Deposing King Coal - the ESG future for re/insurance

"The insurance industry is driving the development towards more sustainable economies and it's a trend that is likely to continue." Ernst Rauch, chief climatologist at Munich Re.

· European /reinsurers lead the way on coal exit policies
· Regulators, investors and public show increasing focus on carbon emissions
· Large US insurers still support the coal sector
· Divesting from coal is 'just the start' as other fossil fuels come under the spotlight

The pressure to move away from coal is growing as the reality of climate change proves undeniable. Some re/insurers are heeding the warnings but others continue to bury their heads in the tar sands.

When news of a house on fire started mobile phones buzzing at 7:20am in Baden-Baden, Germany, it got people's attention.

As delegates attending the Reinsurance Congress 2019 made their way to breakfast meetings, photos on social media confirmed that a ‘house' was ablaze outside the Kongresshaus conference venue, spitting out red hot sparks into a dark morning sky.

Then, as people began arriving at the Kongresshaus for the first sessions of the day, a group appeared around the still smouldering ‘house' and started handing out leaflets.

This was Greenpeace's publicity stunt in October 2019 targeting the re/insurance sector's apparent support for coal. Campaigners had brought with them a specially built structure to dramatically burn down, although after the initial controlled blaze, the 'burning' switched to artificial flames of fluttering fabric.

The leaflets urged delegates to stop re/insuring coal and other fossil fuels to help reduce the impact of climate change.

"We've taken Greta Thunberg's statement that our house, our collective home, is on fire and have created a symbolic activity to show just that," Adam Pawloff, climate and energy campaigner for Greenpeace Central and Eastern Europe, told Intelligent Insurer during the protest.

"The reinsurance industry insures the ongoing future of coal and other fossil fuels through reinsurance contracts and we are demanding that they put an end to that.”

While such a visual publicity stunt is unusual, the industry is coming under pressure in many other ways and from many angles. The Unfriend Coal movement, a global coalition of non-governmental organisations and social movements, for example, has a well-oiled PR machine putting constant pressure on the industry.

One of its specific focuses is on attempting to stop the Adani Group's controversial Carmichael coal project in Australia. In March, it claimed to have prompted an emergency meeting of Marsh's senior executives to discuss this issue. No facts or outcome have emerged but the very fact that the Unfriend Coal movement succeeded in drawing publicity around such a meeting illustrated the pressure companies are under.

In fact, well before certain parts of the media trained their sights on the foot soldiers supposedly loyal to King Coal (aka re/insurance professionals), a number of the sector's big names had already started their own not-so-quiet revolution against coal.

Leaders at some of the world's major firms, including Swiss Re, Allianz, and Talanx Group, which includes Hannover Re, had committed to reducing cover for coal-based risks. This was partly to cut long-term risk exposure to fossil fuel and partly to support a transition away from polluting power (see box below).

NEW FOCUS

Since the Paris Agreement to limit global temperature rises to between 1.5 and 2 degrees Celsius was signed in 2016, the problem of climate change has moved up the agenda.

In 2017, Swiss Re shifted its focus to environmental, social and corporate governance (ESG) criteria. Then in 2018 it confirmed it would not provide re/insurance to businesses with more than 30 percent thermal coal exposure across all lines, with the caveat that this only applies to businesses in developed countries.

Allianz was another relatively early adopter in cutting support for coal. In May 2018, it stopped insuring single coal-fired power plants and coal mines that were operational or at planning stage. The German firm said it was committed to excluding coal risks in its property & casualty business and in proprietary investments by 2040.

In April 2019, Talanx Group joined the ranks of coal cover reduction when it agreed to tighten its underwriting policies for coal-based risks. The company confirmed it would not reinsure any new coal-fired power plants or coal mines as standalone risks. There was a caveat: in countries where coal accounts for a large proportion of the energy mix and where access to alternative energy sources is scarce, the company said it would make exceptions.

These changes, and more across the re/insurance industry, were in place before the Greenpeace protest. But protesters on the ground in Baden-Baden were dismissive of those efforts, saying: "It is not enough, re/ insurers are apathetic about climate change."

Some would argue that the accusation is unfair given insurers cannot simply stop covering coal while a large proportion of people rely on it for power. Strategies in the industry are about transition rather than a hard stop.

Allegations of industry apathy are undermined further by research from another green campaign group showing that the number of re/insurers withdrawing cover for coal more than doubled in 2019.

Figures from the Unfriend Coal network show that 17 of the world's biggest insurers, which control 46 percent of the reinsurance market and 9.5 percent of the primary insurance market, have unveiled coal exit policies.

