In 1973, the Mississippi River experienced one of its worst floods on record, causing more than US$250 million in damage and soaking some cities along the waterway from March until May.
In August of that same year, reinsurance company Munich Re published a report on the devastating impacts of recent floods, warning of the risks of climate change. The document called for more study of global warming, “as a result of which glaciers and the polar caps recede, surfaces of lakes are reduced and ocean temperatures rise.”
It took Munich Re almost 50 years since publishing the document, but the corporation, which is the largest reinsurance company in the world, is now taking steps to detach itself not just from new coal projects, but from oil and gas, too. The company announced in October that it will no longer insure new oil and gas projects as of April 2023.
The corporation is one of a growing number of insurance and reinsurance (which is essentially insurance for insurance) companies that have decided that covering fossil fuel projects is not in their future. A recent report by the Insure Our Future campaign found that in the last five years, 41 insurance companies, representing 62% of the reinsurance market and 39% of the primary insurance market, have either completely or partially sworn off coverage for new coal projects.
Munich Re’s announcement followed a commitment last spring by the world’s second-largest reinsurance company, Swiss Re, to stop providing reinsurance for or investing in new oil- and gas-fields projects starting in 2023. And German multinational Allianz announced it would exclude coverage of most new oil and gas projects as of January.
“We’re seeing a shift in both investment and underwriting away from carbon extraction, especially for coal,” says Craig Stewart, vice-president of climate change and federal issues at the Insurance Bureau of Canada. “It’s the result of rapidly increasing underwriting losses to climate-driven events that insurers and reinsurers are seeing worldwide.”
Observers say momentum has been building in this area in recent years, as the risks and costs of the climate crisis have become too much for the insurance industry to ignore. As society’s risk managers, insurance companies have long been attuned to the perils of climate change. And as the damage (and costs) from its catastrophic effects piles up, there are clear signs that the sector now wants to avoid the risks that come with propping up the very companies responsible for global warming.
Litigation looms
One worry for insurers is that they will be on the hook to cover the costs of mounting climate lawsuits that are being brought against fossil fuel companies by local governments and activists across the world. Insurance companies often offer policies that cover directors’ and officers’ liability insurance for corporations, in the event they get sued for negligence.
Last year, AIG’s National Union Fire Insurance Company refused to cover the costs of climate litigation brought against Aloha Petroleum (a subsidiary of Sunoco) by municipalities in Hawaii. Aloha then sued the insurer, claiming it should be on the hook for more than US$880,000 the company had spent defending the lawsuit. This followed a similar dispute in Massachusetts last summer between insurer Everest and Gulf Oil.
“We’re going to see more and more lawsuits that directors and officers are being negligent in the fossil fuel sector ... and I know insurers are going to be wary about that,” says Jason Thistlethwaite, a professor at the University of Waterloo’s School of Environment, Enterprise and Development. “They just don’t know yet how they are going to be exposed.”
Insured losses adding up
Last fall, Hurricane Ian devastated parts of Florida, killing more than 100 people and causing an estimated US$67 billion in private market insured losses, according to RMS, a risk management company. The cost of damage from severe weather events in the United States was expected to top US$100 billion in 2022.
In 2021, one of the costliest years on record in the U.S., weather and climate disasters caused around US$150 billion in damages. In Canada, that year saw $2.1 billion in insured damage caused by severe weather, according to the Insurance Bureau of Canada, and US$355 billion globally. As the costs add up, Thistlethwaite says, the insurance industry is also realizing that climate change is leading to a set of correlated risks.
The frequency and severity of floods, wildfires and storms have led to insurance companies either raising their rates or flat-out denying coverage in areas they have assessed as being at greater climate risk. But this is not a sustainable strategy in the long run, says Thistlethwaite.
“You’re going to get to a certain point where insurance is a luxury item for the very rich, and that isn’t good for insurers because they want to be able to diversify their risk transfer over a wide population that faces a diverse range of risk as opposed to being very concentrated,” he says.
And continuing to jack up rates and pull coverage could also cause more reputational risk for the sector and increase the likelihood that regulators will intervene. So instead, many large global insurance companies are looking to get out ahead of the coming storm and do their part to address the main source of the problem: fossil fuels.
Divest now for tomorrow
For insurance companies that are big institutional investors, that has also meant divesting their holdings in oil, gas and coal projects. In 2015, France’s AXA became the first insurance company to start divesting from coal. While AXA has committed to stop underwriting new coal projects, advocates say its pledges on oil and gas haven’t gone far enough. In 2021, the company announced it would adopt new restrictions on new oil and gas that comes from fracking, arctic drilling and tar sands. However, Reclaim Finance, a Paris-based climate-finance think tank, calculated this would mean that AXA could continue underwriting more than 56% of planned oil and gas expansion.
Canadian insurance companies have been slow to decouple themselves from fossil fuels. Last fall, Canada’s National Observer reported that life insurance giants Sun Life and Manulife, despite making commitments to be net-zero by 2050, still had US$15.9 billion and US$9.9 billion, respectively, invested in fossil fuels as of June. Peter Bosshard, the global coordinator of the Insure Our Future campaign, says that insurance companies based in Canada and the United States tend to lag behind their European peers when it comes to divesting from and insuring fossil fuels.
“In the U.S., there is still the concept of shareholder capitalism, that a company’s only purpose is to maximize profits, that’s more prevalent and with that kind of an avoidance of social responsibility,” says Bosshard, whose campaign launched in 2017 to put pressure on insurance companies to stop insuring fossil fuels.
We’re going to see more and more lawsuits that directors and officers are being negligent in the fossil fuel sector ... and I know insurers are going to be wary about that.
—Jason Thistlethwaite, professor, University of Waterloo School of Environment, Enterprise and Development
In the latest Insure Our Future scorecard, which ranks global insurers and reinsurers based on whether they have policies that exclude fossil fuel projects, the best companies when it came to coal-exit policies were Allianz, AXA and Axis Capital. Aviva, Hannover Re and Munich Re received the best scores for their oil and gas policies. Among the laggards listed in the report were Starr, Everest Re and Berkshire Hathaway, none of which have any exclusions for fossil fuels (and none of which responded to requests for comment).
The next step for environmentalists when it comes to the insurance sector will be pushing more companies to shed their coverage of existing coal projects as well as all oil and gas. As an agreement to phase out fossil fuels didn’t materialize at COP27, the role of insurance companies in thwarting the expansion of new oil, gas and coal could be vital. Especially considering that a recent analysis by the non-profit Urgewald found that almost all oil and gas companies are still planning new fossil fuel production that would result in a further 115 billion tonnes of carbon dioxide emissions – the equivalent of 30 years of greenhouse gas emissions for the entire EU.
Without insurance, new projects won’t receive loans, or the necessary government permits in some places. “Nothing happens without insurance for a new project in many countries,” says Bosshard.
He adds that “insurance is not the silver bullet. I don’t think we can phase out fossil fuels through an insurance campaign alone, but the goal needs to be to make it increasingly difficult and expensive to insure fossil fuels so that we can tilt the balance ever more towards renewable energy. That’s a gradual process. We’re working to make it happen as soon as possible.”
