Implications for mining companies
The past year has seen a quickening of pace and widening of the scope of actions being taken against fossil fuel companies in the cause of fighting anthropogenic climate change. One such action occurred in March, when the Mayor of London, Sadiq Khan, called on London’s borough councils to divest their pension funds from fossil fuel companies.1 At the end of 2017, the UK government had announced that it was dropping the fiduciary requirement for workplace pension schemes to seek the best returns from their investments, which had previously been seen as an obstacle to schemes that might have wanted to divest from fossil fuels.2
Mayor Khan’s call followed the announcement at the start of the year by New York City Mayor Bill de Blasio that not only would New York be divesting its city pension funds from the fossil fuel industry, but the city was also suing five fossil fuel companies for their alleged contributions to climate change and the costs that it would incur in consequence, such as for improvements to the city’s infrastructure to protect against extreme weather events.3
On July 24 of this year, the San Francisco board of Supervisors became the first municipal body in the US to pass a resolution urging insurance companies to stop insuring and investing in fossil fuels, citing climate change and the impact of pollution on public health and the economy.4
Meanwhile Ireland will become the first country in the world to fully divest public money from fossil fuels, following the passing of legislation in July which requires the €8bn Ireland Strategic Investment Fund to dispose of all its coal, oil, gas and peat investments “as soon as is practicable”.5
The insurance industry has also got in on the act6. In June it was reported that nearly half of the global reinsurance market had now divested some or all of their assets from coal, after Hannover Re joined Swiss Re, Munich Re, SCOR, Lloyd’s, Generali and the Markel Corporation in announcing its decision to divest from the coal industry. Together, these companies are estimated to control 45% of global reinsurance premiums.7
1 https://www.london.gov.uk/press-releases/mayoral 2 https://www.theguardian.com/environment/2017 3 https://www.theguardian.com/us-news/2018 4 https://www.insurancebusinessmag.com/us/news 5 https://www.theguardian.com/environment/2018 6 Note: where the terms “insurance” and “insurer” are used in this article they should be understood to include reinsurance and reinsurers where applicable. 7 http://www.theactuary.com/news/2018/06
However, the potential game-changing development is that a number of the insurance and reinsurance giants have gone further than divestment, by announcing changes in their underwriting policy towards companies operating in the coal sector, mirroring the increasing number of banks which have announced that they will not be financing new coal projects8. However, this retreat from the underwriting of coal risks is not universal, being restricted so far to European insurers. Insurers in the USA have not followed suit, reflecting the Trump administration’s fossil fuel policies, such as the commitment to roll back the Obama- era Clean Power Plan. And even among the Europeans, there are significant variations in policy.
In November 2017 Zurich Insurance Group announced that it would cease providing insurance to entities that derive a significant part of their income from coal mining or coal-fired power generation9, joining major carriers AXA and SCOR which had already announced similar policies. Zurich will not insure companies that derive more than 50% of their revenues from coal mining or coal- fired power generation; for companies deriving between 30% and 50% of their revenues from coal, Zurich says that it will undertake additional Environmental-Social- Governance (‘ESG’) due diligence.
Zurich has been followed this year by Allianz, which announced in May that it would no longer be providing Property or Casualty insurance to single coal-fired power plants or coal mines, whether operational or planned, and that “Allianz’s stated goal is to completely phase out coal risks in the insurance business by 2040”.10Allianz will not insure single coal-fired power plants or coal mines, but will continue to insure “companies that generate electricity from multiple sources, such as coal, other fossil fuels or renewable energies”.
As this article was being prepared, Swiss Re became the latest major carrier to declare a restricted underwriting policy towards coal, announcing in July that it “will not provide re/insurance to businesses with more than 30% exposure to thermal coal across all lines of business”, a policy which applies to “both existing and new thermal coal mines and power plants.11” Swiss Re’s policy will allow it to continue to insure portfolio businesses if their coal contribution is less than 30%, although Swiss Re’s recent declaration differs from that of Allianz in not referencing any longer term ambition to completely phase out insurance for coal risks.
