aims sets a potentially dangerous precedent. “It is not the role of insurance to steer politics,” says Jochen Körner, the executive managing director of specialist insurance brokerage Ecclesia Group, headquartered in Germany.

Nevertheless, Körner concedes he is conflicted on the subject. “On the one hand, I endorse the aims of the San Francisco resolution because we brokers and insurers can be enablers [of The Sunshine Project’s goals] by shutting down the support system for fossil fuel companies,” he says. “This can be a quicker way to ban coal and tar sands than through politics.”

On the other hand, Körner adds, “If insurers are the means to a political end, where does it stop? Who decides what is right and what is wrong?”

Körner is not alone. “The burning of fossil fuels is a concerning issue, but requiring property and liability insurers to abandon a multibillion-dollar business like the energy industry and to limit the diversification of their investment portfolios is bad public policy,” says Robert Hartwig, a professor of finance and co-director of the Risk and Uncertainty Management Center at the University of South Carolina.

In Hartwig’s view, if the Sunshine Project’s approach were taken to its extreme, the insurance industry could be compelled not to insure or invest in other industries deemed socially unacceptable. “There are people opposed to logging companies, pharmaceutical companies, tobacco companies, businesses that make pesticides and herbicides, airlines that produce high emissions, and cars that do the same,” Hartwig says. “Do we ban insurers from insuring or investing in these companies, too?”

Governing Issues

It’s possible, of course. According to the Environmental Protection Agency, the U.S. transportation sector produces more greenhouse gas emissions than the burning of fossil fuels for utilities. If insurers can be politically compelled to forsake the energy industry, automakers and airlines may be next.

Hammond has a different opinion. “Scaling a social movement that results in a healthier planet is a very good thing,” he said. “Insurance companies are investing in and insuring the very industries which are making climate change worse. If insurance companies want to protect us from catastrophic risk, they must break ties with the fossil fuel industry.”

In other words, insurers and reinsurers that continue to underwrite and invest in fossil fuel companies are directly contributing to a future in which they will experience more severe property catastrophe losses. Dump them, and losses will eventually moderate.

Cities have nothing to gain from collaborating with insurance companies that prioritize dirty energy companies over communities.

Aaron Peskin, supervisor, city of San Francisco

That might be a pretty enticing argument if the decision were left up to individual insurers. For years, organizations like the American Sustainable Business Council have advocated that companies voluntarily divest from fossil fuels and invest instead in low-carbon alternatives. The Business Council’s DirectInvest campaign asks companies to sign a pledge to this effect and lists the names of the top 200 oil, gas and coal companies.

But that decision belongs to the companies themselves. In San Francisco, government is calling the shots.

The Sunrise Project sees nothing wrong with this scenario. “Insurance companies are supposed to protect us from catastrophic risks,” the organization states. “Yet when it comes to the largest threat to humanity—climate change—many insurers are fueling a dangerous future through their investments in and underwriting of fossil fuels.”

In their corner is California’s insurance commissioner, Dave Jones, who wants insurers to voluntarily divest from thermal coal investments. Jones’s position is that these investments will experience a precipitous decline in value as the world shifts to renewable sources of energy. Jones has directed that the state insurance department maintain a searchable database of insurers that have invested in oil, gas and coal companies. This is all part of his Climate Risk Carbon Initiative, which was designed to provide the public with information on potential financial risks caused by climate change that California insurance companies face as a result of their exposure to investments in fossil fuel.

Not surprisingly, the initiative was met with virulent opposition in coal- and oil-producing states such as Oklahoma and Kentucky. In June 2017, nearly a dozen state attorneys general threatened to sue Jones for violating the Commerce Clause of the U.S. Constitution, arguing that by targeting energy companies, employment in their states will suffer. (One in four Oklahomans works in the energy industry.) “This initiative is misguided as a matter of policy, questionable as a matter of law, and inconsistent with the principle of comity among the United States,” the group maintains, promising legal action unless Jones relents.

Jones subsequently replied in a statement that he was “undeterred.” In May 2018, as the litigation threats from the 12 state attorneys general hovered above the department, Jones launched the nation’s first-ever stress test of climate-change risks on insurer investments in fossil fuels. Initial findings indicate that insurers in the state have more than $500 billion in fossil fuel related securities issued by power and energy companies, including $10.5 billion invested in thermal coal enterprises.

The California Insurance Department did not reply to requests for an interview with Jones. Leader’s Edge also reached out to the National Association of Insurance Commissioners, the organization representing state insurance departments, for its perspective on the subject. Spokesperson Erin Yang replied, “Unfortunately, it is not an insurance regulatory issue that the NAIC has taken up.”

Hartwig calls this position untenable. “Regulators are required to ensure the financial solvency of insurance companies,” he said. “The industry is one of the largest institutional investors on the planet. By limiting their ability to invest in the energy industry, this reduces the diversification of their investment portfolios. A less diverse portfolio is a risker one. … Ultimately, this will lead to higher insurance rates for people and businesses.”

Although Jones has called for insurers to voluntarily divest from coal and other fossil fuel companies—he’s issued no such mandate—industry groups like the Property Casualty Insurers Association of America (PCI) likened Jones’s position to calls for a boycott. “Politicians have every right to express their desires and set their own policy,” says David Kodama, a PCI assistant vice president. “It’s our role to inform them about the potential ramifications of their decisions.”

Like other insurance industry participants and watchers, Kodama believes the ramifications of San Francisco’s efforts could be precarious. “Our concern is that the Board of Supervisors’ decision will become a template to push a social agenda against companies in businesses that groups of people dislike,” he explained. “It could be used as the model to fight against companies that make certain chemicals, tobacco and e-cigarettes. I could see it used against marijuana businesses, abortion clinics, casinos and adult entertainment enterprises. All of these businesses buy insurance.”

