Risky Business

The insurance industry estimates that the floods in the UK in spring and summer 2007 cost it £3 billion. We investigate the insurance industry's ethics, and whether it's partly to blame in creating the crises it has to pay out on.

Extreme weather events, from hurricanes and typhoons to floods or droughts, are costing the insurance industry billions, resulting in raised premiums for consumers and the threat of cover being withdrawn from increasing numbers of people in areas most likely to be hit.

The performance of insurance companies on the issue of climate change demonstrates the extent to which the actions of one part of a company can exacerbate the problems being faced by another. Because while some insurance companies have been facing up to the issues of climate change for years - longer than in many other industries - the investment divisions of those same companies have been helping to fund climate change activities.

Take Legal & General Group, for instance. Like many other major investors, it has holdings in big fossil fuel companies such as Royal Dutch Shell and BP. However, it also invests heavily in a number of other oil and gas companies which are busy exploring or developing unexploited sources of fossil fuels in countries which have recently opened up to overseas interests, such as the Central Asian states of the former Soviet Union.(1) These are the smaller, riskier pioneer companies which are finding sources of climate-changing fuels to try and prop up an unsustainable way of life in the affluent nations, and which attract some fund managers because of the potential high returns - whatever the environmental cost.

Alongside these investors stands the Royal Bank of Scotland, owner of the Direct Line, Churchill and Privilege insurance names, which branded itself 'the oil and gas bank' for the support it gives the industry.

As well as helping to bankroll the search for new fossil fuel sources, some major names in insurance are still helping to prop up one of greatest out-of-touch cronies of the oil industry - the US Republican Party. Zurich and AIG have both been major Republican donors in recent years, at a time when the party and the Bush administration have been one of the greatest obstacles to serious global action on climate change.(2)

While membership of industry organisations is not always an indication of genuine action, some groups are doing significant work on climate change. These include the Institutional Investors Group on Climate Change (IIGCC) and the Carbon Disclosure Project (CDP), which encourages companies from all sectors to calculate and make public their carbon footprints. The list below shows which companies from this report are engaging with these processes:
* IIGCC : BNP Paribas (Pinnacle), HBOS (esure), Co-operative Insurance (CIS)
* CDP members (who commit to supporting the process over and above reporting their carbon footprint): Aviva (Norwich Union), Axa, Royal Bank of Scotland (Direct Line, Churchill, Privilege), BNP Paribas (Pinnacle), American International Group (AIG)
* CDP signatories (who commit to reporting their carbon footprints): Allianz (Cornhill), Aviva, Axa, Fortis, BNP Paribas, AIG, HBOS, Legal & General, NFU Mutual, Prudential, CIS.

Eco-insurance?

A growing number of 'green insurance' products are appearing on the market, mainly offering car insurance. The main 'environmental' feature of most of these is that the climate change emissions caused by driving are offset by payments to companies specialising in this. The Green Insurance Company, ibuyeco and climatesure are three such providers.

Ethical Consumer remains sceptical about the benefits of carbon offsetting, and therefore does not recommend these products, especially where the insurance itself comes from companies not on the Best Buys list. For more information on why Ethical Consumer does not support offsetting, see the Carbon Offsets buyers' guide on this site.

Green Guide

Going green at home or driving a lower-impact car may not only be good for the environment, but save you money. ‘Eco’ insurance schemes which offer lower premiums to consumers making environmental changes include CIS’ car ‘ecoinsurance’ (www.ecoinsurance.co.uk) with discounts for more fuel-efficient cars, MORE TH>N’s rate cut for hybrid and electric cars, and Naturesave’s discounts on home insurance for houses with features such as enhanced insulation, solar panels and water butts.

Funding war

Insurance companies don't just profit from and help to fund climate change industries. Many of the companies on the table have also attracted criticism for being entangled in the arms industry, deriving income from the growth of companies which profit from conflict.

Particularly controversial amongst the investments of the companies in this report are, for example, Axa's holdings in companies which have been accused of manufacturing phosphorus weapons used by the US army in Fallujah. Phosphorus weapons are said to be designed to cause deep flesh burns.(5) Fortis has also been accused of having holdings in companies which make cluster bombs and depleted uranium weapons.(6) And AIG has holdings in some of the world's biggest arms manufacturers, like Lockheed Martin and General Electric.

