Insurers’ retreat from coal:

is it worth the candle?

Insurers’ retreat from coal:
is it worth the candle?

Introduction
Fossil fuel divestment

Since 2010 the movement for fossil fuel divestment (‘the divestment movement’), started by the climate movement 350.org¹, has been seeking to persuade institutions which have pension funds or other significant sums of money under their management to remove their investments from fossil fuel companies – with some success. For example, in July 2018 the Irish parliament passed legislation which requires the €8bn Ireland Strategic Investment Fund to dispose of all its coal, oil, gas and peat investments “as soon as is practicable”², making it the first country in the world to fully divest public money from fossil fuels.During the last few years the insurance industry, or at least parts of it, has gradually bought into the goals of the divestment movement. Although the divestment movement campaigns against coal, oil and gas projects, insurers to date have focused predominantly on one type of fossil fuel – coal. By the middle of 2018, nearly half of the global reinsurance market were reported to have 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.³

During the last few years the insurance industry, or at least parts of it, has gradually bought into the goals of the divestment movement. Although the divestment movement campaigns against coal, oil and gas projects, insurers to date have focused predominantly on one type of fossil fuel – coal.

The IPCC October2018 report

Stakes raised for energy and power generation sector

The urgency of the transition to cleaner energy sources being sought by the divestment movement (and others) was given a significant impetus by the special report issued by the Intergovernmental Panel on Climate Change (IPCC) in October 2018 on “the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development and efforts to eradicate poverty”.⁴

One of the reasons this report made headlines was that it lowered the previous consensus “manageable” warming level (up to 2°C above pre-industrial levels this century) to 1.5°C. Among an unprecedented range of industrial and individual behaviour changes that will be needed to limit global warming to this level, it states that all of the following must happen by 2050:

Lower overall global energy usage, including through enhanced energy efficiency
Renewables to supply 70–85% of electricity
Increased participation of nuclear and fossil fuels with carbon dioxide capture and storage (CCS) capability
The use of CCS to allow the gas industry’s share of electricity generation to be limited to approximately
8% of all global electricity generated
A steep reduction in the use of coal to close to 0% (0–2%) of all global electricity generated

Can this be achieved?

Whether this transition can proceed at the pace that the IPCC report authors consider necessary is, at best, uncertain. To take one aspect, the CCS industry has not developed as quickly as had been hoped. The Global CCS Institute reported in November 2017 (Global Status of CCS Report: 2017) that although there were “now

17 large-scale CCS facilities operating globally, with four more coming on stream in 2018”, more than 2,000 CCS facilities will be needed by 2040 in order to meet the Paris climate target (which, as already noted, was to limit warming to 2°C rather than 1.5°C).⁵

As for achieving “a steep reduction in the use of coal to close to 0%” by 2050, the indicators are not immediately encouraging. Since the turn of the century, the amount of coal-fired power capacity in the world has doubled to 2,000 gigawatts (GW), due principally to growth in China and India. Another 200GW is being built and 450GW is planned (as of mid-2018).⁶

Coal still has a dominant position in the power sector, generating 40-41% of the world’s electricity. Although 13 countries have pledged to phase out coal by 2030, another 13 are travelling in the opposite direction, planning to join the club of coal power producers.⁷

Some signs of change – but is it enough?However, there are a few encouraging signs. In the first half of 2018, the capacity of new coal plants entering operation was almost balanced by that of units being retired, and the global pipeline for proposed new coal capacity is quickly reducing.⁸ According to the International Energy Agency, global coal investment has already peaked and is now in a “dramatic slowdown”.⁹
Climate aware underwriting
A potentially significant development which may help to accelerate the global “retreat from coal” has emerged from the insurance industry. Over the past 18 months or so a number of the insurance and reinsurance giants, as if anticipating the conclusions of the IPCC special report, have decided that divestment from coal does not go far enough, and announced restrictions in their underwriting policy towards companies operating in the coal sector.

