New analysis of climate risk exposure of insurers’ investments released

News: 2019 Press Release

SACRAMENTO, Calif. — California Insurance Commissioner Dave Jones publicly released today the results of a new analysis of the climate risk exposure faced by investments held by the insurance industry. The climate risk scenario analysis, prepared for the Department by leading climate risk modeler 2° Investing Initiative, is the first of its kind to include analysis of both physical and transition risks faced by insurers assets.  

The analysis for the insurance sector reveals that insurers’ assets continue to remain exposed to climate-related transition risks with the possibility of fossil fuel investments becoming stranded assets and that additional risks are faced by these assets due to climate-related physical impacts. For example, the analysis revealed that investments in coal-powered utilities are significantly exposed to wildfires and that a number of other assets in which insurers invest could be adversely impacted by water scarcity. In addition to a 2 degrees Celsius scenario and other previously included scenarios, the analysis also includes an under 2 degrees Celsius scenario for the first time.
 
“Insurers, like all investors, need to analyze and consider the climate change related risks facing their considerable investment portfolios,” said Insurance Commissioner Dave Jones. “While we are the first financial regulator to undertake an analysis of both climate-related physical risks and transition risks to insurer investments, we know that other financial regulators as well as investors are also moving forward to implement the important recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, including climate risk scenario analysis. I urge insurance companies to run multiple scenarios in assessing their investment and underwriting exposure to climate-related risk, especially in light of the recent UN Intergovernmental Panel on Climate Change and US National Climate Assessment reports and the adoption of an international Paris Agreement ‘rulebook’ at COP 24 all of which point to a transition away from burning fossil fuels. Climate-related physical risks such as wildfires are also becoming more pronounced, with implications for insurers as underwriters and investors.”
 
The Commissioner engaged 2° Investing Initiative to conduct this analysis for insurers in California’s insurance market with over $100 million in annual premiums. The Department of Insurance has published key findings from the forward-looking scenario analysis on its website. The results of the most recent scenario analysis are consistent with Commissioner Jones’ Climate Risk Carbon Initiative determination that thermal coal presents long-term risks for investors, despite any short-term fluctuations in market price and policy signals. Individual insurer reports will be made available to all insurance companies with more than $100 million in annual premiums and sent to the top 100 insurance companies (by size of their investment portfolio) operating in California and those with the greatest exposure to coal, representing over 80 percent of the insurer assets that were analyzed. These reports will explain how insurer investment plans align or do not align with different climate scenarios, where the individual insurer ranks among its peers, and which securities are driving the climate risk exposure of their investment portfolios.

“This initiative shows that scenario analysis is an accessible tool for financial supervisors to monitor both physical and transition climate risks and support their regulated entities on managing these risks. It creates a blueprint that other financial supervisors can follow. Automated, scalable and technology driven solutions related to sustainability are ushering in an era of more cost effective supervision - both for supervisors and financial institutions,” said Jakob Thomae, Managing Director, 2° Investing Initiative.

“Climate action by insurers and regulators requires looking ahead and understanding climate-related risks across insurance and investment portfolios,” said Butch Bacani, who leads UN Environment’s Principles for Sustainable Insurance Initiative (PSI), the largest collaborative initiative between the UN and the insurance industry. “The ground-breaking work of the California Department of Insurance in climate risk scenario analysis is a shining example of leadership and ambition. It highlights the sophisticated understanding needed across the insurance industry to better manage climate risks and opportunities, and to drive ambitious action in line with the aims of the Paris Agreement.”

“The global clean energy transition is essential, irreversible and crucial to a sustainable future. Robust insurer portfolio analysis — under a range of possible climate change scenarios — promotes insurer portfolio resilience and greater investment in appropriate clean energy opportunities,” said Cynthia McHale, Senior Director of Ceres.

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Media Notes: 

Scenario Analysis: Assessing Climate Change Transition Risk in Insurer Portfolios

Commissioner Jones launched his Climate Risk Carbon Initiative in 2016 to address climate related risks faced by insurers as investors, including the potential risk that fossil fuels could become stranded assets as markets, consumers, businesses and governments reduce the use of fossil fuels in order to reduce greenhouse gas emissions causing climate change. A stranded asset is any asset that has suffered an unanticipated or premature write down, devaluation or conversion to liability. 

Commissioner Jones is the first financial regulator in the United States to ask insurers to divest from thermal coal due to the climate-related financial risk that thermal coal could become a stranded asset, the first to identify and disclose the oil, gas, coal and utility investments of insurance companies, and the first to perform climate-risk scenario analysis on the portfolios of insurance companies. 

As an international leader on climate risk, and as the regulator of the largest insurance market in the nation, Commissioner Jones has led a multistate effort since 2011 to require insurers to respond to the Climate Risk Disclosure Survey adopted by the National Association of Insurance Commissioners (NAIC) in 2009. 

In addition to their scenario analysis work with the California Department of Insurance, 2° Investing Initiative recently launched its Terra collaboration with ING banking group at the Global Climate Action Summit. 2° Investing Initiative is also performing scenario analysis for Climate Action 100+ where global investors are engaging companies regarding their greenhouse gas emissions.