Fossil Fuel Insurance Is Turning Into a Climate Change Fight. What’s at Stake.

For decades, insurers lurked in the shadows as the fossil fuel industry and their Wall Street sponsors took most of the heat as the culprit of climate change. Now, many activists want insurance companies to be a key player in the fight against climate change. 

“Without insurance companies’ underwriting support, fossil fuel projects cannot expand and operate, because nobody will provide loans and investments to the uninsured risks,” says Risalat Khan, senior strategist at the Sunrise Project, a climate activism group.

While premiums from fossil fuel underwriting accounts for a small portion of property and casualty insurers’ total revenue, pulling the plug could deal a blow to the energy industry. Insurance companies also invest their massive premiums into interest-generating assets, and activists have been calling them to divest from fossil fuel as well.

Meanwhile, the increasingly frequent and severe extreme weather events are denting insurers’ balance sheets more than ever. The insured loss caused by natural catastrophes have been growing at an annual average rate of 5% to 7% over the past three decades, according to Swiss Re, one of the largest reinsurers that help insurance companies spread their risks.    

Companies will need to quickly adjust their risk model, pricing strategy, and even decide whether to stay in certain regions at all. “Insurers are at the forefront of climate risk,” says Andrea Ranger, a shareholder advocate at Green Century Capital Management, “Premiums will go up, and areas where they can insure will start to shrink.”

The insurance industry has already started shifting away from fossil fuels over the past few years. European insurers, including
Allianz
(ticker: ALV.Germany),
AXA
(CS.France), and
Zurich Insurance Group
(ZURN.Switzerland) were among the first to set restrictions on their investment and underwriting of coal mining and coal-powered energy plants. In 2019, Chubb (CB) became the first U.S. insurer to do so. Today, it is difficult for new coal projects outside of China to find insurance coverage. “It really squeezed the market and availability for insurance related to coal,” says Khan.

Insurers also have moved to restrict underwriting of tar sand projects, a lesser known way to produce gasoline and other oil products by mining a sticky mixture of sand, clay, water, and bitumen—a liquid or semi-solid form of petroleum.

Still, activists argue that more progressive actions are needed, especially on natural gas and oil expansion. “The European insurers have much more ambitious policies on exclusions that cover oil and gas development,” says Green Century’s Ranger. “We have not seen that kind of action here.”

But change may be coming. Earlier this year, Chubb announced new underwriting criteria that would require oil and gas extraction projects to reduce their methane emissions. The firm also said that it will no longer provide coverage for oil and gas projects in government protected conservation areas.

It’s a small step, but activists welcomed the progress. “Now, the expectation builds on other U.S. companies to also put forward oil and gas related policies,” says Sunrise Project’s Khan.

Despite being the pioneer among U.S. insurers, Chubb has refused to commit to net-zero pledges, noting that there is no viable path to achieve such goals. The company strives to reach a balance between the transition to a low-carbon economy and society’s need for energy security, said CEO Greenberg in a statement announcing the new underwriting policy. 

“We don’t yet have great alternatives to gas and oil, and it would be irresponsible of us not to continue to insure those in a responsible way,” Greenberg said at a conference last year. “We’re trying to develop an ability to underwrite new projects in a scientific-based way where we can determine which ones are done in a more sustainable and responsible way and insure those.”

Chubb declined to comment further to Barron’s.

But some want the cutoff to come faster. The Intergovernmental Panel on Climate Change has said that in order to maintain the earth’s temperature increase below 1.5˚C, no more new fossil fuel projects can be developed. Yet hundreds of oil and gas extraction projects continue to get approved and invested in globally every year.

This proxy season, Green Century has filed shareholder proposals at three large property and casualty insurers, asking them to adopt a time-bound phase out of underwriting new coal, oil, and gas projects.

The Securities and Exchange Commission has allowed Chubb to block the proposal.
Hartford Financial Services Group
(HIG) had its annual shareholder meeting this past Wednesday, but the voting results are still pending.
Travelers
(TRV) will have the vote later this month.

