Fossil fuel investments of US insurance sector prompt concern from California, consumer advocates

California's decarbonization efforts are not translating into more green and less fossil fuel investments by leading US insurance firms operating in the state, new S&P Global Market Intelligence Analysis shows.

Instead, the "Climate Risk and Resilience Analysis" reveals that the insurance sector's fossil fuel investments far outpaced "green" investments in 2018 and 2019.

Commissioned by the California Department of Insurance (CDI) in 2020 and released 18 April, the analysis found that at least $476.72 billion, or 9.42%, of the firms' $5.06 trillion in managed assets were invested in fossil fuels in 2018. The percentage was almost unchanged in 2019, when 9.41% of investments, or about $536.22 billion of $5.697 trillion, were placed in fossil fuels.

At the same time, these firms invested $11.4 billion in green bonds to pay for environmentally beneficial energy efficiency as well as clean energy and transportation projects in 2019, more than doubling the $5.03 billion invested a year earlier.

Following the report's release, California Insurance Commissioner Ricardo Lara, who has spearheaded the state's climate risk disclosure efforts from this sector, said insurance firms need to do more to protect consumers and the environment from the billions of dollars in catastrophic climate-related losses caused by wildfires.

"Most exhaustive study"

Terming the S&P Global Market Intelligence report "the most exhaustive study of fossil fuel investments by insurance companies ever done by any US state," Lara said, "for the first time, we are disclosing fossil fuel investments while also measuring insurance companies' commitment to sustainability through their investments in green bonds."

Insurance firms act as both underwriters and investors. They invest premiums paid by customers to help pay claims related to climate-fueled damage that have run into the billions in California, mainly due to the wildfires ravaging the state. In 2018, California's Camp Fire resulted in insured losses of $12 billion and was the costliest event ever globally, according to the analysis.

Since states primarily regulate insurance firms in the US, CDI has been collecting investment data since 2015 from insurance firms with $100 million in premiums to get an idea of their exposure to climate risk. In 2020, CDI commissioned S&P Global Market Intelligence—as it had done two years prior—to analyze the investments approximately 1,200 insurance firms made during 2018 and 2019.

Lacks underwriting data

It did not, however, analyze the fossil fuel assets that insurance firms have underwritten, a major gap in the data, Public Citizen climate financial policy campaigner East Peterson-Trujillo told Net-Zero Business Daily by S&P Global Commodity Insights 20 April.

In response to the report and Lara's statement, the Washington DC-based trade group American Property Casualty Insurance Association (APCIA) said insurers look forward to working with the CDI and other regulatory agencies to "facilitating a more environmentally resilient economy."

"We are pleased the CDI recognized that insurers doubled their investments in green bonds in just one year," Deni Ritter, APCIA assistant vice president for state government affairs, wrote in a 21 April statement to Net-Zero Business Daily. "Insurers have a unique role in fostering development of more green technologies and tools by making capital and protection available to industries as they transition to a lower carbon future."

Although the CDI report provides useful data, Ritter cautioned against using the CDI report "exclusively" to evaluate the climate-related investment or commitments of any particular company.

"Also," she added, "this report should not be taken as a company's current investment strategy given the lag in reporting time cycles."

More states mandate transparency this fall

Work to enhance transparency in the insurance sector when it comes to climate risk is not limited to California. Nearly a fortnight earlier, the National Association of Insurance Commissioners—a trade group for state insurance regulators like Lara—unveiled an updated reporting format in line with international standards. The revised reporting format would require insurance companies to disclose in detail the climate-related liabilities and risks they face from investing in and underwriting fossil fuel companies.

At least 15 states, including California, have agreed to adopt this reporting format beginning in November. NAIC said the format will apply to more than 80% of insurance firms with at least $100 million in premiums.

"The NAIC climate risk survey supplements California's fossil fuel and green investment report, allowing us to hold insurers accountable for addressing climate risk across their entire operations," CDI spokesman Michael Soller wrote in a 20 April email to Net-Zero Business Daily.

However, the APCIA has raised concerns about the implementation timeframe and the ability of small and medium-sized companies to comply.

"For these companies, there simply may not be enough time or they may not have the resources to provide useful narrative responses as currently proposed, considering the internal governance process that will be needed for thorough responses," said David Snyder, APCIA vice president, international policy and counsel, said in a 22 March statement.

Good starting point

Sustainable investors see the climate risk analysis as providing a "good" starting point for California to assess the state's exposure to fossil fuels, which is "clearly and irrefutably" a big part of the climate problem, Steven Rothstein, managing director of Ceres' Accelerator for Sustainable Capital Markets, said in a 20 April interview.

Rothstein said the first step to addressing any problem as complex as climate change is to measure the size of the problem.

So, he added, "having data is a critical element," and the California commissioner and his team should be lauded for taking this step.

The analysis allows the regulator and the public to see that insurance firms are investing nearly 10% of the premiums consumers pay into assets that are causing harm, Rothstein said.

Report lacks detail on low-, zero-carbon investments

While the analysis reveals the extent of fossil fuel investment, it does not detail what percentage of those investments is directed towards clean hydrogen or carbon capture and storage technology or development of renewables.

It does uncover the portion of total fossil fuel investments directed specifically towards mining coal and extracting oil from tar sands. The data show that $3.16 billion in 2018 and $3.69 billion in 2019 went directly to tar sands projects where insurance companies had at least a 50% investment.

The Consumer Federation of America (CFA) wants state insurance agencies to go further than just assessing the exposure of insurance firms to climate change-causing fossil fuel assets.

"The decisions about which risks to insure and which not to cover have huge implications for the climate, of course, but also for consumers," Douglas Heller, CFA director of insurance, told Net-Zero Business Daily. "When we face higher property insurance premiums due to growing catastrophic exposure, we must remember that the availability of insurance coverage was crucial to supporting the fossil fuel projects that are driving climate-induced catastrophes."

In early 2022, insurance companies AIG and Chubb exited parts of the California insurance market due to increased costs associated with climate-fueled wildfires, according to Public Citizen's Peterson-Trujillo.

In other words, "insurance companies are fueling climate change by investing in fossil fuels and at the same time abandoning communities who need coverage to protect themselves from climate disasters," they said.

Responding to such concerns, APCIA's Ritter said the strength of the insurance industry and its ability to fulfill the commitments to its policyholders relies on a robust and resilient investment strategy.

"Each insurer incorporates its own strategy in managing their investment portfolio," Ritter wrote, adding "the diversity of investment strategies is reflected in insurers' governance practices, investments, and underwriting decision-making process, resulting in insurers taking very different approaches to their investments and business practices. This diversity brings strength and stability to the industry overall by avoiding concentration of investment risks."

Posted 22 April 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.