Insuring a safe climate?
Despite being on the front line in terms of paying out on the impacts of climate change, Australia’s major insurers – IAG, QBE and Suncorp – continue to invest in the fossil fuel industry and in the case of QBE and Suncorp, underwrite fossil fuel projects.
Regulators, including APRA here in Australia, have started to wake up to “potentially system-wide” financial risks posed by climate change, and are calling on the insurance industry to take its rightful position as a leader in the public discourse on the issue.
Some moves to reduce exposure to climate risk have been made by international insurers, with AXA announcing in 2017 that it will no longer underwrite companies relying on coal mining or coal power generation for more than half of their business. The French-based insurer’s asset management arm has also divested around $190m worth of coal holdings. The world’s biggest insurer Allianz, and UK-based Aviva have also made significant coal divestments. The world’s second biggest reinsurer Swiss Re has excluded coal companies from its US$130 billion investment since 2016, and in July 2017 announced it was shifting its entire portfolio to ethically-based benchmarks indices.
Despite international movement, and climate risk warnings from the likes of APRA, Australia’s general insurers have so far failed to take decisive action. Our major insurers – along with the Insurance Council of Australia – have been worryingly quiet in the public discourse around climate change and the risks it poses.
What we need to see
We’re calling on Australia’s major general insurers, IAG, QBE and Suncorp, to:
- Rule out underwriting projects that expand the fossil fuel industry;
- Plan to reduce underwriting of the fossil fuel industry in the future consistent with the Paris Agreement;
- Divest from fossil fuel assets in its investment portfolio, and use that money to invest in renewable energy; and
- Take a leading role in the public debate on climate change, calling for action from Australian governments and businesses to limit global warming as much as possible;
- Educate customers about the effects of climate change on premiums, and participate in risk mitigation measures.
But insurance companies are directly supporting the expansion of the fossil fuel industry by underwriting – that is insuring – new coal, oil and gas projects.
This includes everything from coal mines and gas fields to ports, railways, pipelines and even fossil fuel power stations. These expensive projects face serious physical, legal, political and management risks, and the vast majority would not go forward without some kind of insurance cover.
AXA, the world’s biggest insurer, no longer underwrites projects of companies that derive 50% or more of their revenues from coal. Swiss Re, the world’s biggest reinsurance company, doesn’t offer coverage for off-shore drilling in the Arctic, greenfield tar sands projects, and unless certain conditions are fulfilled, hydraulic fracking. ERGO, a subsidiary of Munich Re, does not cover oil drilling in the Arctic either. Many other insurance companies have adopted Environmental, Social and Corporate Governance policies that offer general guidance but do not rule out coverage of coal projects and other destructive sectors
Of the Australian general insurers, both QBE and Suncorp underwrite fossil fuel projects.
In February 2017, London-based insurance giant Lloyd’s reported on the massive scale of potentially stranded fossil fuel related assets, finding the global insurance industry particularly exposed, and therefore vulnerable. The Lloyd’s report recommends insurers stress-test their portfolios against potential devaluation of carbon-intensive assets, and also actively contribute to legislative and regulatory development in order to reduce stranded asset risk.
General insurers in Australia manage more than $80 billion, making them some of the biggest – and therefore most influential – asset managers in the country. Each of the big three insurers are heavily exposed to fossil fuel investments, and therefore stranded asset risk.
Each of the major general insurers has incurred significant losses recent years, as the amounts they’ve paid out on claims for natural disaster events have far exceeded their provisions for such claims.
These losses highlight the growing difficulty insurers are facing as they try to predict potential payouts and price their premiums accordingly. The inability to properly price risks has raised concerns that some of the most disaster prone areas of Australia may be inadequately covered by insurers.
The problems facing the industry have been noted in a September 2015 report published by the Bank of England’s Prudential Regulation Authority (PRA), which found that insurance losses from natural disasters in the UK have increased five-fold since the 1980s, and predicted that these losses will only increase in a changing climate.
The report also highlighted two further categories of risk posed by climate change: transition risks and liability risks. Transition risks arise from the transition to a low-carbon economy, such as the repricing of carbon intensive assets as some reserves are left stranded under strict carbon budgets. Liability risks are posed by the increasing likelihood of claims for loss and damage suffered as a result of climate change being levelled against companies and directors who have significantly contributed to the problem.