Its report "Insuring Coal No More: The 2019 Scorecard on Insurance, Coal and Climate Change", published in December 2019, finds that most of the re/insurers it examined refuse to insure new mines and power plants. Leading companies in the industry have gone further, refusing to continue covering existing coal projects and the companies that operate them. Similar policies have been put in place to stop insuring tar sands, something insurer Zurich, and more recently Axis Capital, have done.

"Almost all major European insurers have adopted coal exit policies," the report says, although "most specialty insurers on the Lloyd's market have yet to take action".

Insurers have divested around $8.9 trillion of investment from coal, according to Unfriend Coal, representing more than a third (37 percent) of the industry's global assets. By December 2019, 35 companies had taken action to reduce their exposure to coal, up from 19 companies with $6 trillion assets under management in 2018, and 15 companies with $4 trillion assets in 2017.

Campaigners, perhaps rightly, remain hungry for greater and faster change. The same report goes on to name and shame some of the biggest insurers in America and Asia for a lack of progress. By ranking companies on their policies to reduce reliance on coal, the report puts US firms AIG, Liberty Mutual and Berkshire Hathaway at the bottom of the pile.

AIG and Liberty Mutual come in for particular criticism, with campaigners stating that they are "among the biggest international carriers to still insure coal and among the rare players able to take the lead in multi-billion dollar coal projects".

On the plus side, other US insurers are beginning to embrace change, with coal exit policies announced by Chubb and Axis Capital in 2019.

In Asia, Sinosure, Samsung Fire & Marine (Samsung FM) and MS&AD are at the rock bottom of the rankings, but campaigners show extra disdain for Tokio Marine and Sompo, as well as Sinosure and Samsung FM, for what it calls their "critical role in insuring coal".

"Of the Asian insurers examined for the scorecard, only Ping An has so far adopted a coal policy," the report says.

"The policy stipulates conditions under which the company ‘will consider restricting to underwrite' coal projects. The conditions are lax and allow Ping An to continue insuring most projects in the pipeline, particularly in China."

The report commends QBE and Suncorp for announcing exit policies this year.

Specialty insurers on the Lloyd's market based in Bermuda faced criticism for their lack of action. Citing findings from Willis Towers Watson, campaigners highlight that the Island is "highly vulnerable to ever more serious hurricanes, yet the Island's specialty insurers remain steadfast, and have largely maintained a consistent appetite for coal projects".

Report authors add: "There is now a risk that US and Asian insurers will undermine the climate action taken by early movers. They will face pressure to cover projects for their national coal companies if international carriers withdraw from the market.

"Some may also be tempted to opportunistically increase their presence in the coal sector and seize commercial opportunities as their competitors exit."

NO EASY TASK

Pulling out of coal is not as simple as some environmental campaigners would like it to be.

"Some large insurers in the US still see supporting the coal sector as important and have the view that companies in the coal sector are transitioning," says Brandan Holmes, vice president, senior credit officer at Moody's.

"In Japan, it's difficult for insurers not to support it because it's important in energy production," he adds.

Holmes authored an "Issuer in-depth" report, published on February 24, 2020, analysing the strategies of five major firms to reduce underwriting and investment exposure to fossil fuels. It looked at Allianz, AXA, Swiss Re, Munich Re and Zurich.

Holmes' report says these five firms "are going further than most of their international peers" in reducing their underwriting and investment exposure to fossil fuel. They are pulling back from thermal coal in particular, because the sector is said to have the highest carbon intensity per unit of energy produced. These firms are being more proactive than their North American and Asian peers, he says.

While approaches varied between these leading firms, all five were found to be responding to increased regulatory, investor and public focus on carbon emissions in their efforts to reduce cover for coal and other carbon-intensive industries.

"The European companies are at the forefront of that. If you look at the context of Europe, coal is already in decline, there are a lot of policy measures phasing this out and insurers already have a somewhat low exposure to the sector, so while it is positive and good that they are retracting from coal, it might be easier for them than for insurers in other regions where the fuel is more important and more palatable politically," says Holmes.

Swiss Re is a key example of this. As an early adopter of greener re/insurance strategies, it has taken a bold stance with its fossil fuel strategy in 2020. In February this year, as the insurer unveiled its 2019 results, it also revealed plans to cut business support in underwriting and asset management to the world's 10 percent most carbon-intensive oil and gas producers by 2023, in addition to its existing policies on reducing cover for coal.

Christian Mumenthaler, group chief executive officer, adds that Swiss Re aims to achieve net-zero emissions by 2030.

