A (re)insurer’s ability to receive a glowing report card from eco-activists is partly influenced by the size and nature of its existing business.
If you’re a relatively new carrier like Fidelis, or any of the “class of 2020” start-ups, then naturally it is easier to take a strong stance on limiting coverage for, say, energy producers focussed on fossil fuels than it is for established carriers with long-established relationships with the same firms.
This is not to diminish the strong stance that Richard Brindle’s Fidelis has taken on ESG issues but it is clearly easier not to write new coal mining projects if you do not have to disappoint an existing - and valued - client.
This is a dilemma for (re)insurers. It also goes to the heart of what role the P&C industry should play in assisting the desire of Governments and the United Nations to decarbonise the global economy. On the one hand, it is clearly desirable that producers of cleaner energy sources have access to relevant cover; on the other hand, is it really the role of the industry to cut off coverage to fossil fuel producers in countries which remain utterly dependent upon them?
After all, in the worst case scenario, the latter could provoke economic hardship and social unrest. Countries such as Poland, South Africa and Australia all depend on coal for more than 75 percent of their power. Even Germany relies on coal for 24 percent of its electricity production. Is it really the industry’s role to effectively turn off a country’s energy supply?
In reality, of course, this is unlikely to happen. But what it would do is force energy producers to look elsewhere for cover. This would be an act of self-harm for their previous insurer.
This dilemma is compounded at Lloyd’s, the near 350-year old market that specialises in writing the difficult risks (like energy production) that standard insurers often eschew.
Lloyd’s senior management - led by CEO John Neal and chairman Bruce Carnegie-Brown - are determined the market takes a lead position on the industry issues of the day, such as pandemic coverage (last year) and climate change (this year). This is no doubt why, for example, Lloyd’s recently launched the Sustainable Markets Initiative Insurance Task Force in partnership with the Prince of Wales ahead of the COP26 event taking place this week.
But as a market consisting of competing syndicates with rules enshrined in an Act of Parliament, Lloyd’s management cannot simply pull a lever and order an immediate change of direction. Put simply, Lloyd’s is not a company which explains why the market has often tied itself in knots over implementing reforms such as electronic trading placement. More often than not, Lloyd’s has to nudge changes of behaviour rather than mandate them because it can’t do the latter.
This is worth bearing in mind when examining the excruciating criticism levelled at Lloyd’s by the climate activist group Insure our Future earlier today.
The group publishes a league table - what they call a “scorecard” - of (re)insurers’ strategies around sustainability, judging both their underwriting and investment policies. Earlier today, Lloyd’s was effectively relegated by the group following an update to the market only last week.
By way of background, last December Lloyd’s published its inaugural ESG report which said: “managing agents will be asked to no longer provide new insurance coverages or investments for coal, oil sands and Arctic energy projects as of 1 January 2022” with a date of 2030 also outlined for exiting existing coverages.
Note the use of the word “asked”. It was not a mandatory order because Lloyd’s cannot simply demand syndicates stop providing coverage for an activity that is entirely legal (and necessary).
In its latest guidance - published last week on the eve of COP26 - Lloyd’s said its stance remains “a sensible and pragmatic ambition”, but added that it would not be mandating their exclusion and “it will be up to each managing agent to determine their appetite”.
Yes, one could argue that the wording is a slight softening but really it is simply a statement of reality. Lloyd’s cannot order syndicates to cease providing cover which is entirely legal.
This provoked Insure our Future into accusing Lloyd’s of one of the worst sins in climate activism - greenwashing (when a person or company pretends to be “green” but is in fact anything but).
Insure our Future - like many of its activist peers - are savvy PR operators. They no doubt timed their report to come out on a day dedicated to finance at COP26 in a bid to maximise embarrassment among Lloyd’s executives.
From an industry perspective, we think there are a few lessons to be drawn. The first is that if you adopt a prominent “leadership” position, then you have to expect the risk of being shot at by activists if you displease them. Indeed, Axa’s CEO Thomas Burberl experienced this only last month with a campaign which included full page advertisements in newspapers such as The FT
Second, Lloyd’s needs to be very transparent about what it can - and can’t - do in encouraging changes to behaviour regarding insuring carbon emissions.
But the third is arguably the most important of them all. The industry should very much be at the heart of the debate about how to transition to a lower carbon world. It - after all - pays out billions of dollars every year from climate losses. It has data, expertise, risk mitigation skills, modelling and actuarial resources which can all assist. It also has huge investment leverage. It would be a missed opportunity if it is not engaged and relevant to the debate.
But equally the industry also needs clear and consistent policies around encouraging behavioural change (carrot) versus cutting off capacity (stick). Simply saying it will stop underwriting fossil fuels coverage in less than ten years when the World’s governments don’t have a plan to transition those countries still dependent upon them for energy may appease activists but it is also unrealistic and self-harming. In reality, the road to a lower carbon world is much more complicated and the industry’s approach must acknowledge this…