Fossil fuel investing and profiting from climate risk don’t mix
Seeing the devastation wrought by extreme weather events — particularly wildfires, hurricanes, and floods — and knowing many more such impacts are on the horizon, U.S. insurers are restricting, canceling, withdrawing, and charging more for coverage. State Farm in California, for example, said it will stop accepting new applications for most types of policies anywhere in the state — after similar moves by Allstate, American International Group, Inc. (AIG), and Liberty Mutual, among others.
Unfortunately, while State Farm and other insurers can pivot to avoid their own risks, they will continue to increase risks and costs not only for individuals in California but also, in turn, for banks and municipalities across America. Worse, State Farm and other insurers may be accelerating climate change with their large investments in fossil fuel companies and their public affairs lobbying to undermine socially responsible legislation.
Systemic climate risk for the masses
The most immediate victims of the insurance industry’s climate-related actions are their own businesses and home-owning clients. A recent Federal Reserve Board report indicates climate risk will “flow” to consumers who lose access to affordable insurance. Usually, these individuals and communities haven’t acted to assume these climate risks and don’t have the capacity to respond. After many years of living or doing business in a location, they now find themselves in an area vulnerable to climate change impacts, but can’t afford to build resilience to the risks or leave the area as insurers can.
When climate-related costs to consumers exceed their capacity to pay their loans and taxes, the risks will then flow to banks in the form of mortgage defaults, and other unpaid loans and the loss of tax revenue to state and local governments.
Spreading risk
When climate-related costs to consumers exceed their capacity to pay their loans and taxes, the risks will then flow to banks in the form of mortgage defaults, and other unpaid loans, and the loss of tax revenue to state and local governments. This blow to municipal revenue is in addition to the damaging impact of more frequent and extreme weather events on municipal infrastructure and services. So far in 2023, there have been 9 confirmed weather/climate disaster events with losses exceeding $1 billion each to affect the United States, including 1 flood, 7 severe storms, and 1 winter storm event — with significant economic impact. Since 1980, the level of billion-dollar-plus weather damage-related events has risen from 2 that caused $2 billion in damages to 18 events that caused $175 billion last year according to NOAA. In 2018, the Camp Fire in California alone resulted in insured losses of $12 billion and was the costliest event ever globally. Ultimately, the risks will flow to an even broader swath of taxpayers as banks need to be bailed out and municipalities require support.
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Contradictory climate strategies
The irony is that many of the business practices of insurance companies are increasing risks to their customers. For example, State Farm, AIG, and Liberty Mutual, among other insurers, have significant oil and gas holdings which, along with coal, are the primary source of greenhouse gasses. Recognizing the potentially significant financial risks posed to insurers’ investments in oil, gas, coal, and utilities, California has required insurers with more than $100 million in annual premiums to disclose their investments in fossil fuels. California’s most recent data showed, for example, that State Farm held approximately $30 billion in fossil fuel assets.
Supports ALEC
At the same time, insurance companies are also quietly lobbying against measures that would protect individuals and communities from costly climate impacts and risks. State Farm supports efforts by the American Legislative Exchange Council (ALEC) to get legislators to oppose any “government action to disincentivize, penalize, or restrict carbon dioxide emissions” as these are “counterproductive and harmful public policy.” ALEC also supports efforts by some state treasurers to penalize banks and asset managers that are reducing investments in coal and other fossil fuels. Such “anti-ESG” measures are costly for taxpayers.
Insurance critics in California also charge that State Farm and Allstate are deliberately using the excuse of rising damages to “boycott” California in order to “extort” the state to approve “uncontrolled rate increases.”
The lessons are pretty clear: Although the insurance industry claims it “has little control over…environmental issues, such as…global warming,” the links between insurer investments in fossil assets, greenhouse gas emissions, and climate change are clear. Insurers can, and should, exit these investments. And efforts by the industry more broadly to pocket the upsides of ignoring climate change, while saddling the public with the downsides must be called out and prevented. Insurance companies must provide the public with access to information and reasonable coverage at reasonable rates. It’s what a good insurance neighbor would do.