The company's environmental drive is altruistic in part, but there are business reasons behind it. As the company announced its lower than expected 2019 results, John Dacey, group chief financial officer, explained: "Changes in climate have caused us to forcefully adjust our model, and we expect to see increases in our summer pricing."

The company reported a 73 percent profit rise to $727 million for 2019 from $421 million in 2018, but Dacey added that he believed the poorer than expected figures were caused by a series of manmade and natural disasters such as typhoons in Japan, Atlantic hurricanes and the bushfires in Australia, as well as expenses on the US casualty side.

An increase in disruptive weather and the severe damage it can cause has been repeatedly linked to climate change by a large number of scientists.

NOT JUST COAL

Divesting from coal is a start but curbing the wider use of fossil fuel is a huge challenge.

Ernst Rauch, chief climatologist at Munich Re, agrees that the discussion should not be just about coal.

"What is needed is an overall approach to make economies carbon-neutral, first of all by elevating new climate-friendly technologies," he says.

"The insurance industry is driving the development towards more sustainable economies and it's a trend that is likely to continue.

"A growing number of companies throughout all sectors, including insurers, are willing to take their share of responsibility to achieve the targets set in the Paris Agreement. Insurers are kind of seismographs for the economic impact of climate change as they are experiencing rising loss trends which can, in some regions and with certain perils, already to some extent be linked to climate change, for example, more devastating hail events in Europe."

Rauch says that at the same time major investors are increasingly taking sustainability criteria into account.

American investment firm BlackRock caused a stir earlier this year when it announced it was putting sustainability at the centre of its investment plans. As one of the 10 biggest shareholders of coal insurers including AIG, Tokio Marine, W.R. Berkley and Markel, BlackRock said it would intensify its engagement with companies on sustainability-related risk with a particular focus on divestment from coal-fired power.

It signalled a seismic shift towards more climate-friendly thinking and underscored the issue for other businesses.

Asked if re/insurers are doing enough to support businesses in their transition away from fossil fuels, Rauch says: "Enabling new technologies through our innovative risk transfer solutions, such as long-term performance warranties for photovoltaic modules or battery storage systems, is at the centre stage of Munich Re's climate strategy.

"The reason for this is that societies can exit from carbon-heavy technologies only if there are adequate and affordable alternatives. We need new technologies for electricity generation, transport, energy storage and industrial production.

"Without them, the only way we could limit global warming would be by accepting lower living standards. We want to help establish new climate-friendly technologies by providing insurance solutions, whereby we shoulder a portion of what are often quite unique risks."

He points to the Net Zero Asset Owner Alliance led by the United Nations as an example of good practice.

"This alliance managed to bring together institutional investors which hold assets of over $4 trillion, among them Munich Re. The goal is to make their investment portfolios 100 percent climate-neutral by 2050."

Rauch adds that the re/insurance industry should at the very least "be part of the leading team", to bring about change via pro-climate business models and leveraging both sides of the balance sheet “liability/insurance and asset management” to encourage greener activities.

"We could be an enabler for new technologies by making them more bankable and investable with our risk transfer solutions and we can increase our investments in low- carbon activities," he says.

It is "obvious", he says, that new coal- fired power stations with long operating lives are "incompatible with the goals of the Paris Agreement". This fundamental fact influenced Munich Re's decision to stop insuring them in industrialised countries.

As the trend for divesting from coal continues to grow, campaigners will continue to question how much re/insurers are really doing, as well as their motivations.

In defence of the industry, Holmes says that while some re/insurers might be more explicit than others in their policies to divest from fossil fuels, they all recognise the need to engage with these clients.

"Some have taken the view that ‘if we completely disengage they will just get that insurance capacity from someone else who might not put gradual pressure on them to transition'.

"It's about their adopting fairly pragmatic approaches and assessing the reality of the situation and that they can make more difference by remaining engaged than pulling out," he says.

Holmes also has a question for the industry: when will we see more companies broaden their sights beyond coal, like Swiss Re and Zurich?

"That is the logical progression," he says. It started with divesting from coal, but momentum is building to encompass all fossil fuels as re/insurers help sound the death knell for polluting power. It would seem that campaigners are wrong to make sweeping statements about apathy. The evidence shows there are certainly some in the industry making a stand against the king.

MORE INFO

Who is doing what on divesting from coal and other fossil fuels

SWISS RE

Reducing the effects of climate change has been a key focus for Swiss Re for a number of years, according to Christian Mumenthaler, group chief executive officer. The latest stage in the reinsurer’s plans to reduce its carbon footprint involve plans to cut business support in underwriting and asset management to the world’s 10 percent most carbon-intensive oil and gas producers by 2023.