He also disapproves of limiting insurer investments. “The inference is that insurers should invest in green companies providing sustainable and renewable energy instead of oil and coal companies,” Kodama says.

“But what if these investments are less secure and more speculative in nature? That would jeopardize the stability of insurers’ investment returns, to the detriment of their policyholders.”

Hartwig agrees. “Some environmental advocates believe the future will involve the massive storage of energy in industrial batteries, but the environmental consequences of these activities are becoming clearer,” he says. “Could this result in insurer prohibitions from investing in companies that make electric cars? What about other zero carbon energy technologies like hydroelectric dams that impact fish and wildlife or wind turbines that kill birds? Once you go off in this direction, there is no end in sight.”

His point is obvious: under such a scenario, insurers would be required to restrict their investments solely to politically correct companies. Körner provides another unsettling scenario. “If insurers and reinsurers don’t assume coal mining and coal plant risks, the government may need to provide insurance,” he says. “However, no government is equipped to underwrite coal-related risks. If losses exceed premiums, taxpayers will be on the hook. … The government is never a good risk-taker.”

One need look no further than the federal government’s National Flood Insurance Program for an example of how not to underwrite U.S. flooding risks; the program has been in the red since Hurricane Katrina struck the Gulf Coast in 2005.

If insurers are the means to a political end, where does it stop? Who decides what is right and what is wrong?

Jochen Körner, executive managing director, Ecclesia Group

Taking the Pledge

Despite these concerns over government overreach, many of the world’s largest European insurers and reinsurers are doing what The Sunshine Project, Commissioner Jones and the San Francisco Board of Supervisors have urged. Swiss Re, Zurich, Allianz, Aviva and Axa have decided to no longer underwrite and to divest from coal companies, according to a recent report by an organization called Unfriend Coal. In August 2018, Munich Re joined them. Altogether, the insurers have divested about $23 billion from coal companies.

“Climate change generates enormous economic and social risks,” says Oliver Bäte, CEO of Allianz. “It is already harming millions of people today. As a leading insurer and investor, we want to promote the transition to a climate-friendly economy.”

And the insurer doesn’t see the move as detrimental to its bottom line. “We are convinced that our approach will further improve the risk/return profile of our portfolio in the long term and that we will strengthen our position as a forward-looking investor,” says Günther Thallinger, a member of the board of management of Allianz who is responsible for investments and environmental, social and governance criteria. “As a long-term investor, we want to shape the change to a climate-friendly economy together with our clients. We will thus also strategically develop our investment opportunities in new technologies.

“It is important to limit global warming as quickly as possible. This will only succeed if business and politics pull in the same direction.”

It is not clear if these commitments by the foreign insurers and reinsurers also apply to their business in the United States, Hammond says. However, last summer Swiss Re announced it would no longer provide reinsurance to insurers with more than 30% thermal coal exposure.

No U.S. insurer has made such commitments. “The big gaping hole is the United States,” Hammond says. “Even though the coal industry is pretty much in a terminal decline, there are still plenty of coal-fired plants in the U.S. and plenty of proposals in the Powder River Basin and in Appalachia for more coal mining. Our goal is to get U.S. insurers to do what European insurers have done and are doing.”

Hammond is confident The Sunrise Project will prevail. In July, the group sent a letter to 22 insurers asking them to voluntarily stop underwriting and investing in fossil fuel companies. Among the companies receiving the letter are such large insurers as AIG, Liberty Mutual, Berkshire Hathaway, Chubb, Nationwide and The Travelers Companies. “We need a U.S. company to get out in front of this,” Hammond says. “Axa apparently got a lot of pressure from the French government to do something on climate change, given the Paris Accord. We’d love to see a big company like AIG take the lead on this here.

“This is an extraordinary opportunity for the industry to make a huge difference—a chance to make a mark when nothing positive is going to happen at the federal level,” he says.

At present, Hammond is doing outreach in other U.S. municipalities to consider initiatives similar to the one issued in San Francisco. He also recently visited Silicon Valley to discuss The Sunrise Project’s goals with large technology companies.

“We’re hoping that companies like Google and Facebook that already have done quite a bit on climate change will start a dialogue with their insurers—if they want to keep their business, they’ll need to distance themselves from the fossil fuel industry,” Hammond says. “Changing insurance companies is not a big deal.”

He’s also targeted the cities of New York and Los Angeles as likely to follow San Francisco’s lead in breaking ties with insurers of coal, oil and tar sands companies. “Both cities that have already taken actions on climate change,” he explains. “We want them to put their insurers on notice that these are their expectations going forward.”

Crossing the Line

Certainly, the overarching ambition of The Sunrise Project is clear. It wants coal, tar sands and other fossil fuel companies to fold up their tents for good, by whatever means necessary. Without insurance and insurer investments, the organization figures the companies cannot survive, and it’s probably right.

Some would agree this is a good thing. The question is whether the property and casualty insurance industry should be the means to such an end.  

The industry is one of the largest institutional investors on the planet. By limiting their ability to invest in the energy industry, this reduces the diversification of their investment portfolios. A less diverse portfolio is a risker one.

Robert Hartwig, co-director, Risk and Uncertainty Management Center, University of South Carolina

It’s a Solomon-like determination. As Körner says, “I have nothing against requiring insurers to demonstrate how they are individually reducing their carbon footprint, but to require them all to stop writing the risks of an industry that is doing nothing illegal crosses a line.”

Once a line is crossed, there is no going back.

Russ Banham is a Pulitzer Prize-nominated financial journalist and author who writes frequently for Leader’s Edge. russ@russbanham.com