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Threatening Climate for Insurance Sector 

US insurers lag Europeans in withdrawing from fossil fuel underwriting, but all face major strategic challenges.

The insurance industry’s business model is breaking down as a result of climate-related catastrophic losses, according to new research, which tracks the pace of the sector’s withdrawal from fossil fuel underwriting.

Some players are now backing out of markets in which they would potentially be exposed to such losses, while others may take legal action against companies whose carbon activities can be blamed for such disasters, said Peter Bosshard, Global Co-ordinator of the campaign organisation Insure our Future.

Meanwhile, investment bank Jefferies put a US$45 billion price tag on Hurricane Ian, which hit parts of the Caribbean as well as US states Florida and South Carolina in September, and forecast that rates would rise.

Munich Re, the world’s biggest re-insurance company, reported that natural disasters caused losses of US$280 billion in 2021, up from US$210 billion in 2020 and US$166 billion in 2019.

“Stretching at the seams”

Insure our Future’s recently published annual scorecard scrutinises the top 30 fossil fuel insurers to gauge the strength of their exclusion policies in these industries. “While US insurers have taken some steps…they still fall far behind their European counterparts,” it said.

In terms of policies restricting, respectively, coal, and oil and gas underwriting, Allianz, Axa and Axis Capital were ranked in first place on coal, while figures for oil and gas placed Aviva first, with Hanover Re and Munich Re second.

The combined total saw Allianz first, followed by Axa second, Aviva third, Swiss Re fourth and Axis Capital fifth.

“The insurance industry was created to manage risk,” said Bosshard, “but under pressure from the mounting impacts of climate change, its business model is now stretching at the seams.”

Making polluters pay

He forecast that the industry would respond in a number of ways. “We will see growing areas where insurers refuse to provide cover. Or they provide it at such a ridiculous price that no-one can afford it.

“The state may step in with its own insurance service, as has happened in Florida, but it is likely the authorities will offer only basic cover.”

Another avenue, he said, would be for insurers and re-insurers – those who provide cover for the original insurer – to take the responsible companies to court. This happens already, he said, in other areas, such as car insurers pursuing those responsible for accidents, and should now be extended.

“As the costs of climate disasters mount, insurance companies should explore how they can bring similar claims against the companies which are driving climate-related losses through their carbon emissions,” he said. “They should, in other words, explore how they can make big polluters pay their fair share of costs of hurricanes like Ian.”

No conflict of interest

Numerous re-insurers, said Insure our Future, have reduced or ended their exposure to natural disasters, however “the largest actors – particularly Munich Re, Swiss Re and Hanover Re – view climate risks as a business opportunity and have increased their rates for natural catastrophe cover”.

Bosshard conceded that insurers have, to date, shied away from suing carbon polluters, not least because their business model requires them to service these large businesses; being seen to be taking legal action against such companies could make them less attractive to potential clients. Furthermore, they may end up suing one of their own clients.

But he saw one possible answer: “Re-insurers that are not covering significant liability costs of carbon majors are best placed to bring cases against these large carbon emitters, as they will not face the potential conflict of interest of acting as the insurer of the company they attempt to sue.”

Jefferies said the losses caused by Hurricane Ian might not be as large as first anticipated, noting also painful longer-term consequences: “Industry estimates for insured Hurricane Ian losses have oscillated wildly, from US$20 billion initially, up to US$65 billion. Nevertheless, recent statements from Citizens Insurance [Florida’s state-backed insurer] and Swiss Re perhaps imply a lower loss of about $45 billion.”

But, it added that underlying margins appear weak.

“Given the high level of catastrophe losses and underlying margin weakness, it appears inevitable that re-insurance prices will not only rise at the upcoming January renewals, but even accelerate their momentum year-on-year.”

 

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