Insurance Sector's Climate Risk from Fossil Assets

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by KnowESG
KnowESG_Insurance Sector's Climate Risk from Fossil Assets
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In a groundbreaking report released recently, it was revealed that the US insurance industry retained fossil fuel-related assets amounting to a staggering $536 billion in 2019.

This revelation comes even as some insurance companies acknowledged climate-related risks and the impact of natural disasters, factors that prompted them to adjust premiums and coverage in vulnerable regions.

The comprehensive study "Changing Climate for the Insurance Sector" was a collaborative effort involving Ceres, ERM, and Persefoni. The research exposed that a mere 16 leading US insurance companies accounted for over 50% of the $500 billion fossil fuel-related holdings across the sector.

This quantitative analysis relied on the 2019 asset data of US insurers, meticulously compiled by the California Department of Insurance, representing the most up-to-date and comprehensive dataset accessible.

In a bid to mitigate climate-associated risks, several insurers are already taking proactive measures, opting to withdraw specific policies in certain geographic areas.

Notable examples include State Farm's momentous resolution in May 2023 to cease offering new home insurance policies in California due to heightened wildfire peril.

Similarly, Farmers made headlines in July 2023 by announcing the discontinuation of renewals for nearly a third of its Florida policies. Furthermore, approximately 20 home insurance providers in hurricane-prone Louisiana either retreated from the state or found themselves in a state of financial instability.

Tom Reichert, the Group CEO of ERM, underscored the industry's increasing exposure to climate-induced challenges as the global climate crisis escalates. He emphasised that the time is ripe for insurers to proactively manage these risks and capitalise on the potential inherent in their investments and underwriting practices. By doing so, they can ensure the resilience of their business models while effectively serving their clientele, ultimately propelling the shift toward a low-carbon economy.

Kentaro Kawamori, CEO and Co-founder of Persefoni, emphasised the pivotal link between climate risk and financial risk. He urged insurance companies to consistently evaluate their emissions-related financing and gauge the repercussions of their fossil fuel-linked assets.

The technology to accomplish this task is readily available and can facilitate a smooth transition to a global economy centred around decarbonisation without unduly burdening businesses or consumers.

Mindy Lubber, CEO and president of the esteemed sustainability nonprofit Ceres, emphasised the escalating climate change risks confronting insurance firms, particularly in light of the increasing frequency and severity of extreme weather events like hurricanes, floods, and wildfires.

Lubber highlighted the pressing necessity for insurers to confront the financial risks posed by their fossil fuel investments and seize the opportunities to accelerate their investment portfolios' shift toward clean energy alternatives.

The report also brought to light the remarkable concentration of fossil fuel assets within the sector. The top two US property and casualty insurance giants, namely Berkshire Hathaway and State Farm Insurance, together accounted for a substantial 44% of the total fossil fuel-related holdings within the entire industry.

In contrast, the ownership of assets among life insurance companies exhibited a more diverse distribution. Among these, the top two life insurance companies, TIAA Family Group and New York Life, collectively possessed 14% of the sector's fossil fuel-related assets.

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Source: ERM


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