by Lieve Lowet
This is the second part in a series of three articles written by me, which focuses on coal, climate change and capital.
The recent findings of the Coal Policy Tool of Reclaim Finance reveal that indeed, as Sweeney said, managing climate-related risk remains a novel process for many. If insurers and reinsurers want to be part of the solution, more serious action is required beyond divestments and a few pioneers. If a sector is not insurable, it is not bankable. And if it is not bankable, most coal projects cannot be financed and built. The Indian Adani Group’s Carmichael Australian coal mine controversy is a warning. Whereas the European insurers and reinsurers are roughly and broadly speaking ahead of their American, Korean or Japanese counterpart across the five criteria Reclaim Finance examined in underwriting, and the best practice case is a large European insurer, there is still a lot of work to be done by insurers and reinsurers alike to reduce capacity meaningfully and to avoid the liability risk.
Examining only the first criterium of the Coal Policy tool, the underwriting exclusion of coal and coal relation projects, only one (1!) European insurer has a full and clear exclusion policy. Fourteen (re)insurers of which 11 Europeans have an exclusion policy with exceptions, and four (re)insurers (two European and two American) have a limited exclusion policy, especially focused on new mines. Even if that means that 19 (re)insurers are exiting coal (admitted, some partially and with loopholes), 12 of the largest commercial (re)insurers (and many not assessed in the tool) have absolutely no systematic exclusion policy. One large Asian insurer has a very timid (lax?) exclusion policy. If phasing out coal is the single most important step to aligning with the Paris Agreement, surely a coal and coal project related underwriting exclusion policy must be a low hanging fruit? Why continue to pursue self-inflicting damage? The list of laggards includes mainly large US and Asian (re)insurers (Japan, China, Korea) who risk to undermine the coal-exiters opportunistically. But it also includes PZU, 34% owned by the Polish State Treasury and the largest financial institution in Poland and Central and Eastern Europe according to its 2019 SFCR, which will continue to offer cover for most state-owned mines and power stations in Poland according to a WTW report, as well as Lloyd’s of London, and its specialty individual Lloyd’s syndicates, of which several are based in Bermuda. The syndicates continue to be free to both invest in and insure coal projects. Was it not Lloyd’s where -yes indeed- Carney held its 2015 speech? Quousque tandem abutere, Catilina, patientia nostra?
And where are the large global insurance brokers in this picture who e.g. arrange risk covers for controversial coal construction projects and developers? And who seem to bundle coal with non-coal business, confusing the picture? Insurance brokers play a critical role in new coal projects, new mining or new infrastructure projects as these are typically insured by syndicates of 15 or more participants. Or they help in setting up captives for mining companies around the world. Are the intermediaries (and their consultancy arms?) also running a reputational risk against which, oh irony, brokers in their capacity as risk advisors try to warn their clients, in case they do not have a clear coal-exit plan? …1
Regulators and supervisors stepping in but liability risk not primordial
The International Association of Insurance Supervisors (IAIS), associating more than 200 supervisory authorities, is working on an application paper on supervision of climate-related risks. It will include actual examples and case studies that enable the practical implementation of supervisory material, helping this complex risk to be embedded within the global regulatory regime. Its 2018 IAIS-SIF issues paper on climate change risk to the insurance sector drew attention to liability risk, defines it as a double whammy: the risk of climate-related claims under liability policies, as well as direct claims against insurers for failing to manage climate risks. Coal is mentioned essentially as a transition and reputational risk on the underwriting and investment side.
The Network of Greening the Financial System published in May 2020 a guide for insurance and bank supervisors on how to include climate related and environmental risk in supervision, classified liability risk as a subset of either physical or transition risk, hardly mentioned coal and talked about increased prudential risk. In June 2020, a pioneering PSI guide, the result of a multi-year collaborative effort with leading insurers and key stakeholders through a global consultation process co-led by Allianz and UN Environment, is showing how insurers can develop a systematic approach to managing the broad spectrum of ESG risks such as climate change, environmental degradation, protected sites and species, animal welfare, human rights, controversial weapons, and corruption. It focuses on non-life insurance. Coal gets a few mentions. Too little too late?
Does it pay off?
According to WTW Mining risk review 2020, of 16 September 2020, capacity is still steady however. “Even for coal mining risks, we have not experienced any significant insurer withdrawals over the course of the last 12 months, and overall capacity levels – at last in theory – have remained broadly similar to what was available to buyers this time last year, with mutuals such as Oil Insurance limited (OIL) (the biggest Bermuda based energy mutual) continuing to offer significant capacity to mining companies. While in previous years we have focused on the withdrawal of certain major insurers from coal mining risks, it seems that lobbyist pressure has now moved on to insurers’ involvement in/with other industries, with only CNA Hardy pulling out of coal this year.” However, WTW continues, it has noticed a minor contraction in the realistic capacity available, due to certain major insurers offering reduced lines compared to what they were offering last year. But these developments are likely to be increasingly offset to some extent by the arrival of new markets such as Convex Insurance Limited (CIL) (UK) which started business in 2019, and Guide One (a US mutual in Des Moines, Iowa, with a long history of serving niches – Religious Organizations, Nonprofits & Human Services, Schools, Small Businesses and Programs, and which, according to its website is “excited to further the company’s diversification by launching GuideOne National, our Specialty E&S carrier that is committed to serving five key industry verticals such as Energy & Mining”. The same report elsewhere writes that “the extent of an insured’s coal-related operations is becoming an increasingly dominating factor in determining whether insurers will consider providing cover. This is particularly pertinent for non-Lloyd’s markets, who are the most likely to apply coal-related criteria to their underwriting guidelines or refuse to write coal-related risks altogether.”
According to Moody’s, the insurers which excluded coal risk did not witness meaningful losses. But the climate continues to do.
The author, Lieve Lowet is an EU Affairs consultant and lobbyist since 2003, focuses on European dossiers relevant for the insurance and pension sector. From 2003 to 2008, she was Secretary-General for the international mutual insurance association AISAM (now AMICE), which accounted for 15% of the European and 6% of the world insurance market. Prior, she worked for McKinsey as a European banking and insurance expert.
