A worker checks the valve of an oil pipe at the Lukoil company-owned Imilorskoye oil field outside the Siberian city of Kogalym, Russia. Picture: REUTERS/ SERGEI KARPUKHIN
A worker checks the valve of an oil pipe at the Lukoil company-owned Imilorskoye oil field outside the Siberian city of Kogalym, Russia. Picture: REUTERS/ SERGEI KARPUKHIN

For the insurance industry to fulfil its stated commitment to combat climate change, it may want to  accelerate its efforts to exit the oil and gas industry.

To date, just one insurer has promised to take “significant action” in this regard, according to analysts at Societe Generale (SocGen). Australia’s Suncorp was the first to announce it would no longer provide coverage for all new oil and gas production projects.

While insurers (23 in all) have moved to end their underwriting of coal-related activities, they have been slow to act on oil and gas. That is mainly because the insurance market for those fossil fuels is considerably larger, with estimated premiums of more than $17bn in 2018, compared with $6bn for coal power, said Peter Bosshard, programme director at the Sunrise Project and global co-ordinator of Insure Our Future (IOF). 

Reducing exposure to oil and gas has to be the next environmental objective for the insurance industry, said Nick Holmes, the London-based head of the insurance research team at SocGen.

Oil and gas accounts for 55% of all global carbon dioxide emissions unrelated to land-use such as deforestation, compared with 40% for coal, according to a group called Global Carbon Atlas.

The UN’s Intergovernmental Panel on Climate Change has said oil and gas operations must be reduced to meet the Paris Agreement’s target of limiting global warming to 1.5°C by 2050. Yet governments still plan to expand oil production by 20% over the next two decades. Oil Change International has said that CO2 emissions from existing oil, gas and coal fields and mines are likely to push the world far beyond 1.5°C unless urgent action to restrict oil and gas growth is taken.

Highly concentrated

For insurers, “we feel momentum is starting to gather in this area”, Holmes said. The floods last month in central Europe caused about €6.5bn of damage, making clear that insurers have a vested interest to combat climate change, he said. 

The oil and gas part of the insurance market is highly concentrated in about 10 companies, including American International Group, Travelers Insurance and Zurich Insurance Group. The 10 companies account for about 70% of total underwriting, according to the IOF environmental non-profit.

Insurers can have a huge effect on the oil and gas industry by refusing to provide coverage for the very worst aspects of the industry regarding atmospheric and environmental destruction — oil and tar sands, oil shale and Arctic drilling — and by refusing to insure new projects, the SocGen analysts wrote in their 26-page report, “Insurance ESG Big Picture”. Premiums from insuring new oil and gas projects amounted to about $1.7bn in 2018, which equals just 0.1% of all property and casualty premiums. This means the financial impact on insurers from restricting coverage for new capacity would not be very significant. 

Insurers can thus afford to drop the world’s biggest perpetrators of climate catastrophe, but choose not to.

Companies such as Axa and Assicurazioni Generali have begun to restrict insurance for oil sands, oil shale and Arctic drilling. Insurers that take decisive measures should become more eligible for what the SocGen analysts call a higher “green valuation premium”.

Highest ratings

European insurers have shown their desire to combat global warming by exiting coal insurance and coal-related investments. Nowadays, most major European insurers and reinsurers will not touch new coal projects and have established clear road maps to fully exit coal. Consequently, coal companies are finding it more difficult and expensive to find coverage, with many reportedly facing rate increases of as much as 40%, according to the SocGen analysts.

The analysts give France’s Axa and Swiss Re the highest environmental, social and governance ratings of the 14 European companies in their report, and they say restricting oil and gas would add to the “ESG premium” for all insurers. Axa was among the industry’s first to announce restrictions about exposure to oil sands and Arctic drilling, and Swiss Re has said it will cut insurance services for the world’s most carbon-intensive oil and gas producers by 2023.

“We think ESG investors should recognise this with a ‘green’ valuation premium,” Holmes said.

The SocGen analysts have determined that an insurer’s position on ESG-related underwriting and investments can have an effect on its valuation ranging from -3% to +9%, mainly driven by environmental factors such as exiting coal. Using this system, the bank’s analysts raised their target price for Axa and Swiss Re by 6%, and their target price for Generali, Zurich, Allianz and Munich Re by 5%.

Some insurers deserve credit for increasing their investments in the “green” economy, Holmes said. Most European insurers and reinsurers, led by Allianz and Axa, boosted their green investments by 20% to 30% in 2020. Axa plans to raise its green holdings to €25bn by 2023 from €16bn at the end of last year.

In July, eight European firms established the Net-Zero Insurance Alliance, which includes measurable and science-based climate targets that will be monitored and updated every five years.

The insurance alliance “aims to be a high-ambition group, which is positive”, Bosshard said. “But if the members want to follow the science and show credible ambition, they have to stop insuring new oil and gas projects.”

The new SocGen report finds that doing so will also be in their financial self-interest.

Bloomberg News. More stories like this are available on bloomberg.com

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