The latest data shows the insurance sector holds $536 billion in fossil fuel-related assets, despite some insurers citing climate-related risk and natural disasters as factors in raising premiums and/or dropping coverage within certain high-risk regions.
- The latest analysis shows that the US insurance sector is heavily exposed to stranded asset risk in the fossil fuel sector.
- The top 16 US insurers held approximately 50% of the over $500 billion dollars in fossil fuel-related assets owned by the sector – with just two holding 44% of the whole.
- Given insurers are starting to withdraw coverage from areas subject to extreme climate risk, it seems right that they should address their own risk profiles.
A report from sustainability advocacy non-profit Ceres, sustainability consultancy ERM, and carbon management software company Persefoni, has found that the US insurance sector held $536 billion in fossil fuel-related assets in 2019, despite some insurers citing climate-related risk and natural disasters as factors in raising premiums and/or dropping coverage within certain high-risk regions.
The report, Changing Climate for the Insurance Sector, revealed that the top 16 US insurers alone held more than 50% of the half trillion dollars in fossil fuel-related assets owned by the sector. Mindy Lubber, chief executive and president of Ceres, said: “Insurance companies are facing increasing climate change risks as the frequency and severity of extreme weather events, such as hurricanes, floods, and wildfires escalate, adding that there is an urgent need for insurers to address the financial risks of climate change posed by their fossil fuel holdings.”
Why is investment in fossil fuels a concern?
Insurers are often large asset owners and therefore have an important presence within the institutional investor sector. US insurers, however, often lack an accessible, systematic approach to incorporating climate-related factors into investment decision–making.
The challenge lies in stranded asset risk – which is clearly poorly understood. This refers to the risk that an investment, such as a plant or other type of asset, is vulnerable to significant financial risk if the cost of carbon is realised through carbon pricing, such as taxes, or emission standards, and may not be able to continue operating as projected in investment plans. If the expected return is suddenly not realisable, there is a loss of value associated with the asset across the whole portfolio.
Given the exposure of the oil and gas industry to sudden spikes in the carbon price, or significant policy action (for example a phase-out of fossil fuels, as under discussion in the climate negotiations), the sector is one of the most exposed to stranded asset risk. At the start of 2022, only 320 billion tonnes of greenhouse gases (GtCO2) were left within the carbon budget – the amount of CO2e that can be emitted to retain 66% chance of limiting warming to 1.5°C.
At current rates of emissions, this will be exhausted in just eight years, by 2030. As it stands, research from June 2023 suggests that stranded asset risk within oil and gas is up 40%.
The problem is what happens if the risk is realised – the sudden loss of value could send shock waves through the global stock markets, and potentially destroy the value of insurers’ portfolios.
Kentaro Kawamori, chief executive and co-founder of Persefoni, said: “This research once again emphasizes that climate risk is financial risk. Insurance companies must continue to evaluate their financed emissions and measure the impact they have through their fossil fuel-related assets. The technology to do this exists and will help the transition to a global decarbonized economy without penalising businesses and consumers.”
Are insurers addressing stranded asset risk?
Some insurers are currently moving to curtail climate-related risk, with a growing number ceasing to offer certain policies in some locations. This includes State Farm’s May 2023 decision to stop offering new home insurance policies in California due to wildfire risk, Farmers’ July 2023 announcement that they will stop renewing almost a third of the policies the company has written in Florida, and close to 20 home insurers in hurricane-prone Louisiana either pulling out of the state or declaring insolvency.
Tom Reichert, group chief executive of ERM, said: “As the climate crisis intensifies, the insurance industry is finding itself uniquely exposed to climate-related challenges. Now is the time for insurers to take action to address these risks and opportunities related to their investments and underwriting. This will help to ensure their business models remain resilient and that they can continue to serve their customers effectively, while ultimately accelerating the transition to a low-carbon economy.”
The report also revealed that the top two US property and casualty companies, Berkshire Hathaway and State Farm Insurance, owned 44% of total fossil fuel-related assets owned by the entire sector. Asset ownership among life insurance companies was more broadly distributed, with the top two life insurance companies, TIAA Family Group and New York Life, owning 14% of assets owned by companies in that sector.
This research was based on a quantitative analysis of US insurance sector investments in fossil fuel and green bonds and the ways that insurers’ approaches to fossil fuel exposure in investments and underwriting have evolved over the past five years.
It was undertaken using data captured in a California Department of Insurance (CDI) database of US insurance companies operating in California, which covers the most recent years of data available (2018/19) and was released in 2022. As insurers reporting to the CDI database comprise 77% of all insurers operating in the US, the dataset is broadly representative of the overall US insurance sector.