US insurers lag in adjusting investments to low-carbon world

Companies: Allianz, Axa, Munich Re, Swiss Re, Aegon

New York City, USA. On the sideline of the Insurance & Climate Risk Americas conference held this week, California insurance commissioner Dave Jones spoke to Insurance Asset Risk's Vincent Huck about US insurers' assessments of climate risk and how regulators can help.

How are US insurers managing climate risk?

It is important to understand there are different types of climate-related risk: there is physical risk, transition risk and liability risk.

In terms of physical risk, P&C insurers, both reinsurers and direct writers, have a pretty good handle on what the risks are. Certainly there is room for improvement with regards to risk modelling, but on the physical impact side, insurers are well positioned to understand and react to those risk. How they react can be a problem for communities and families in the US, because one of the ways in which they react is by raising the price and writing less insurance. But from their standpoint of economic viability, they are well positioned.

Transition risk is different. That is the risk associated with moving away from a carbon-based economy. It poses risk to the investment portfolio of the insurance companies, particularly to the investments in oil & gas and coal in the automotive sector. There, the US insurers are not paying as much attention as they should be.

So what I tried to do as a regulator is to encourage them to think about, and begin to address, transition risk in their investment portfolio.

Finally in regards to liability risk, so far no court has attached liability risk to any greenhouse gas, for contributing to climate change. But you can imagine that the law might evolve in that direction so that is something insurers ought to be thinking about. But so far that risk hasn't materialised.


Why are US insurers not so good at assessing and addressing transition risk in their investment portfolio?

I think it has to do with a history of disparagement of climate change as a legitimate issue in the US. Unfortunately climate change has become very politicised in the US and as a consequence, notwithstanding the very real and material impact that it can have for investors [and for] investment managers of insurance companies, unfortunately not a lot of insurers are looking at it. That is unfortunate and problematic.


What is the role of the regulator in changing this?

“Insurers are aware of the physical impact risk, and appear to be in a position to address it”

My role as a regulator is several-fold. First, I want to make sure that insurers are on a sound financial footing. Part of my job is to make sure that they are invested in assets that will retain value and ideally provide some positive return, we want to make sure as regulator that there is money available to pay future claims.

So with regards to climate change and investment portfolio and the risk it poses for insurance companies, I'm keenly concerned that insurers think about and address those risk.

Insurers are aware of the physical impact risk, and appear to be in a position to address it. In the US they really not paying attention to transition risk, so I've done a number of things. I've required that they disclose their investments in oil, gas and coal and utilities that derive more than 50% of their electricity from gas and coal. I've asked insurers to voluntary divest from thermal coal because I've concluded that thermal coal has a high risk of being a stranded asset on their books and I don't want these companies to be invested in an asset that is going to decline in value and be worthless, ultimately, because of the transition wave from thermal coal

More recently, the other month, we undertook the first of its kind transition-scenario testing on insurers' investment portfolios, of companies that collect more than a $100m a year in premium. There were 600 of them. We ran a scenario analysis modelling on their portfolio of different transition scenarios, so that we could see what impact that would have. We prepared individualised reports, using these scenario analyses, for the CEOs of the companies and encouraged that they take a look at this analysis as they are taking investment decisions.


Should there be more collaborations between regulators, within the US and also internationally?

I'm very excited by the high level of collaboration between regulators internationally. In 2016 I founded the sustainability insurance forum, which is a global platform for international regulators to come together to share practices, hear from one another and advance this work. The SIF has supported the TCFD recommendations, and we put out a white paper with the IAIS to highlight best practices.

I'm excited that, even though this has become such a politicised issue in the US, there are so many thoughtful regulators from all over the globe working on this issue. I am also very excited about the leadership of international re/insurers like Allianz, Axa, Munich Re, Swiss Re, Aegon and others that have demonstrated their commitment to ESG principles generally, but more specifically to climate risk

I'm very pleased about these developments and I believe insurance has an important role to play in helping insure communities against climate change. We need to work closely with the industry to make sure that insurance is available and affordable, so that communities can recover from these catastrophic weather events driven by climate change.