Arms investments, however, are also in a small way an illustration of the power that public pressure can have on companies. French insurance giant Axa was attacked by Amnesty International in 2006 for continuing to hold shares in companies which produce cluster munitions, a type of bomb which spreads dozens or hundreds of smaller 'bomblets' over an area as large as two or three football pitches.

According to NGO Handicap International, 98% of those injured by cluster munitions are civilians. In July 2007, Axa finally caved in to the damage being done to its image, and announced that it would be working with Handicap International and Amnesty to identify and divest itself from the estimated $5 million(5) worth of cluster-bomb-linked investments in its portfolio.(4)

Transparent shareholding

For some consumers, whatever the level of engagement being practised by investors, some shareholdings - whether in companies which test on animals, manufacture arms or pollute the planet - are unacceptable. This means that transparency is vital to allow people to make informed choices. As often happens in such cases, it also means that those companies following 'best practice' and disclosing their information, such as CIS and HBOS' Insight Investment division, get worse scores on the table, while companies which don't make their holdings public - like insure.co.uk's owner Insurance Australia, have comparatively good marks which disguise their failure to be totally transparent. This also accounts for the disparities between the Best Buys advice and the table.

As with any Ethical Consumer product report, all the companies can pick up marks on the table for their own direct activities, such as infringing workers' rights or having operations in oppressive regimes or tax havens. However, many of the companies also have criticisms derived from their investment activities, which explains why companies concerned with finance also have marks in categories such as nuclear power or armaments.

Many brands also pick up boycott call marks from companies they invest in, such as Shell and Tesco. Companies in many countries are now legally obliged to reveal this information, either through the reports which the US Securities & Exchange Commission requires from investment managers, or the major shareholder lists which companies traded on the London Stock Exchange must divulge.

Lloyds of London

Best Buy company Naturesave differs slightly from many of the other companies on the table by being entirely underwritten by Lloyds of London. One of the grand old men of the insurance industry, Lloyds was legendarily founded in an eighteenth-century London coffee shop and started out insuring the colonial trade in slaves and sugar. In 1968 a shortage of money meant that the creaking institution finally admitted women to its select population of wealthy individuals (the famous Lloyds ‘names’) who originally provided the finances to pay claims.

After a series of financial crises and scandals in the 1980s and 1990s the Lloyds system was overhauled to allow corporate groups, as well as individuals, to play a significant role in the organisation. Matthew Criddle of Naturesave admits that this has undermined much of the difference between Lloyds and conventional big insurance companies.

“There’s no such thing as an ‘ethical’ insurer at the moment,” he contends, “because every provider is dependent on unethical funds and capital structures at some point, especially the life insurance and pensions providers but really any company with an investment element. Until the early 1990s Lloyds could be seen as a more ethical option because it was largely made up of private individuals using their funds to underwrite risk, and had no corporate capital base. But now it’s no different from most big general insurers like Royal & Sun or Zurich.”

An ethical insurance company?

According to Naturesave’s Matthew Criddle, then, an ‘ethical insurance company’ is one which “encourages sustainable development, rather than those that can be identified as ethical by concentrating on their corporate structures.”

Naturesave’s approach is to offer rebates for customers who take environmental measures like fitting renewable energy sources and to give small business clients comprehensive support in ‘going green.’ Its relationship with its clients also, however, gives it clout in lobbying its Lloyds partners to become more sustainable, because the long-term customers it attracts provide good value to underwriters.

But, says Matthew Criddle, more effort needs to come from government. “We’re lobbying for a ring-fenced insurance premium tax for flood defences, renewable technologies etc, a bit like that used in France, where a 9% premium tax is applied to all insurance to cover the costs of natural disasters.”

Engaging and divesting - how can big money be ethical?

Insurance companies make their money in two main ways. Firstly, they take a gamble that the amount that you, the policy holder, pay them in premiums will, over the course of your contract, be greater than the amount that you claim back for accidents, burglaries or whatever you're insuring against.

Secondly, while they actually hold the money accumulated through your premiums, they invest it in massive funds which are amongst the largest shareholders operating on the world's stock markets. This is where the sustainable investment issue becomes relevant to insurance companies, because the clout they wield by virtue of their sheer size means that they can seriously affect company behaviour, if - and this is key - they choose to.

