A new report warns insurance companies could face billions of dollars in losses if they stay on the current course of investments that contribute to climate change, at “a scale exceeding some of the worst wildfires in California’s history.”
The findings of what is being touted as the first-ever “stress test” of insurance company investments by insurance regulators from California, Oregon and Washington titled, “The Hidden Cost of Delaying Climate Action for West Coast Insurance Markets,” was released on Tuesday.
Companies that do not have effective long-term plans in place would face higher costs in the event of a “transition shock,” or a revaluing of fossil fuel-related assets as the world economy moves to cleaner technologies, according to the report, which warns these losses could range from $7 billion to $40 billion on corporate bonds alone in coming decades.
In recent years, insurers have restricted underwriting in response to U.S. and global catastrophes and economic conditions. Because insurance solvency is regulated at the state level, regulators are working together for sustainable markets. This report implements part of the first-ever Sustainable Insurance Roadmap, released by California Insurance Commissioner Lara and the United Nations Principles for Sustainable Insurance in 2022.
- Expected losses for corporate bonds related to coal, oil & gas, power, and automotive sectors are large, and losses increase dramatically the longer the transition is delayed. Aggregate expected losses on bonds range from $7 billion to $28 billion, depending on the pathway, with a shock transition in the year 2026 but more than double to range between $14 billion and near $40 billion if the transition is delayed to 2034. This is on scale with the 2017 and 2018 California wildfires which costed an estimated $22.7 billion in aggregate losses.
- Insurance companies’ corporate bond portfolios have greater exposure to climate risk than their equity portfolios. This is significant because bonds make up a larger share of investments than stocks industry-wide.
- Insurance companies are significantly invested in transition technologies such as renewable power capacity production, which are likely to grow with state and federal investments. Investments supporting renewable power, hydropower, and nuclear power made up more than a third of the total from power capacity production.
- Exposure of investments to fossil fuel extraction varies widely between insurers. While the average was 4.5% across all insurance companies, some have up to 95 percent of their corporate bond portfolio and 30 percent of their listed equity portfolio in climate-exposed assets.
- Life insurers have the most value invested in the oil & gas extraction sector ($150 billion) and the power sector ($100 billion) from the analyzed assets. Property/casualty insurers have the smallest share of their listed equity portfolio value in oil & gas extraction (less than 1%), still amounting to $6 billion in assets.
- Insurers’ investments include companies ramping up zero-carbon technologies, but not quickly enough to meet the Paris Agreement goals. Investments in carbon-intensive technologies like oil power, oil extraction, and coal mining, are found to be misaligned with the Paris Agreement, posing potential transition risks. The major exception is coal power, where insurance investments are in companies whose plans align with a sustainable development scenario.
The report uses the Paris Agreement Capital Transition Assessment (PACTA) tool and the 1-in-1000 TRISK climate stress testing framework to compare insurance companies’ investments to the emissions-reduction targets set in the 2015 Paris Agreement that must be met to avoid the worst consequences of climate change.
This report analyzes transition risks from assets controlled by insurance companies licensed in the states of California, Oregon and Washington earning more than $100 million in national premium – in total representing more than $2.9 trillion in corporate bond and stock market investments. Transition risks refer to shifts in supply and demand for high-emission industries such as coal, oil, and gas because of climate effects or climate action.
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