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Industry Voices

Our best insurance: Keeping coal in the ground

Insurance underpins our industrial society. Without prudent risk management by the insurance industry, no high rise can be built and no major factory can be operated.

Taking a long-term view on risk, insurance companies have warned about the impacts of global warming and encouraged climate action since the 1970s. Their far-sighted position is not purely altruistic: Catastrophic weather events are already hitting insurers' bottom lines; the climate chaos that a temperature increase of 2 degrees Celsius would produce would make large parts of their market uninsurable.

After the rejection of the Paris climate agreement by the Trump administration, climate action by the private sector has become all the more important. Many insurance companies have come out in support of the Paris agreement, and are offering reduced rates for insuring climate-friendly products.

The blind spot of the insurance industry's stance on climate change is its continued support for the coal sector as underwriters and investors. Most property and casualty underwriters continue to insure the serious risks of climate-destroying coal mines, transport infrastructure and power plants. Without such insurance, existing coal mines and new projects could not continue.

Many coal producers in the United States are emerging from bankruptcy. Government officials pressured companies to end the practice of self-bonding for reclamation costs. The government was driven by the fact that company balance sheets overvalued assets and hid liabilities. Third-party insurers eagerly jumped into the market and now are collecting premiums based plans that are highly dubious business that for their overly optimistic outlooks demand.

Managing almost one-third of the world's institutional assets, insurers also play an important role as investors. Ceres and Profundo, two research institutes focusing on finance and sustainability, found that 55 leading insurance companies have invested more than $590 billion in fossil-fuel assets. U.S. insurers are more heavily exposed to fossil-fuel bonds than the typical index fund is.

Leading companies like Exxon Mobil Corp. have lagged broad stock indexes for the last several years having led those same indexes for decades. Broader oil and gas index performance is similarly lagging. Coal stock performance remains dismal, and there is far more coal being claimed as reserves than is economically available for mining. This contradiction can be seen, for instance, in Peabody Energy's assertion that the Powder River Basin of Montana and Wyoming will see an increase in production through 2021 — an outlook at blunt odds with the U.S. Energy Administration's expectation of further declines in that region. Insurance companies should ask if the valuations that are being reported to them are valid.

According to the latest report of the Asset Owners Disclosure Project, insurers perform worse in addressing the climate risk of their investments than any other class of investors. Investing in fuels that have no future hurts the climate and is not a prudent way to manage the premiums of insurance customers.

Generating 44% of the world's carbon dioxide emissions, burning coal is the single most important cause of climate change. Climate Analytics, a research institute, has found that no new coal projects can be built and existing plants have to be retired early if the world is to meet the goals of the Paris agreement in a cost-effective way. The best insurance against runaway climate change is to keep coal in the ground.

So far, eight insurance companies — including sector giants such as Allianz, Aviva, AXA and Swiss Re — have decided to divest their assets from coal companies. In April, AXA was the first insurer to stop underwriting coal companies in the interest of its climate credibility.

Climate change is the most serious risk humanity is facing. By adopting a sectorwide position to stop underwriting the coal industry—by making coal uninsurable—insurance companies can follow their most fundamental mandate: to protect the world from catastrophic risk.

Tom Sanzillo is director of finance at the Cleveland-based Institute for Energy Economics and Financial Analysis and a former first deputy comptroller of New York state.This article represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.