Insurers are on the front line of climate change. Extreme events will rack up insured losses and expose areas of underinsurance, while the unpredictability of those events make insurance pricing difficult to do accurately.
Is the industry prepared? And does it have in mind a feasible way to tackle climate change? A recent survey from the European Insurance and Occupational Pensions Authority suggests perhaps not.
The supervisor complained that insurers’ attitudes reflected what Mark Carney, governor of the Bank of England, has called “the tragedy of the horizon”: the fact that the current generation has no direct incentive to ease the costs that will be felt by future ones.
Most of the focus on judging how seriously insurance companies are taking environmental issues appears to be on their assets. This is important from a prudential point of view as well as an ethical one. Stranded assets — those that have suffered unexpected write-downs, or may even have become liabilities — are a big deal now that environmental factors are to the fore when it comes to valuations. They threaten insurers as big, long-term investors with a need to match liabilities.
But the underwriting side arguably deserves more focus. This is where the risks and responsibilities of insurance firms are unique. Many economic activities are not viable without reasonably priced insurance. That gives insurance firms a big say in the shape of the economy.
Climate change is most relevant to the underwriting practices of non-life insurers. Some have already restricted underwriting related to fossil fuel companies.
But life insurers are also affected. EIOPA warned that climate change could have an impact on their exposures through the effect of climate events on mortality rates.
There may be some value in insurance companies raising ESG-linked bonds to fund their liabilities. But how much is the virtuous looking label really adding?
That question has, of course, been asked of any number of ESG bond issuers, but many more of them were directly funding ESG work that was core to their business.
Governments and supranationals may issue to finance infrastructure projects that alleviate pollution in the long run, such as rail transport. A bank may issue to finance environmentally-friendly mortgages. Insurers, meanwhile, exist to provide insurance, not to invest in big infra, or energy-efficient homes.
As such, insurers should think carefully about what they are funding.
Proceeds from Australian insurer QBE’s green bond were used simply to invest in other green bonds. This is not funding new investments; if the deal is counted towards overall green bond volumes, it is double counting. A social bond QBE issued similarly invests in the bonds of companies that have been recognised as having strong policies on gender equality.
CNP’s use of proceeds at least goes beyond that, funding green assets. But even that is going to be done indirectly in two of the three categories.
The insurer’s investment in green buildings will be delegated to asset managers in charge of dealing with real estate managers and companies; and for investment in sustainable forestry, forest management will be delegated to the Société Forestière, an entity with a sustainable framework covering this area.
Insurance firms’ sustainability bonds are far from virtue-free. But companies seeking to follow CNP should ask themselves if they could spend their time better directing their energies towards more virtuous underwriting than simply adding to the volume of green-labelled debt swilling around the markets.