Environmental altruism?These insurers’ stated motivation for the changes in their underwriting stances announced in 2017 and 2018 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 (this was the previously considered manageable increase, before the IPCC report lowered it to 1.5°C). Announcing the change in its position in a press release of November 2017, Zurich stated:“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”.¹⁰
Enlightened self-interest?While insurers’ announcements on their fossil fuel positions have tended to be worded in altruistic language of this kind, they also are likely to have been motivated by self-interest.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.¹¹ Given the likely link between this trend and changes in the earth’s climate, insurers that will be expected to pay claims arising from such events now have a clear incentive to try to mitigate the extent of climate change.
2017 – the first signs of a new climate-aware underwriting philosophy

By the end of 2017 three major European insurers – Zurich, AXA and SCOR – had made official announcements that they were curtailing the provision of insurance to entities that derived a significant part of their income from coal-fired power generation or coal mining:

Zurich announced that it would no longer 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 said that it will undertake additional Environmental-Social-Governance (‘ESG’) due diligence.¹²

SCOR said that it will not “issue insurance or facultative reinsurance that would specifically encourage new greenfield thermal coal mines or stand-alone lignite mines or plants.”¹³

AXA declared in December 2017 that it would stop insuring any new coal construction projects and would no longer provide property insurance to existing power plants and coal mines when presented as “coal only” risks, although some exemptions will still apply in countries where coal comprises the main baseload energy.¹⁴

2018 – the pace acceleratesZurich, AXA and SCOR were joined in 2018 by other major European carriers:

Allianz 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”.¹⁵

Swiss Re declared 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.”¹⁶

In August Munich Re reversed its previously neutral stance by announcing 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.”¹⁷

In November, AXA announced that its recently-acquired XL division would adopt AXA’s position on climate change and withdraw from insuring coal business.¹⁸

And in the same month Generali became the latest European insurer to declare an underwriting position against coal, publishing what it termed a technical note in which it committed not to increase its “minimal” involvement in coal-related activities and “not to insure any new coal-related customer and any new coal construction project (mines and plants) with immediate effect”.¹⁹ (Cynics might note that this announcement came shortly after Generali, together with Vienna Insurance Group, had agreed to insure the new 660MW Ledvice coal plant in the Czech Republic.)²⁰

Underwriters marching in lockstep?
Differing criteria allow some coverage

Despite these developments, the criteria for what these major carriers will or will not insure not only differ from each other, but also allow for the continued underwriting of certain coal risks. Although they will not insure single coal-fired power plants, most insurers will continue to insure companies that generate electricity from multiple sources, including coal, provided that the contribution from coal is less than approximately 30% (or similar ceiling). This creates the anomalous situation where the insurability of a coal plant could be determined not on its own qualities or environmental impact, but by whether or not it is part of a mixed portfolio with other types of fossil fuel or renewable energy plants. Other European insurer reluctanceMeanwhile not all of the major European carriers have bitten the underwriting bullet. For example, 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 projects²¹. And despite the Lloyd’s Corporation implementing a “coal exclusion policy” with effect from
1 April 2018, it has been reported that this leaves individual Lloyd’s syndicates free to continue to both invest in and insure coal projects.²²

Meanwhile not all of the major European carriers have bitten the underwriting bullet.

European case study: Poland

Diversification – but inconsistencies remain

Heavily dependent on black coal and lignite, the Polish government has announced that, as part of the country’s energy strategy, by 2030 the coal’s share of the country’s power generation mix will decrease from 80% to 60%.²³

The country intends to develop non–coal generation facilities such as gas, offshore wind farms, biomass and photovoltaic. There are plans to diversify gas supplies by:

The construction of a gas pipeline from Norway to Poland
The development of an LNG terminal in Swinoujście
The possible construction of a floating terminal in the Gdańsk Bay area

Meanwhile, Offshore Wind Farms projects in the Baltic Sea await parliamentary legislation. It is expected that by 2030 offshore wind farms will account for over 8GW of power generation.²⁴

However, certain decisions are inconsistent - for example, the ministry of energy recently confirmed their plan to build a new 1.000 MW coal-fired installation in Ostrołęka²⁵. Indeed, the chances of the renewable energy industry supplying 70%-85% of electricity in Poland by 2050 as currently envisaged are, in reality, very small.

