U.S. Senate Committee probes insurance giants for climate risk

A U.S. Senate Committee is investigating seven large insurance companies that continue to underwrite new fossil fuel projects, for climate risk, at a time when the same insurance industry is curtailing coverage for homes located in areas that are suffering from larger and more frequent climate disasters.

A subsidiary of State Farm said in May that it would no longer sell insurance policies to homeowners in California, citing the “rapidly growing catastrophe exposure” and the company’s need to “improve the company’s financial strength.” State Farm is the largest provider of homeowner’s insurance in the state.

California has suffered from several years of extreme wildfires, as the climate crisis has contributed to soaring temperatures and years of drought. Homeowners are finding it increasingly expensive and difficult to obtain insurance coverage as the fires grow worse.

Other insurance companies are pulling out of states like Florida and Louisiana, where catastrophic hurricanes in successive years have left deep scars in housing and insurance markets. The average homeowner’s insurance premium in Florida is three times higher than the rest of the country. Many residents in Florida need to rely on state programmes for insurance, but those too are under tremendous financial pressure and could be pushed into serious trouble if and when the state suffers another major storm.

As climate disasters become more extreme, localized disasters and insurance woes could multiply into regional problems for housing markets, which could then ripple into banking and financial markets.

“Climate disruptions upset insurance markets, which in turn upsets mortgage and housing markets,” Senator Sheldon Whitehouse (D-Rhode Island) said at a Senate Budget Committee hearing in March 2023. “Sea level rise and wildfire risk can upset property markets so profoundly as to cause systemic economic damage across the whole economy, similar to what we lived through in 2008.” To underscore the point, he said that one need not live in a disaster-prone part of the country to be affected by what is becoming a mounting risk to the economy.

“Just as the U.S. economy was overexposed to mortgage risk in 2008, the economy today is over exposed to climate risk,” Eric Andersen, president of Aon PLC, a global risk and reinsurance company, said at the hearing.

In 2022, global disasters caused USD$115 billion in insured losses in 2022, substantially higher than the ten-year average of US$81 billion between 2012 to 2021.

Insuring the climate crisis

But even as insurance companies retreat to protect their balance sheets, some of the same companies are underwriting the ongoing expansion of oil, gas, and coal projects — the very projects that exacerbate climate change.

That apparent hypocrisy now has insurance giants in the sights of the U.S. Senate Budget Committee, which on June 9 sent a sharply-worded letter to seven major U.S. insurance companies — Berkshire Hathaway, State Farm, Liberty Mutual, AIG, Travelers Insurance, Starr, and Chubb.

The letter warned that climate change poses “systemic risks” to the economy, which can “cascade out of immediately affected sectors of the economy to do harm not only nationwide but also globally.”

The Committee letter demanded answers to a series of questions about the policies of insurance companies related to financing and underwriting the growth of the fossil fuel industry. The letter pointed to the $582 billion in investments in fossil fuels that U.S. insurers hold, including $90 billion in coal.

“U.S. insurers continue to underwrite polluting projects while making investments in an industry whose continued expansion poses multiple serious dangers to overall economic stability and to insurance services in particular,” the Senate letter stated.

The Committee said that Berkshire Hathaway, Starr, and Liberty Mutual stick out as “key laggards” that have taken very few steps to restrict underwriting of fossil fuel projects. Berkshire Hathaway, for instance, has subsidiaries that own at least eleven coal-fired power plants, with partial stakes in thirteen others. It also owns Burlington Northern railroad, a major shipper of coal.

Starr, AIG, and Liberty Mutual underwrote Canada’s massive Trans Mountain Pipeline, which will ship 590,000 barrels per day of highly-polluting Alberta tar sands to the coast for export. Starr underwrote three coal plants in Vietnam and the Philippines.

The Senate panel gave credit to Chubb for being the first U.S. insurer to adopt an oil and gas restriction policy, which included vowing not to underwrite new oil and gas projects in certain sensitive areas. Chubb also was the first U.S. insurer to limit coal financing, a policy it later extended to oil sands. But the Senate letter said Chubb still has “loopholes” in its policies that allow for insurance for many new oil and gas drilling projects, pipelines, and other midstream and downstream facilities.

In addition to the physical risk to property from the climate crisis, the insurance industry faces several other forms of risk, each of which is growing more substantial. “Transition risk” refers to the potential (and likely) change in government policies aimed at accelerating the energy transition, changes that may affect values of existing assets. There is also “reputational risk,” the negative publicity from financing or underwriting fossil fuel projects. And, perhaps less well-known is “litigation risk,” or the payouts to firms that insurance companies will have to make as polluters face heightened legal challenges.

Last year, AIG refused to cover the cost of a climate lawsuit against an oil company brought by local governments in Hawaii. The oil company, Aloha Petroleum, sued AIG, in what could be a preview of a conflict between insurance companies and their clients that will become more common going forward.

“Insurers may be at even more risk than other financial firms, and climate change may present new challenges and severity of losses that the industry has not previously seen,” the Center for American Progress, a Washington-based think tank, wrote in a 2022 report.

Gas Outlook reached out to all seven insurance companies targeted by the Senate Committee. Only AIG responded, declining to comment. The other six did not respond.

The U.S. insurance industry is arguably behind its European peers, many of which have already begun to restrict services to fossil fuel projects. In March, Spain’s Mapfre said it would no longer insure oil, gas, and coal producers unless they have plans to transition away from fossil fuels. That came after similar moves from France’s AXA, and Germany’s Munich Re, Allianz, and Hannover Re.

“The risks of climate change have long been recognized by the reinsurance industry — including SwissRe and Munich Re — but U.S.-based insurance companies have been slower to acknowledge them publicly until now,” Rachel Cleetus, policy director of the climate and energy programme at the Union of Concerned Scientists (UCS), a Washington-based NGO, wrote in a June 7 blogpost.

The Senate Budget Committee accused American insurers of contributing to the very crisis now afflicting their own industry.

“It seems nonsensical at best—and complicit at worst—for State Farm to carefully factor climate risk from wildfires into its homeowner’s insurance policies, refusing in some cases to provide such policies at all, while apparently ignoring the heightened climate risk that its investment portfolio is helping to create,” the letter stated.

The Committee gave the companies until June 23 to respond.