Insurance industry’s ‘biggest financial stress test’ sees 672 portfolios screened for climate risk

California regulator performs scenario analysis on nearly 700 investment portfolios

California’s insurance regulator has undertaken “arguably the most comprehensive financial stress test analysis ever conducted for the insurance sector” – looking at climate-related investment risk for nearly 700 US insurers.
Defying threats of legal backlash from numerous other states, Insurance Commissioner Dave Jones has scrutinised the investment portfolios of 672 insurance companies operating in California – all of which generate more than $100m each in annual nationwide premiums – to see how they stand up to possible climate scenarios.
“One of my duties as Insurance Commissioner is to monitor the financial health and wellbeing of insurance companies,” Jones said in a media briefing. “An important part of that is to make sure that insurance companies have adequate reserves to pay claims, and are therefore invested in ways that will maintain value, not decrease in value”.
He added that one of his key concerns as a regulator was that there was “a significant risk that coal will become a stranded asset”.
As part of a national move on the topic of climate risk to insurers – and mirroring efforts from regulators such as the Bank of England in Europe – Jones has been surveying insurance companies on climate change and fossil fuel exposure since 2011. In 2016, he codified state-level efforts by creating the California Department of Insurance’s Climate Risk Carbon Initiative.
But the new project goes beyond any existing moves by insurance regulators globally, and Jones says it will help insurance companies apply the recommendations of the FSB’s Task Force on Climate-related Financial Disclosures.
Working with climate think-tank 2°C Investing Initiative, a “technology deployment roadmap” was developed, based on 2°C, 3°C, 4°C and 6°C scenarios from the International Energy Agency and other company/sector data. The insurers’ investment portfolios have been mapped against these scenarios – focusing entirely on investment and not on the provision of insurance.
The conclusion was that, in aggregate, the insurers’ investment portfolios were aligned with 6°C. This is roughly in line with other industries, said Stan Dupre, founder of 2°C Investing Initiative. The think-tank performed a similar test on the Swiss pension industry last year, which showed average alignment of between 4°C and 6°C.Insurers did not have to submit any information to be included in the project, but individual results have now been sent to each insurer, confidentially, with California’s 100 biggest being asked by the Commissioner to respond. These 100 make up some 80% of the analysed assets.
Jones, who was the founding Chair of the Sustainable Insurance Forum, has been an outspoken critic of insurance companies that invest heavily in coal and other fossil fuels, on the basis of financial risk.
The Climate Risk Carbon Initiative began by asking the 1,300 insurers licensed in California to consider divesting from thermal coal. It also requires those insurers to disclose their investments in oil, gas, coal and utilities with high electricity generation from fossil fuels.
Results so far have shown that those insurers with more than $100m in annual premiums have $528bn invested in fossil fuels and related investments, with $10.5bn in thermal coal enterprises, said Jones. More than $4bn has been divested from fossil fuels, and another $1bn of divestment is planned, he told reporters. In addition, 670 said they had divested some or all of their holdings in coal.
But the efforts have not been received well in some corners – especially by US states heavily reliant on fossil fuel industries. Six fellow Insurance Commissioners, all in southern states, have already called on Jones to axe the initiative, or limit its coverage. More recently, 12 Attorney Generals and one State Governor have threatened Jones with legal action over the initiative’s request for insurance companies to evaluate their potential climate risk.
The insurance industry is facing rapidly-mounting pressure to address climate risk – both in its own investments and in the insurance it provides to the fossil fuel industry. Last week, Allianz – the world’s biggest insurer – announced it would exit coal by 2040 across both sides of its activities.
According to reports, Dai-ichi Life Insurance has just committed to end new project financing from non-domestic coal plants. Fellow Japanese life insurer Nippon Life is reportedly expected to follow suit.