Travelers didn’t respond to a request for comment. Hartford declined to comment, but pointed to the firm’s proxy statement, where it cited complexities of the insurance system, the fossil fuel industry’s role in energy transition, and the complex regulatory environment as reasons to oppose the shareholder proposal. “Divestitures and boycotts are not the optimal foundation to reach net zero,” the firm wrote.

Another advocate group, As You Sow, has asked Chubb, Travelers, and
Berkshire Hathaway
(BRK.A) to disclose the greenhouse gas emissions targets for their underwriting, insuring, and investment activities.

The resolution received support from 44% of Berkshire’s independent shareholders in early May. But there was a big shift in Chubb investors’ position: At the firm’s annual meeting on May 17, only 29% voted for the proposal, a sharp drop from the 72% support for a similar proposal last year—highlighting shareholders’ swinging view on the issue.

Companies aren’t required to take any action even if a shareholder proposal passed the 50% threshold, but the results are often taken seriously by the board.

The push is coming from legislators as well. Last year, a group of Democratic lawmakers, including New York congresswoman Alexandria Ocasio-Cortez, issued a letter asking some of the nation’s biggest insurance companies to stop underwriting new fossil fuel projects and criticized the group for cutting back services and raising prices in areas affected by climate threats.

In March, Connecticut lawmakers proposed a bill that would impose a 5% annual tax on premiums received from underwriting fossil fuel exploration and production. The insurance industry strongly opposed it, noting during a public hearing that the bill inappropriately singled out insurers and is likely unconstitutional.

Regulators are also asking for more transparency from the industry. Last year, a bipartisan group of 15 state insurance commissioners––the main regulators of the industry––adopted a new standard for insurance companies to report their climate-related risks. Combined, these states represent about 80% of the U.S. insurance market.

Insurers have argued that even without third-party underwriting, fossil fuel companies have other risk transfer alternatives to move forward their projects, such as setting up a mutual insurance company, or a captive insurance company to underwrite their own risks. “Denying access to the traditional insurance market will not end or dramatically reduce fossil fuel activity,” according to Chubb’s climate change policy report. 

Besides the climate implications, insurers need to decide if underwriting fossil fuel is good business or not. While it’s difficult to know the exact return or loss of insuring oil and gas assets, one thing is for sure: The energy industry itself is not immune from the physical impacts of climate change. 

Over 40% of commercially recoverable oil and gas reserves are highly exposed to the effects of climate change, according to risk and strategic consulting firm Maplecroft. Onshore operations are exposed to sea level rise, storms, heatwaves, and flooding, while offshore operations, such as in the Gulf of Mexico, are vulnerable to tropical cyclones and extreme wave heights, says the firm.

For investors, the good news is that pulling out of oil and gas likely won’t affect insurers’ bottom line by much. Although fossil fuel is an important pillar of the global economy, when it comes to physical assets like oil rigs and refineries, the energy industry’s share in the insurance market is quite small, says Matthew Carletti, an insurance analyst at JMP Securities.

Although each loss event could be worth large sums of money due to the sheer size of the fossil fuel projects, the chance of that happening is much lower than, say, a house catching on fire or a car getting into an accident. As a result, the premiums insurers can collect from fossil fuel companies is relatively small compared to the value of their assets.

In 2021, the estimated premiums for fossil fuels insurance was around $20 billion, about 2% of the entire commercial P&C insurance sector, according to Insuramore, a market intelligence company. While some smaller firms might have more concentrated exposure, for big companies like Chubb, keeping the business or not won’t make a noticeable difference in their financial results.

Still, insurers are feeling the pain from climate change already. Extreme weather events are increasingly hitting areas with concentrated populations, while soaring inflation further pushed up the costs of the damaged properties. According to Swiss Re, natural disasters caused an estimated $275 billion global economic loss in 2022, about half of which were shouldered by the insurance industry—more than 50% higher than the 10-year average. 

To make up for the losses, insurers either increased premiums or withdraw coverage from vulnerable regions. Even then, their profit margins were getting squeezed. All this could bring more regulatory scrutiny, says JMP’s Carletti, as governments push for new rules to make insurance affordable and accessible.

“There are lots of things fighting against insurers,” he says.

Write to Evie Liu at [email protected]