Polish insurance market will still offer cover

In Poland, most of mines and power generation plants are still controlled by the state – as are the largest insurers, such as PZU S.A. and PZU Mutual. It is therefore difficult to imagine a situation whereby these insurers will want to withdraw or restrict writing coal based power business in Poland. Furthermore, these insurers will seek reinsurance protection from outside Europe as well.

Moreover, certain large insurance companies from outside Europe, such as the People’s Insurance Company of China, have already expressed their interest to write coal fired plants in Poland.

Across the pond –
the view from the US
Less activity - but some signs of movementIt is noticeable that all of the insurers who have announced a curtailment of underwriting coal risks are European. To date, there has been little sign of the major US insurers following suit. However, it would be wrong to assume that there is complete inactivity in the US on this issue; in July 2018 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.²⁶And in September 2018, a new coalition of public interest groups called Insure Our Future was launched, calling on the US insurance industry to “follow their European cousins and divest from coal and tar sands companies, and to make plans to stop underwriting extreme fossil fuel projects”.²⁷Insure Our Future is part of the global Unfriend Coal campaign, which promotes a rapid shift of the insurance industry from fossil fuels to clean energy. Its rationale for targeting the insurance sector is the premise that coal plants cannot be built or operate if they do not have insurance. “Insurance companies are uniquely placed to drive the transition from coal to clean energy by ceasing to underwrite and invest in coal projects”.²⁸

Insure Our Future is part of the global Unfriend Coal campaign, which promotes a rapid shift of the insurance industry from fossil fuels to clean energy.

Coal’s share of US power generation declining…Coal’s share of US generation is aging and shrinking. The current US president continues his advocacy for coal, but this has been trumped (so to speak) by economics, as coal-fired generation is not competitive compared to cleaner technologies; consequently, no new coal projects are in the works and new power projects are dominated by renewables and natural gas. Other factors working against coal include:

Many states continue to pursue established long-term renewable targets

2018 Congressional elections were favourable towards cleaner power, with Democrats taking control of the House

Historically damaging wildfires on the West Coast have helped sway even many staunch conservatives into begrudgingly acknowledging man’s impact on our climate

…but insurance still needed!However, US coal generating facilities remain and need to be insured, especially against Property Damage. The exodus of many international insurers from the market for coal risks complicates securing Property coverage, particularly when insured individually rather than as part of a portfolio shared with non-coal assets. FM Global, AEGIS and American International Group (AIG) continue to insure these risks, though AIG is reducing its capacity for many business classes, not just coal generation. Munich Re continues to renew their existing clients’ business, at least for now. Bucking the trend, other insurers (HDI, Liberty International, Aspen, and Berkshire Hathaway) offer modest capacity to complete programs, albeit often on their terms. Ultimately, while sufficient capacity remains to insure stand-alone coal clients, these clients have less leverage with the insurance marketplace, given the limited choices available.

Implications for coal power generating companies
Surplus capacity may mitigate effect

Whether the unavailability of certain carriers will make a material difference to the scope and/or cost of insurance for coal power generation companies in practice 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 18 months have not yet precipitated a domino effect on the rest of the market, with insurers domiciled outside Europe yet to make any sort of move on the issue.‘Portfolio’ generators will be least affected

As already noted, we think that most insurers with declared coal underwriting positions will continue to offer insurance to power producers who generate electricity from multiple sources, provided coal represents less than 30% of total activity. Therefore those power generation companies that operate diversified portfolios may find that they fall within the ‘insurability’ thresholds.
Danger for smaller operators

The generation companies more likely to be affected in the short-to-medium term are therefore the independent and smaller coal operators, with single-site exposures and/or without a diversified portfolio of other activities, especially if they operate in a competitive electricity market alongside a range of other types of generator. Even if they can find sufficient insurance capacity for their needs, the unavailability of most of the major European carriers is likely to mean that their insurance will cost more than it would otherwise have done – both because they might have to use insurers who would otherwise have been uncompetitive and because the reduced level of competition itself will affect the demand/supply price dynamic.Additional insurance costs may well affect their competitive position, especially as insurance is usually one of a power company’s highest costs. Having to factor this element into their bidding will put them at a commercial disadvantage when competing with lower-cost greener generators. One can therefore see that this could be the area in which insurers’ coal underwriting policies will come closest to having their desired impact.

