Insurance Industry

Insurer Coal Holdings Challenged

California’s chief insurance regulator asks insurers to divest themselves of thermal coal holdings.
By: | June 22, 2016

The California Insurance Commission, citing concerns about global warming, is asking all insurance groups doing business in that state to voluntarily divest their stakes in thermal coal. The commission also wants companies to submit annual reports disclosing any additional holdings in oil, gas and coal companies.

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California’s request applies to about 1,300 insurance companies doing business in the state, the largest U.S. insurance market.

The state agency is concerned the investments insurance companies make in fossil fuel companies may decline in value as energy users reduce carbon emissions and shift to renewable energy sources.

The insurance industry is a big investor in fossil fuel companies, the second largest only after pension funds, according to studies. Declines in the value of fossil fuel companies overall could have an impact. But coal represents a small percentage of carriers’ overall energy holdings.

The top 40 insurers hold more than $459 billion in fossil fuel investments, according to a new study by Ceres, a nonprofit organization that promotes action on climate change, water scarcity and other global sustainability challenges. That includes $237 billion in electric/gas utilities, $221 billion in oil and gas companies, and just under $2 billion in coal companies, Ceres said.

This is sort of like turning an ocean liner; it’s going to take a while to change direction. But you can’t sit on the sideline on this one. — Cynthia McHale, director of the insurance program at Ceres

Ceres believes an insurer’s balance sheet can be eroded by global warming on two fronts. First, warming temperatures cause more severe events requiring insurance claims payouts. Second, the insurers are heavily invested in the fossil fuel companies that produce the carbon emissions blamed for causing global warming.

California Insurance Commissioner Dave Jones also believes global warming poses risks.

That’s why he’s asked insurers to voluntarily divest from their thermal coal holdings and is also requiring detailed financial disclosures of investments in the carbon economy including coal, oil and gas.

Insurers doing business in the state who do not intend to comply must submit a request for exemption by July 1.

“I believe that climate change presents risks that insurance companies should consider with regard to their business operations, investment portfolio, and underwriting,” Jones said.

“We should all be concerned about the impact climate change will have on the future availability and affordability of insurance coverage.”

Jones is the first U.S. insurance regulator to make such a request.

It is unclear whether U.S. insurers have taken any action to identify and evaluate their potential investment exposure, Ceres said. In Europe, some insurers have already announced plans to shed their coal holdings.

“Regulator scrutiny has a real impact on insurers,” said Alex Bernhardt, principal, head of responsible investment, U.S., at Mercer.

“And fossil fuel divestment campaigns are gathering speed.”

Alex Bernhardt Principal, head of responsible investment. Mercer.

Alex Bernhardt
Principal, head of responsible investment.
Mercer.

Some charge Jones with overstepping his authority but he defends his actions.

“There’s growing risk that investments in coal, oil and gas will become stranded assets of diminishing or no value,” Jones said.

“This is of great concern to me as an insurance regulator and should be of concern for insurance companies as well.”

His request, while a first in the insurance industry, is not unique in California. Two of the world’s largest pension funds — CalSTRS and CalPERS — are under orders from the state legislature to divest their thermal coal holdings by July 2017.

Climate change is a potentially material risk to investors of all types, and in particular to insurers, who have exposure on both sides of their balance sheets.–  Alex Bernhardt, principal, head of responsible investment, U.S., at Mercer.

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Thermal coal is coal used in heating.  Coal for the coking process in steel making is another use for the carbon-based substance.

“I do not want to sit by and then discover in the near future that insurance companies’ books are filled with stranded assets that have lost their value because of a shift away from the carbon-based economy, jeopardizing their financial stability and ability to meet their obligations, including paying claims to policyholders,” Jones said.

“The writing is on the wall, the world is shifting away from fossil fuels,” said Mindy S. Lubber, president and a founding board member of Ceres.

The rating agency A.M. Best regularly analyzes what would be higher risk assets as a percentage of an insurance company’s total capital and in general is not concerned about insurance company investments in coal.

“A.M. Best does not currently have a specific concern regarding insurers’ investments in fossil fuel companies,” said Ken Johnson, vice president in the life/health ratings division at A.M. Best.

“As a whole the insurance industry remains somewhat diversified across and within the energy sector, including fossil fuel companies.”

“Although climate change overall may provide an increased risk through the energy sector, A. M. Best believes exposures remain well managed, even for the larger concentrations, and more importantly, companies should be able to absorb increased impairments for this sector over time if they were to materialize,” Johnson said.

Should Carriers Divest?

Cynthia McHale, director of the insurance program at Ceres, said the nonprofit isn’t strictly advocating for divestment. Realistically, changes can’t happen right away as many bonds are not due for years and companies don’t want to sell at a loss.

“This is sort of like turning an ocean liner; it’s going to take a while to change direction. But you can’t sit on the sideline on this one,” McHale said.

As big institutional investors, insurers have a lot of leverage they can exercise, she said.

Insurers need to know how the fossil fuel companies they are invested in—and particularly energy company boards, which are accountable for overseeing these companies— are evaluating the future of demand and the potential for their assets to become stranded, Ceres said.

It is likely that most insurers will need to develop or consult with experts on their carbon asset risk so investments can be evaluated. Expertise from underwriting and risk management functions should be shared with the investment function and vice versa, Ceres said.

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Mercer developed the TRIPTM climate risk assessment methodology as part of its 2015 report “Investing in a Time of Climate Change,” which allows investors to quantify the impact of four climate change risk factors on investor portfolios, asset classes, and equity sectors over 35 years.

“Climate change is a potentially material risk to investors of all types, and in particular to insurers, who have exposure on both sides of their balance sheets,” said Mercer’s Bernhardt.

Juliann Walsh is a former staff writer at Risk & Insurance. Comments or questions about this article can be addressed to [email protected]

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