Mutual Insured Destruction

This Week's Trend In Brief:

• Climate politics and extreme weather are leading the insurance industry to reconsider its willingness to “cover anything, at the right price,” including energy projects.
   

• From California to the Gulf Coast, a combination of policies limiting insurers’ ability to raise rates, coupled with natural disasters like wildfires and hurricanes has led to an “insurance crisis.”
   

• Simultaneously, insurers are feeling pressure from policymakers and activist groups like Insure Our Future, who have scrutinized insurers over their coverage of fossil fuel companies and projects, not to mention activist and policymaker demands that insurers divest their investment portfolios from fossil fuels.
   

• As the insurance industry reassesses its relationship with fossil fuels, the energy sector faces both insurability and fundability challenges, and energy firms need to develop a plan to protect their interests and ensure stakeholders understand how and why insurance industry shifts will impact energy accessibility and affordability.

Digging Deeper:

 
As wildfires wreak havoc across California, both Allstate and State Farm have announced they will no longer offer new homeowner insurance policies in the state, largely due to state policies limiting insurers’ ability to raise rates to reflect risk. In late May, State Farm, the largest property insurer in California, announced it would no longer offer new policies for homeowners or businesses in the state. Allstate, the state’s fourth largest insurer, also announced it had stopped “issuing new policies for homes, condos and commercial properties,” saying the policies had become too expensive “in the wildfire-prone state.” Industry officials attribute the companies’ decisions to state policies “that limit the ability of insurance companies to raise rates.” Many of these restrictions originated with California’s Prop 103, which “has made it almost impossible to set premiums based on computer models that project future risks including climate impacts,” forcing insurers to set “rates based on losses over the preceding 20 years.”
 

Gulf Coast states prone to hurricanes are also facing an “insurance crisis” that could quickly become “a 50-state problem.” An insurance crisis is also spreading across the Gulf Coast as natural disasters and extreme weather increase property damage. In Florida and Louisiana, hurricanes have led to regional insurance company failures and hundreds of millions of unpaid claims, as well as billions in losses for the insurance market and significant proposed rate hikes. In Texas property coverage options have become increasingly scarce as many small regional insurers “have become insolvent … or stopped covering property in hurricane-prone areas …” However, these challenge may not be limited to California and the Gulf Coast, with one insurance industry leader warning insurability is quickly becoming “a 50-state problem as insurers are being forced to re-assess their risk tolerance as climate change leads to more common and severe extreme weather events.”
 

Simultaneously, concerted pressure from activists and policymakers has some insurers reconsidering their willingness to insure fossil fuels projects. For years, activists have targeted insurers over their coverage of fossil fuel projects. In March, the Insure Our Future Network published its annual open letter to insurance companies, demanding they “Immediately stop offering any insurance services which support the expansion of coal, oil and gas production and within two years phase out all insurance services for fossil fuel companies which are not aligned with a credible 1.5ºC pathway.” Additionally, just last week, Democratic members of the U.S. Senate Budget Committee launched an investigation into insurance companies’ climate risk evaluations. Amidst this scrutiny, the industry adage that insurance companies will “cover anything, at the right price,” appears to be wavering. According to a 2022 report from Insure Our Future, “In the five years since the Insure Our Future campaign launched, 41 insurers have withdrawn or reduced cover for coal, representing 39.3% of the market for primary insurance and 62.1% of the market for reinsurance.” Additionally, nearly 40% of reinsurance companies “are now excluding some oil and natural gas projects.”
 

With activists and policymakers scrutinizing fossil fuel commitments and investors increasingly setting ESG commitments, some insurance industry participants also are considering divesting their sizeable portfolios from fossil fuels. The insurance industry controls trillions of dollars in cash and invested assets. As we have noted before, activists have led fossil fuel divestment campaigns for years, including against insurance companies. Some regulators have also sought to limit fossil fuel firms’ access to capital. Indeed, last year California Insurance Commissioner Ricardo Lara specifically scrutinized insurance companies’ fossil fuel investments. This scrutiny has significant majorities of insurers considering new climate targets for their portfolios.
 

As the insurance industry reassesses its risk tolerance and its relationship with fossil fuels, the energy industry needs to prepare for how that pressure will impact its insurability and ability to attract capital. As the insurance industry has a reckoning over extreme weather and its own relationship with fossil fuels, scrutiny is coming for fossil fuel firms, both as it relates to insuring as well as funding new projects. As this scrutiny grows, the energy industry needs to develop a plan to protect its interests and ensure its projects are provided equitable access to funding and insurance, and educate stakeholders on how restrictions on such access could impact energy accessibility and affordability.

Trends in Energy is your weekly look at key trends affecting the energy industry, brought to you by the competitive intelligence experts at Delve. As the political and regulatory landscape continues to shift, reach out to learn how our insights can help you navigate these challenges.