Coal-dependent countries

If, as Unfriend Coal maintains, power plants cannot operate without insurance, one would expect the new underwriting policies to be felt most in those parts of the world where the ultimate consequence of unavailability of insurance would be severe power shortages. In South Africa, for example, over 90% of electricity is generated from coal, higher than anywhere else in the world. In Poland, the figure is 83%. In China and India it’s more than 70%, and more than 60% in Australia (Figures from 2017).²⁹China also happens to be the world’s leading country in electricity production from renewable energy sources, with half of the world’s new solar capacity³⁰, and Australia is reported to be on track for producing 50% of its electricity from renewable sources by 2025³¹. But for the lights to stay on, traffic lights, televisions and hospital equipment to keep working, and a host of other socially-desirable outcomes to continue, large parts of the world, in particular in the Asia Pacific region, will continue to rely extensively on coal-fired generation, at least in the medium term and probably for longer. Something will have to give.Insurer flexibility?

It is our understanding that AXA’s underwriting guidelines explicitly allow for exemptions to apply in countries where coal comprises the main baseload energy, and others may apply the same criterion when faced with this ‘real world’ conundrum. Together with the capacity of domestic insurers and those international insurers who have not declared a curtailed position on coal, so coal plants in these countries might still be able to find enough commercial insurance cover for their needs.If not, it is in these places that Unfriend Coal’s axiom that power plants cannot operate without insurance may start to feel the strain. Experience suggests that, in the absence of commercially available insurance, national governments are likely to step in as insurer of last resort. Examples of such action include the UK government’s setting up of the Northern Ireland Compensation Scheme in 1972, or the US government’s formation of the National Flood Insurance Program to enable plants to continue operating.
The example of India

Like China and Australia, India is on a path to reduce its dependence on coal-fired electricity generation and expand its renewable generation capability. Its National Electricity Plan 2018³² includes a core target of 275 GW of renewable energy by 2027, with the closure of 48.3 GW of end-of-life coal plants. However, the plan still envisages that India will have coal power capacity of 238 GW in 2027, including 94.3 GW of new construction.India’s economy is forecast to grow significantly, with GDP rising 7-8%³³ annually over the coming decade. It is surely stretching credibility to suppose that the unavailability of insurance would be enough by itself to persuade the Indian government to scrap its strategy for securing the electricity capacity required to fuel this growth.

Unintended consequences…

One of the benefits of commercial insurance is that it brings with it the discipline of external risk engineering, with insurers and/or brokers sending specialist engineers to survey industrial facilities and recommend, and sometimes mandate, measures to protect and improve the risk.If power plants in certain territories are allowed to operate without commercial insurance, this external discipline is likely to be lost. Over time, this could bring about a fall in the risk quality of some of these plants, increasing both the risk of losses occurring and their potential severity. This in turn could lead to less efficient and more polluting plants being utilized to replace the lost generation capacity – the exact opposite of what insurers are trying to achieve.

..and will they stick to their knitting?If insurers start to see that withholding their capacity is not having the desired effect on the amount of coal generation capacity being built and operated around the world, or if they see their “less enlightened” competitors increasing their market share of the power generation sector at their expense, will they be forced to conclude that trying to maintain a socially responsible underwriting position in these circumstances might not be worth the candle?

