Energy transition prompts more insurers to back away from coal

Earlier this month, Chubb became the first U.S. insurance company to limit coal-related underwriting and investing, expanding a global trend that has seen 15 companies — underwriting a total of $313 million in premiums — announce new policy restrictions.

Why it matters: The proliferation of coal-exclusion policies at globally significant financial institutions — 113, according to the the Institute for Energy Economics and Financial Analysis — is leading large, diversified mining and utility companies to reduce their exposure to coal, and in some cases to exit the coal industry altogether, to avoid losing access to finance.

What's new: The policy from Chubb, the world’s largest publicly traded property and casualty insurer, will end new coverage for utilities and miners whose power generation or revenue is more than 30% derived from coal, in addition to phasing out existing relationships with such firms.

Background: Since rapid declines in coal power create risk for investors and insurance companies, higher costs of capital and rising premiums could become the “new normal.”

• The Bank of England conducted stress tests on insurer portfolios and consistently found coal investments to have the highest transition risk.
• According to California's voluntary disclosure database, the more than 1,000 insurance companies operating in the U.S. collectively hold over $131 billion in coal investments.
• Willis Towers Watson projects companies that continue to invest in coal will find it harder to replace their coverage as more insurers leave the industry.

Between the lines: The strength of insurers' coal-exit policies varies widely. Chubb’s policy, for example, allows exceptions until 2022 and would not impact large diversified miners like Glencore, whose coal dependence falls below the threshold.

• Per a scorecard by a group of NGOs, some divestment policies define coal companies too narrowly to include many leading developers, while others exempt certain types of insurance or projects as well as assets managed for third parties.

• While divestment policies will raise premiums for utilities like RWE, AEP and Ameren, loopholes could end up dampening the effects. Even still, however, companies unaffected by the policies, like BHP, are planning coal exits in response to investor pressure.

What to watch: Based on a Moody's forecast that coal could fall to 11% of the U.S. power supply by 2030, it will be easier for insurers to implement coal restrictions without hurting their bottom lines. More policies like Chubb's may soon be on the way.

Justin Guay directs global climate strategy at the Sunrise Project and advises the ClimateWorks Foundation.