Opinion | With Climate Change Still Our Biggest Threat, Why Inaction from U.S. Insurers Is Increasingly Indefensible

By: | December 7, 2020

Kevin McComber holds a PhD in materials science and engineering from MIT. He has worked in insurance, technology, and academia. He currently runs Spark Photonics, a company focused on promoting integrated photonics technology for applications in sensing, communications, and more. He can be reached at [email protected]

Do you remember back in April when the price of a barrel of crude oil went negative for the first time in history? That shocking event was just another chapter in the downward trend in the value of fossil fuel assets the world over.

Over the past decade, (according to comparisons of the S&P 500, the S&P 500 Energy and the Dow Jones U.S. Coal indices on September 18, 2020) U.S. oil and gas companies lost 43 percent of their value, and coal companies lost a staggering 98 percent. The COVID-19-induced economic recession is deepening these losses and making a compelling case for investing in and underwriting a clean energy economy.

In my former role as an employee at a large global property and casualty insurer, I advocated internally for the company to be more proactive in addressing its own stance on underwriting and investing in fossil fuel projects.

And while they and other insurers have made positive strides over the past several years, new research from the Insure Our Future campaign shows that the U.S. insurance industry unfortunately continues to lag far behind global peers when it comes to meaningful action to eliminate the human-made causes of climate change.

While European and Australian peers have adopted stringent policies to exit coal and are starting to phase out oil and gas underwriting, U.S. insurers have either done nothing at all, or adopted policies with large loopholes. Six of the top ten U.S. companies have coal restrictions, but none have published a plan to phase out coal business.

Several major companies have not taken any steps to restrict fossil fuel support. And not a single U.S. company has restricted support for oil and gas expansion projects that the climate cannot afford, which is particularly troubling given that U.S. insurers have the largest share of the global oil and gas insurance market.

Insurance is foundational to the operation of any reputable business, so by refraining from acting on climate change, U.S. insurers are continuing to support the large-scale pollution that is driving ever-more-devastating catastrophes. Among insurers, this should be cause for alarm, both financially and morally.

Global financial institutions are taking steps now to proactively protect their own assets as well as the assets of the individuals and companies they insure. Banks, fund managers, insurers, and institutional investors – particularly those in Europe – are defunding and divesting from the coal industry, Arctic drilling, tar sands oil, and the entire fossil fuel sector at unprecedented rates.

These major financial institutions are intelligently reacting to the economic risks of climate change and the reality that fossil fuel projects will become “stranded assets” before too long.

Insurance companies are already shelling out for their large exposures to the wildfires and hurricanes devastating the country.

Following the extreme events of this summer, insurers are bracing for at least $4 billion in losses from the record number of hurricanes that made landfall, as well as $8 billion for the wildfires that swept the West Coast. These massive losses are following a trend: over the last decade, natural disasters caused a record $3 trillion of losses – $1.2 trillion higher than in 2000-2009.

These companies are not blindly underwriting assets that are prone to climate change. Instead, the best insurers have sophisticated algorithms to predict catastrophes, guide underwriting and actuarial reserving, process claims, and much more.

Insurers are now starting to view themselves as technology companies, to the point that some leading insurers are setting up dedicated innovation groups to drive growth and hold their own against “digital-first” insuretech startups.

This means insurers are now competing for talent with the likes of Amazon, Facebook, Google, and other tech firms large and small. New recruits are typically young, smart, and keenly interested in working for companies that have strong environmental agendas.

Last year, hundreds of prospective insurance employees signed onto an open letter to the U.S. industry urging action.

“While we are excited to contribute to the industry’s success, we need to know that our professional energy and efforts are not contributing to the climate crisis,” they wrote.

Workers at Amazon, Google, and other tech companies are actively organizing to demand their employers scale up climate ambition. Amazon, for one, has committed to being carbon neutral by 2040, and is leading The Climate Pledge to encourage other large firms to set the same goal.

The U.S. insurance industry will have a difficult time attracting and retaining a qualified workforce if its values do not align with those of its talent pool. It will also face unrelenting pressure from environmental advocates, affected communities, and institutional clients and investors that are seeking more sustainable options. And all this is on top of the losses that will continue to mount from poorly-performing fossil fuel investments as well as catastrophe-driven claims.

The financial and reputational risks are pointing to the same logical conclusion. I urge the insurance and reinsurance industry to embrace the role that it can play in accelerating a responsible transition to a sustainable economy. &

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