David Reynolds is Executive Director at Natural Resources P&C, Willis Towers Watson.
Additional material by Michael Perron and Wojciech Woznica

¹https://350.org/
²https://www.theguardian.com/environment/2018/jul/12/ireland-becomes-worlds-first-country-to-divest-from-fossil-fuels
³http://www.theactuary.com/news/2018/06/almost-half-the-global-reinsurance-market-divests-from-coal/
⁴ http://www.ipcc.ch/report/sr15/
⁵https://www.globalccsinstitute.com/news/institute-updates/paris-climate-change-targets-cannot-be-met-without-ccs-cop23
⁶https://www.carbonbrief.org/mapped-worlds-coal-power-plants
⁷https://www.carbonbrief.org/mapped-worlds-coal-power-plants
⁸https://www.carbonbrief.org/guest-post-peak-coal-is-getting-closer-latest-figures-show
⁹https://www.carbonbrief.org/seven-charts-show-why-the-iea-thinks-coal-investment-has-already-peaked
¹⁰https://www.zurich.com/en/knowledge/articles/2017/11/insurers-can-facilitate-the-transition-to-a-low-carbon-future
¹¹https://www.cisl.cam.ac.uk/business-action/sustainable-finance/climatewise/news/insurance-leaders-warn-protection-gap-due-to-impact-climate-risks
¹²https://www.zurich.com/en/knowledge/articles/2017/11/insurers-can-facilitate-the-transition-to-a-low-carbon-future
¹³https://www.scor.com/en/media/news-press-releases/scor-announces-further-environmental-sustainability-initiatives
¹⁴https://www.axa.com/en/newsroom/press-releases/axa-accelerates-its-commitment-to-fight-climate-change
¹⁵https://www.allianz.com/en/press/news/business/insurance/180504_allianz-announces-climate-protection-package/
¹⁶https://www.finanznachrichten.de/nachrichten-2018-07/44184219-swiss-re-ag-swiss-re-establishes-thermal-coal-policy-to-support-transition-to-a-low-carbon-economy-353.htm¹⁷https://www.reuters.com/article/us-munich-re-group-coal/munich-re-to-back-away-from-coal-related-business-ceo-idUSKBN1KQ0NE

¹⁸https://www.insurancebusinessmag.com/uk/news/environmental/axa-makes-xl-ditch-coal-accepts-100-million-losses-117107.aspx
¹⁹https://www.generali.com/our-responsibilities/our-commitment-to-the-environment-and-climate
²⁰https://www.insurancebusinessmag.com/uk/news/environmental/campaign-group-slams-insurers-of-new-coal-power-plant-115443.aspx
²¹https://www.insurancebusinessmag.com/uk/news/environmental/coal-update-hannover-re-adopts-exclusion-policy-103791.aspx
²²http://www.theactuary.com/news/2017/04/lloyds-accused-of-putting-profits-ahead-of-people-by-continuing-to-insure-coal/
²³https://www.gov.pl/web/energia/polityka-energetyczna-polski-do-2040-r-zapraszamy-do-konsultacji
²⁴http://globenergia.pl/8-gw-z-morskich-farm-wiatrowych-oto-nowy-cel-energetyczny-w-polsce/
²⁵http://globenergia.pl/8-gw-z-morskich-farm-wiatrowych-oto-nowy-cel-energetyczny-w-polsce/
²⁶https://www.insurancebusinessmag.com/us/news/breaking-news/san-francisco-urges-insurers-to-ditch-fossil-fuel-investments-107028.aspx
²⁷https://www.sfchronicle.com/opinion/openforum/article/Insurance-for-fossil-fuel-projects-but-not-13282801.php
²⁸ https://unfriendcoal.com/
²⁹https://www.worldatlas.com/articles/15-countries-most-dependent-on-coal-for-energy.html
³⁰https://www.dw.com/en/china-leads-in-global-shift-to-renewable-energy/a-43266203
³¹http://theconversation.com/at-its-current-rate-australia-is-on-track-for-50-renewable-electricity-in-2025-102903
³² http://ieefa.org/ieefa-india-new-national-electricity-plan-reinforces-intent-toward-275-gigawatts-of-renewables-generated-electricity-by-2027/
³³http://ieefa.org/ieefa-india-new-national-electricity-plan-reinforces-intent-toward-275-gigawatts-of-renewables-generated-electricity-by-2027/e