An earlier policy, rolled out in 2018, saw the company pledge to stop providing re/ insurance to businesses with more than 30 percent of exposure to thermal coal across all lines of business, with the caveat that this withdrawal of service applied only to businesses in developed countries.

The reinsurer aims to achieve net-zero emissions by 2030, with the company planning to extract the carbon dioxide it has released from the atmosphere using technology currently being developed.

MUNICH RE

Munich Re has taken steps to divest from coal and included environmental, social and governmental criteria in the investment process to make its investment portfolio carbon-neutral by 2050.

In July 2018, the reinsurer confirmed it would not insure any new coal-fired power plants or coal mines, and would not invest in companies that generate more than 30 percent of their revenues from coal extraction or coal- fired power generation.

Any remaining investments that met this criterion were to be sold by the end of 2018. There was an exception to this rule for projects in countries where a significant proportion of the population (more than 10 percent) did not yet have access to electricity.

ALLIANZ

In May 2018, Allianz stopped insuring single coal-fired power plants and coal mines that were operational or at planning stage. The insurer said it was committed to excluding coal risks in its property & casualty business and in proprietary investments by 2040.

At the time, chief executive officer of Allianz SE Oliver Bäte said: “Climate change generates enormous economic and social risks. It is already harming millions of people today. As a leading insurer and investor, we want to promote the transition to a climate- friendly economy.”

AXA

A new phase for AXA’s climate strategy was confirmed in November 2019 with a range of commitments, including measures to ensure its investments’ alignment with the Paris Agreement, a strengthening of its coal policy, and the launch of transition bonds to facilitate decarbonisation.

In addition to this, the firm’s climate strategy strengthens the group’s coal policy and implements an exit strategy. It also launched transition bonds that are a new type of bond used to finance energy transition projects, encouraging the move towards low- carbon energy technologies.

AXA has set a target to double its green investment from €12 billion ($13.4 billion) in 2020 to €24 billion ($26.7 billion) in 2023.

CHUBB

In July 2019, Chubb, property and casualty insurer, joined the ranks of firms reducing their support for coal. It said it would no longer underwrite the construction and operation of new coal-fired plants or new risks for companies that generate more than 30 percent of their revenues from coal mining or energy production from coal.

The firm said it would no longer create new debt or equity investments in companies generating more than 30 percent of revenues from thermal coal mining or energy production from coal. It also said that it would phase out insurance for existing coal-plant risks that exceed the 30 percent threshold by 2022.

MAPFRE

Spain’s global re/insurer unveiled its Sustainability Plan at its annual general meeting in March 2019. Shareholders approved the plans to stop investing in electricity companies that earn over 30 percent of their revenue from coal-produced energy. The company has also stopped insuring new coal-powered electricity plants and the operation of new coal mines.

Mapfre said it is committed to making the operations of all its companies based in Spain and Portugal carbon neutral by 2021, which will mean a 61 percent decrease in current emissions. The re/insurer has also set out a public commitment on carbon neutrality, to make it an environmentally neutral company globally by 2030.

ZURICH

The Swiss-headquartered insurer confirmed it would stop writing certain thermal coal and oil sands risks in June 2019. The company said it would no longer underwrite or invest in companies that generate more than 30 percent of their revenue from mining thermal, oil shale or extraction of oil from oil sands, or produce more than 20 million tonnes of thermal coal per year.

TALANX GROUP (INCLUDING HANNOVER RE)

In April 2019, Talanx Group revealed it had tightened its underwriting policies on covering coal-based risks as part of wider efforts to reduce the group’s long term exposure to coal power. The group confirmed it would not reinsure any new coal-fired power plants or coal mines as standalone risks. There was a caveat: in countries where coal accounts for a large proportion of the energy mix and where access to alternative energy sources is scarce, the company said it would “make exceptions”.

AXIS CAPITAL

Under its thermal coal and oil sands underwriting and investment policy, revealed in late 2019, the specialty lines insurance and treaty reinsurance firm says it will not provide new insurance or facultative reinsurance for the construction of new thermal coal plants or mines and their dedicated infrastructure or oil sands extraction and pipeline projects and their dedicated infrastructure.

It will not re/insure companies that generate 30 percent or more of their revenues from thermal coal mining, generate 30 percent or more of their power from thermal coal, or hold more than 20 percent of their reserves in oil sands.

The company says it will not make new investments in companies that generate 30 percent or more of their revenues from thermal coal mining, that generate 30 percent or more of their power from thermal coal, or that hold more than 20 percent of their reserves in oil sands.