Munich Re, on the other hand, stated in July that it would continue to underwrite coal-related business. According to a spokesperson: “Munich Re will continue to insure all types of companies, taking into account an assessment of all risk aspects – including environmental, social and governance criteria12.”
However, the company was reported as saying that it looked at the issue repeatedly, with a number of investors reportedly considering that this underwriting stance could become increasingly untenable. And indeed it was only a month later that Munich Re’s CEO announced in the German newspaper Frankfurter Allgemeine Zeitung: “In the individual risk business, where we can see the risks exactly, we will in future in principle no longer insure new coal-fired power plants or mines in industrial countries.13” This stance still does not go as far as some of Munich Re’s peers, and it remains to be seen how Munich Re’s underwriters will implement this “in principle” position in practice.
8 http://www.mining.com/hsbc-pulls-plug-coal 9 https://www.zurich.com/en/knowledge/articles/2017 10 https://www.allianz.com/en/press/news/business 11 https://www.finanznachrichten.de/nachrichten-2018-07 12 https://www.reuters.com/article/us-munich-re-group-coal 13 https://www.reuters.com/article/us-munich-re-group-coal
Meanwhile Generali issued a release in February 2018 announcing a range of measures as part of its climate change strategy14 which not only fell short of complete disinvestment in the coal sector but also failed to include any change in underwriting practice, since its “exposure to coal-related activities is minimal in relation to total non-Life premiums and primarily refers to countries in which the economy and employment depend heavily on the coal sector.”
Likewise, when Hannover Re announced its coal divestment decision it said that it will continue to reinsure coal plants and other “fossil energy resources”, and would not “act contrary to the decisions of sovereign nations” that wish to continue with such projects.15
SCOR’s position, as announced in September 2017, seems carefully worded: “SCOR will not issue insurance or facultative reinsurance that would specifically encourage new greenfield thermal coal mines or stand-alone lignite mines or plants.”16 This therefore leaves SCOR free to insure existing thermal coal mines, and the curious “specifically encourage” language (rather than an unequivocal statement about not offering insurance) may even provide some flexibility in respect of other coal assets.
AXA declared in December 201717 that it would stop insuring any new coal construction projects (as well as the main oil sands and the associated pipeline businesses) and would no longer provide property insurance to existing coal mines and power plants when presented as “coal only” risks. This strengthened their previous underwriting proscription, which (as with Zurich) had applied to companies earning more than 50% of their revenues from coal, but some exemptions will still apply in countries where coal comprises the main baseload energy.
14 https://www.generali.com/ 15 https://www.insurancebusinessmag.com 16 https://www.scor.com 17 https://www.axa.com
Insurers’ stated motivation for their new underwriting stances is to assist in the efforts to reduce CO2 emissions in order to meet the Paris Agreement goal of restricting global warming to no more than 2°C above pre-industrial levels. Zurich stated in the press release announcing the change in its position:
“Insurers can play a role in facilitating this generational transition towards cleaner energy by increasingly reflecting the climate-related risks inherent in thermal coal in their underwriting and investment policies.”
Allianz’s announcement included a statement that it was “significantly expanding its climate strategy”, aiming to “ensure the integration of the [Paris Climate Agreement] two-degree target in all of the Allianz Group’s relevant business activities”. The purpose of Swiss Re‘s thermal coal policy is “to support transition to a low-carbon economy”.
While insurers’ announcements on their fossil fuel positions have tended to be worded in altruistic language of this kind, they will also have been motivated by self-interest. While there remains a variety of views on this subject all around the world, it’s interesting to report that less than 0.01% of authors of peer-reviewed articles on global warming published in 2013 and 2014 rejected the concept of anthropogenic global warming.18
In December 2016 ClimateWise, a global network of 29 insurance industry organisations convened by the University of Cambridge Institute for Sustainability Leadership, reported that the frequency of windstorms, floods, and weather-related catastrophes had increased six-fold since the 1950s.19 Given the likely link between this trend and changing climate, insurers who will be expected to pay claims arising from such events have a clear incentive to try to mitigate the extent of climate change.
