The Insurance Industry’s Failure on Climate Change

The conventional wisdom, which is something I more or less thought too, is that you could watch the actions of the insurance industry on climate change, as their ultimate financial interests are about not paying out huge claims and therefore it might act before the government would. Alas, I should have known that the cult of the quarterly profit report would reign supreme here too. There’s an excellent American Prospect story on how the insurance industry is actively supporting dirty energy companies precisely because of the short-term profit potential.

One would think, then, that the insurance industry would be among the most forceful advocates for large-scale intervention on climate change, based on, if nothing else, that good old market homily that is self-interest. The losses keep mounting in the absence of aggressive measures. Either the federal government, in tandem with private investment, pays for a major decarbonization program, or the insurance companies pay for the cleanup. That shouldn’t be a tough decision for a bunch of fund managers to make.

Furthermore, because of their clout and institutional power, one would also assume that if insurers put their mind to it, they could be unusually effective advocates for a green transition. Just about the only time anything gets done in Washington is in those rare moments when a corporation or industry decides they want it to happen. That could be the legacy of insurance companies and climate change.

And yet insurers have not been terribly vocal about the climate crisis. In fact, they’ve been highly resistant to even small-bore climate solutions, instead opting for tepid statements about environmental sustainability.

At the same time, outside of the fossil fuel industry itself, there may be no industry more actively and intimately tied to the climate crisis than the insurance industry. “Insurance companies are a crucial but really misunderstood piece of the fossil fuel production ecosystem. You can’t have a coal mine or oil pipeline or anything,” said Yevgeny Shrago, policy counsel for Public Citizen’s Climate Program.

But by loading up on stocks of oil and gas companies and energy utilities, purchasing corporate debt of coal and other fossil fuel firms, and underwriting the development of new infrastructure like pipelines and plants, much of which is being done at record rates, the insurance industry is currently propping up the industry that is expediting its own demise. Insurance companies are financially vulnerable to the ravages of climate change, but they also happen to be profiting off of its acceleration.

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WHY INSURERS REMAIN SO LOYAL to fossil fuel companies in the face of gale-force economic headwinds can only be hypothesized. The problem is the result of a handful of factors: financial, regulatory, and cultural.

The annual time scale on which financial years are assessed and bonuses are paid out discourages long-term planning; the backward-looking risk forecasting model is predicated on a world that isn’t our current one. More important, executives at insurance companies rely on the continued burning of carbon for their livelihoods.

“Their relationship managers have good relationships with their fossil fuel companies,” said Shrago. “Their individual bonuses depend on continuing that business.” Elana Sulakshana, a campaigner with the Rainforest Action Network, added that the risk specialists who might be disinclined to continue working with the fossil fuel sector aren’t as high on the totem pole within insurance companies as the executives who are intertwined with the industry.

Meanwhile, regulation of the insurance industry is left to the states, which means that there isn’t an overarching national authority to compel transparency, action, or a change in behavior. Some insurance commissioners around the country, like Jones, have been focused on the climate issue, but others, particularly in oil and gas extraction states, are more captured.

Really, I should have known better.