According to Dr Rory Sullivan, head of investor responsibility at Insight Investment, engagement developed as a middle ground between selling all the shares in bad companies and turning a blind eye on corporate ethics by investors. Proponents of engagement believe that cutting off from a company entirely means that investors lose the ability to influence it, and should therefore only be done as an absolute last resort. Ethical Consumer has always taken the position that without a genuine threat of divestment, engagement is likely to be of very limited use because companies often need to be forced into making real changes for the better.

According to Rory Sullivan, fund managers are often active in engaging on subjects where their own interests are at stake, such as company transparency, good practice on selection of directors and the amount of money paid to board members. "If it's a corporate governance issue investors are all over it," he says, "because it's in the interests of shareholders to resolve it. The results haven't been perfect but after 15-20 years of activity from investors most British businesses are in fairly good shape on this front."

On the other hand, says Rory Sullivan, there is still "little awareness" of issues like pollution and human rights amongst general investors or the companies they hold shares in. "These become an issue for investors when consumer demand or impending regulation impacts on markets and companies because the message that this is important hasn't got through," he says. "But investors can sometimes work as catalysts, providing a stimulus for change and getting companies to do things like develop and implement human rights policies or environmental reporting."

However, Sullivan still sees difficulties for investor engagement in some of the most pressing ethical issues. "The classic case of market failure is climate change," he says. "Until very recently, and to an extent still, the market has made making real reductions in climate change emissions uninteresting for companies in the absence of either market or consumer pressure. The costs of corporate behaviour in terms of climate change emissions have just been picked up by the state. "Or in the case of biodiversity, companies have been effectively encouraged to squander public goods such as fish stocks and forests because there is no cost or incentive telling them not to."

This means that investors wanting to change company behaviour have little leverage with boards intent on increasing profit, because they cannot point out probable business costs of inaction, such as increased government regulation or loss of profits.

However, Sullivan is also critical of the way in which some campaign groups have tried to use shareholder action to force companies to change. "It's unusual to see environmental or social shareholder resolutions in the UK," he says. "This is often because those that have been put forward have been poorly thought through by unsophisticated campaigners.

For instance, the Shell resolution in 2006 basically asked the company to do things it was already doing and did not focus on the very real problems in Sakhalin and the West of Ireland. If campaigner resolutions were better designed there might be more scope for them to be supported by institutional investors and for the groups to work together, as happens more in the USA."

In terms of the companies in this report, Rory Sullivan singles out CIS and his own organisation, Insight, which handles investment for HBOS, as publishing wide-ranging information not only on how they vote, but on how they engage directly with companies and the results of this activity. But, he notes "most fund managers are not that transparent."

According to Alex Van Der Velden, Executive Director of Fairpensions, a group campaigning on ethics in the pensions and insurance industries, "if the fund managers aren't telling you what kind of action they're taking in terms of ethical engagement, it's probably because they're not doing any. The ones that are active tend to make it public because it's a selling point."

Comparing the ethical engagement records of different companies is not always easy; Fairpensions (www.fairpensions.org.uk) and CRG Advisory (www.crgadvisory.com) are both in the process of benchmarking UK fund managers, but no information was available as we went to press.

The voting and engagement records of the companies covered in this report are given in the pdf of this buyers' guide which you can download from the link above (£3 or free to subscribers).

References

1 www.hemscott.com, August 2007
2 www.opensecrets.org, June 2007
3 email from Fortis Group, 22/08/2007
4 http://en.handicapinternational.be/index.php?action=article&numero=483, 4/9/2007
5 Banktrack, “preparations for a new Fallujah?”, March 2006
6 International Alert, “Conflict and Project Finance: exploring options for better management of conflict risk,” January 2006
7 Friends of the Earth International, Link magazine, January 2006
9 email from Allianz Communications Department, 31/8/2007
10 email from Ecclesiastical PR department, 23/8/2007
11 email from Royal & Sun Alliance Corporate Responsibility department, 8/8/2007
12 Guardian newspaper, 31/10/2006
13 email from Zurich media relations department, 29/8/2007
14 email from AIG media relations department, 27/8/2007