Indeed, as the insurance sector looks to manage its exposures and risk aggregations, it is possible that more frequent and predictable climate-related events could render certain currently insurable risks and/or assets uninsurable in the commercial market. AXA’s December announcement included a blunt statement from its CEO: “A +4°C world is not insurable”.
In an Opinion piece on 9 January 201820, the Financial Times described this pullback from coal underwriting as “a welcome and logical development”, stating:
“It is not possible to shut down coal production overnight, without severe consequences for energy security in many parts of the world. Countries such as Poland or India have no immediate alternative. But any responsible government should be aiming to phase out coal as swiftly as possible, especially given the rapidly falling costs of cleaner alternatives. Many insurers have already stopped investing in coal. It makes little sense to adopt a policy of disinvestment unless underwriting practices also change.”
Meanwhile, external pressure continues to be applied to insurers. In May, a group of NGOs involved in the Unfriend Coal campaign wrote to the CEOs of 25 leading energy insurers, ahead of a meeting in Paris in June hosted by the Geneva Association. Their letter called on the CEOs to immediately divest from coal and tar sands companies and stop insuring companies that operate in these sectors, unless they are rapidly transitioning to clean energy sources. Unfriend Coal is also applying pressure on individual insurers which it sees as behaving at odds with climate change statements and commitments.21
18 http://journals.sagepub.com 19 https://www.cisl.cam.ac.uk 20 https://www.ft.com/content 21 https://www.insurancebusinessmag.com
The giants of the coal mining sector operate diversified businesses, producing not only coal but a wide range of other commodities such as iron ore, platinum and copper.
Such companies will tend to fall within the 30% - 50% thresholds referenced above, leaving carriers like Zurich and Swiss Re free to offer them insurance within their new underwriting criteria if they choose, or indeed if the companies want it – most of the mining ‘majors’ use alternative risk financing structures to carry substantial self-insured retentions.
The companies in the sector more likely to be affected in the short-to-medium term are therefore the smaller operators, with single-site exposures and/or without a diversified portfolio of other activities – although if insurers progressively tighten their underwriting practices towards coal, moving towards a complete exit from the sector as envisaged by Allianz’s recent declaration, the majors will start to fall within scope of the companies new underwriting criteria.
Whether the unavailability of certain carriers will make a material difference to the scope and/or cost of insurance for mining companies remains to be seen. Although there will be geographical differences and variances between different classes of insurance, it is well documented that the global insurance market in recent years has enjoyed record levels of capacity, as new capital has flowed into the market from investors seeking better returns than have been available from traditional interest-bearing investments.
The position for buyers will also depend on how many other insurers join those who have already declared a restricted coal policy. The carrier announcements over the past 12 months have not precipitated a domino effect on the rest of the market, and the changes to date seem unlikely to represent any significant market change or withdrawal of capacity.
Many of the mid-caps and junior thermal coal producers, who are likely to require relatively modest insured limits and sums insured and can therefore usually chose from a broader selection of insurers, may therefore find that the required levels of coverage are still readily available at economic cost in the commercial market, especially if they can demonstrate good risk management and loss record.
Another unknown is how the new restricted policy on coal insurance will apply when it comes to treaty reinsurance, rather than direct or facultative. Will the likes of Swiss Re be able to include the threshold criteria used for their retail clients to those of their treaty clients? The position at present is not clear.
Some of the insurers that have announced coal restrictions have acknowledged the need for flexibility where there are few alternatives to coal. The use of coal in these territories will have huge societal and economic benefits, and an acceptable balance will need to be found.
And finally, it remains to be seen whether insurers will ‘walk the walk’. However much the new restricted coal policies may be motivated by a sense of social responsibility or enlightened self-interest, will they hold their nerve when they see their competitors profiting by filling the gap that they have created?
Andrew Wheeler is a mining specialist and Client Relationship Director at Willis Towers Watson in London.
