Last updated: May 2013
Making a bad situation worse?
In the summer of 2007 severe floods landed UK insurers with a £2.5bn bill. Two years later they paid out £175m after flooding in Cumbria. According to the Association of British Insurers, Aviva alone faces home insurance losses of between £20m and £40m in the first half of 2012.(3) When an agreement between the insurance companies and the government runs out in 2013, many living in high risk areas fear being unable to get any insurance against flooding at all.
Flooding in 2009, photo credit: Flickr.
Internationally the story is the same. For example, some have estimated that Hurricane Sandy which struck Latin and North America may cost insurance companies between $30-$50 billion in the US alone.(9)
Extreme weather events are not good for business. They are also bad news for consumers who can not only expect a rise in premiums, but also damaged property and an uncertain future for their children.
In the insurance industry, like the scientific community, the consensus on climate change remains unchanged. It’s happening now and we’re to blame. So what are the powerful investment arms of the big insurance companies doing to ensure they don’t make a bad situation even worse?
The answer appears to be very little. This is best evidenced by their continued investment in companies carrying out exploratory drilling for oil in the Arctic where the rush for black gold has started despite the huge environmental risks.
Investments in Arctic Oil
Greenpeace have been actively campaigning on the issue recently (specifically around the actions of Cairn Energy). However they are not the only organisation to raise alarm bells about drilling in this pristine wilderness. A report from insurance company Lloyd’s of London estimates the region will attract $100 billion in new investment over the next decade. However they go on to warn that responding to an oil spill in a region “highly sensitive to damage” would present “multiple obstacles, which together constitute a unique and hard-to-manage risk.”(5)
The report states that a number of key factors make exploration “risky” and that companies should take a step back before perusing potential reserves in the area. The report describes, “Significant knowledge gaps...” along with “challenging and often unpredictable” environmental and political conditions while it adds that “environmental consequences of disasters in the Arctic are likely to be worse than in other regions”.
There have even been warnings from within the oil industry. Total SA, the fourth largest publicly traded oil and gas company in the world, warned that drilling could be a “disaster”. The company’s CEO, Christophe de Margerie, told the Financial Times that the risk of a potentially devastating oil spill was too high and that “a leak would do too much damage to the image of the company.”
Meanwhile in the UK a parliamentary committee also recently called for a halt to drilling in the Arctic Ocean. Committee chair Joan Walley MP said, “The shocking speed at which the Arctic sea ice is melting should be a wake-up call to the world that we need to phase out fossil fuels fast.”(4)
Some financial institutions have begun to to take note with German bank WestLB announcing it would not provide financing to any offshore oil or gas drilling in the region, saying the “risks and costs are simply too high.”(4)
But what of the insurance underwriters covered in this report? The table below shows some of the key companies involved in exploration in the area and the direct investments in them by insurance companies covered in the buyers' guides.
Cairn Energy: Legal and General, Aviva
Tullow: Legal and General
Shell: Legal and General, NFU
Statoil: Legal and General, AIG
Eni: LV=, Legal and General, RBS, Aviva, AXA
Green investment groups
Its not all bad news though. There are some green shoots of responsibility visible in the activities of three collective projects: the Institutional Investors Group on Climate Change, the Carbon Disclosure Project and ClimateWise. Optimism needs to be treated with some caution given the presence of the same companies in some of these groups and on the list of investors in Arctic oil.
Institutional Investors Group on Climate Change
The Institutional Investors Group on Climate Change (IIGCC) say they are a “forum for collaboration on climate change for European investors.” The IIGCC currently has over 75 members representing around €7.5 trillion in assets. The IIGCC say they bring “investors together to use their significant collective influence to engage in dialogues with policy-makers, investors and companies to accelerate the shift to a low carbon economy.”
UK IIGCC members in this report are Aviva, Axa, Legal and General, Co-op Asset management.
The Carbon Disclosure Project
The Carbon Disclosure Project (CDP) is an independent not-for-profit organisation working to drive greenhouse gas emissions reductions and sustainable water use by business and cities. They provide a system for thousands of companies to measure, disclose, manage and share environmental information.
CDP Carbon Action Signatories – Aviva, AXA, Lloyds Banking Group, Legal and General. This is a new investor-led initiative to accelerate company action on carbon reduction activities, moving away from just disclosure to action. It launched in April 2011 and now has the support of 92 investor signatories representing US$10 trillion in assets.
CDP Signatories – Allianz, Aviva, AXA, Co-operative, Ecclesiastical Investment Management, Groupama, Prudential, Royal Bank of Scotland Group. They commit to supporting the process over and above reporting their carbon footprints.
CDP investor members – Aviva, Axa, RBS. They commit to reporting their carbon footprints.
ClimateWise describes itself “the global insurance industry’s leadership group to drive action on climate change risk.” Members commit to action against the ClimateWise Principles and are independently reviewed against these annually. The results of these are published on the ClimateWise website (www.climatewise.org.uk). The six principles are:
- Lead in risk analysis
- Inform public policy making
- Support climate awareness amongst our customers
- Incorporate climate change into our investment strategies
- Reduce the environmental impact of our business
- Report and be accountable
Reporting against these criteria makes ClimateWise the most effective of the three projects mentioned as it helps to drive change in relation to a number of benchmarks which are then independently verified.
Members include: ACE, Allianz, Aviva, Chartis, Co-op, Ecclesiastical, Hiscox, Legal & General, Lloyds TSB, Lloyd’s of London, RBS, RSA, Zurich.