California Insurance Commissioner Dave Jones ran a “stress test” on the state’s largest insurers, something that he claims is the first done by U.S. financial regulators to focus on climate-related financial risks and analysis of insurance companies’ investments in fossil-fuels.
Jones has for the past few years sought greater disclosure of insurer investments into coal and other fossil fuels, warning these carriers could have assets stranded as their values plummet while the world increasingly turns away from these sort of energy investments in favor of clean energy.
Jones and the California Department of Insurance have engaged 2° Investing Initiative, a partner of European financial regulators, to conduct an analysis of insurers in California’s insurance market with more than $100 million in annual premiums.
Jones said he believes this to be the most comprehensive financial stress test analysis ever conducted for the insurance sector.
Insurers analyzed have more than $500 billion in fossil fuel-related securities, issued by power and energy companies, $10.5 billion of which consists of investments in thermal coal enterprises, according to the analysis.
The stress test stems from a recommendation from the FSB Task Force on Climate-related Financial Disclosures that financial institutions perform scenario analysis on their portfolios to assess financial risks related to climate change.
The goal of the scenario analysis conducted by Jones’ office was to assess the exposure California insurers have to transition risk based on the evolution of production and assets in the real economy. The analysis compares the currently planned production from physical assets allocated to a portfolio with future production levels defined in a 2°C global warming scenario.
It looks at, for example, the projected number of barrels of oil produced by an oil well owned by a company that has issued a security held in an insurer’s portfolio.
Data on insurer investments was taken from the 2016 year-end financial filings of all insurers operating in California with more than $100 million in premiums, which produced a sample of 672 insurers with more than $4 trillion in investments, nearly 87 percent of which is held in fixed-income portfolios.
Jones said he sees this as part of his duties as the state’s insurance commissioner.
“One of my duties is to monitor the financial health and well-being of insurance companies,” Jones said.
He said the CDI will send the results of the survey to companies and encourage them to use it to assess the risks to their portfolios, and he’ll use the information in his capacity as the state’s insurance regulator.
“It’s our intention as we’re doing examinations of insurance companies to avail ourselves of this report as part of this regulatory exam process,” Jones said.
PCI Urges Caution
The Property Casualty Insurers Association of America urged caution following the announcement.
“Under the watchful eye of investment professionals, regulators, rating agencies and other stakeholders, insurance company investment strategies are regularly assessed and re-balanced to meet the needs and risks of each entity,” David Kodama, assistant vice president of research and policy analysis for PCI, said in an email reply to a request for comment for this story. “However, unprecedented regulatory actions ranging from a demand to boycott investment in a specific industry to evaluating whether insurer’s investment portfolios are in alignment with a European Investment Initiative have raised concerns not only within the insurance industry but with other regulators and attorneys general in a dozen states.”
He also noted that during the last year, insurers were well prepared to respond to historic levels of insured losses and remain financially prepared for future natural and climate-related disasters.
The California stress test is based on a climate scenario in which clean energy technologies must be deployed by 2050 to reach a 50 percent probability of limiting global warming to 2°C. The department published key figures from the scenario analysis on its website.
Jones’ efforts to do battle with climate change haven’t gone unnoticed or unopposed.
Jones last year came under fire from 12 state attorneys general and one governor, who called his efforts an “affront to sound insurance regulation” and threatened to sue him for calling on insurance companies to evaluate and address potential climate-related risks to their investment portfolio.
Oklahoma Insurance Commissioner John Doak has also urged Jones to back off his Climate Risk Carbon Initiative, which calls for insurance company disclosure of investments in fossil fuel-producing companies and aims to discourage them from such investments.
Oklahoma Attorney General Mike Hunter said California’s policies, which require insurance companies to annually disclose their carbon-based investments as part of the National Association of Insurance Commissioners Climate Disclosure Survey that’s been ongoing since 2011, including investments in oil, gas and coal, will harm the energy industry.
Jones during Tuesday’s press conference said that based on the results over the past five years of the survey that he believes insurers are not doing enough to prepare for climate change.
“I reached the conclusion that insurance companies were not addressing the serious financial risks associated with climate change,” Jones said.
*A version of this story ran previously in our sister publication Insurance Journal.