A Hard Market Is Here.

by Mary Williams Walsh.

For some time now, it has felt as though America was sleepwalking through the apocalypse. Wildfires ravaging California, orange skies over Manhattan, 110-degree summers in Phoenix, vanishing glaciers, sinking cities, killer hurricanes—one climate disaster comes on the heels of another, and then it’s back to business as usual. There doesn’t seem to be anyone or anything pulling humanity back from the brink.

But look again, in a place you wouldn’t normally think of looking: the world’s giant reinsurance companies. Munich Re, Swiss Re, Hannover Re, and others are big, deep wells of capital moving quietly around the world, keeping insurance companies stable, unremarkable as wallpaper. But now they’ve decided to pick a fight with the world’s most carbon-intensive industries. And while they haven’t won, they’ve drawn blood.

In May, the attorneys general of 23 mostly red states sent a cease-and-desist letter to a group of global insurers and reinsurers called the Net-Zero Insurance Alliance. It’s a United Nations-convened body whose member companies are committed to phasing out their dealings with high-carbon businesses like coal, oil and gas, and transport.

That’s a serious threat—try running an oil tanker or a power plant without insurance. So the states’ attorneys lobbed it back, on behalf of their hydrocarbon-burning constituents.  

By advancing “an activist climate agenda,” they wrote, the alliance was veering into restraint of trade, illegal boycotts, and other antitrust violations, causing “record-breaking inflation and financial hardships for the residents of our states.” The reinsurers in the alliance, they said, were pushing the insurers to illegally discriminate against “disfavored customers.” Discrimination by an insurer was lawful, they said, only when the customer in question exposed the insurer to greater risk.

In other words, if a coal-fired power plant in Utah increased its insurer’s risk of covering catastrophic hurricane damage in Florida, the states’ attorneys didn’t see any connection. The reinsurers do.

As it happens, it was a founding member of the Net-Zero Insurance Alliance, Munich Re, that first started banging the drum about global warming—way back in 1973, nearly two decades before the Earth Summit in Rio de Janeiro first called widespread attention to the link between fossil fuels and climate change.

Munich Re picked up the scent early because its analysts had noticed that flood damage was getting worse over time—even back then—and they wanted to examine possible causes. In August 1973, the company called for “a study of thermodynamic processes such as, for example, the rising temperature of the earth’s atmosphere (as a result of which glaciers and the polar ice caps recede, surfaces of lakes are reduced and ocean temperatures rise).”

The “impact on the long-range risk trend has hardly been examined to date,” Munich Re added. It set out to remedy the situation, and built what is now one of the world’s biggest natural-disaster databases, dating back to 79 A.D., when Pliny the Younger wrote the only known eyewitness account of the eruption of Mt. Vesuvius. The company also joined forces with the London School of Economics to research financial aspects of climate change.

Other big reinsurers followed suit. Reinsurers work by contracting to take over the payment of insurers’ claims—lots of them—which is an essential function if you want a stable industry where insurers don’t go bust over black-swan events. The premiums are negotiated up front, and getting the terms right means having a good sense of how many hurricanes, wildfires, killer droughts and other disasters are in the cards; how bad the damage is likely to be; and what the cost of repairs will be, if repairs are possible.

A reinsurer can’t afford to under-estimate. Underprice the risks you take on year after year, and you can bankrupt your firm—it’s that simple. Just as there are no atheists in foxholes, there are no climate-change deniers in reinsurance.

By now the reinsurers have plenty of data on the rise in natural disasters and what is causing it. Where they have been less successful has been in keeping their prices high enough to cover their mounting risks. For years, they were caught in what the industry calls “a soft market,” where competition is intense, rivals underprice each other, and premiums stay flat, even as the risks grow. In 2022 alone, the industry was hit by Russia’s devastation of Ukraine; severe droughts in Europe and East Africa; flooding in Pakistan, China and South Africa; and Hurricane Ian in the US and Cuba. That’s billions out the door. Standard & Poor’s estimates that reinsurers earned their cost of capital in only one year of the last six, 2019.

The zigzag progress of climate-change policy didn’t help. In December 2015, world leaders announced the Paris Agreement, a legally binding treaty that requires nations to set emission-reduction goals and work toward net-zero emissions.

But in June 2017, then-President Donald Trump called the Paris Agreement “very unfair, at the highest level, to the United States,” and pulled out of it. (The United States is the world’s second largest emitter of greenhouse gasses.)

Trump then lost the presidency to Joe Biden, and on the day of his inauguration, Biden signed an order to rejoin the Paris Agreement.

Three weeks later Michael Bloomberg, who had endorsed Biden, was re-appointed as the UN Secretary-General’s Special Envoy on Climate Action and Solutions. His mandate: to mobilize governments, companies, cities and financial institutions ahead of a key climate conference set for Glasgow, Scotland, in November 2021.

And mobilize them he did. In April 2021, the United Nations announced that 43 global banks had agreed to work together to reduce the greenhouse-gas emissions of the companies in their lending portfolios. Known as the Net-Zero Banking Alliance, they were also founding members of the Glasgow Financial Alliance for Net Zero. That, in turn, was an initiative of the former Bank of England governor, Mark Carney, who was also a UN Special Envoy, for Climate Action and Finance.

Carney’s group received the backing of the US Treasury Secretary, Janet Yellen, and yet another UN Special Envoy for Climate, John Kerry, the former Massachusetts senator and Secretary of State in the Obama administration.

Meanwhile, the Lloyd’s of London insurance market was leading a task force to form what became the Net-Zero Insurance Alliance—with the backing of the Prince of Wales, now King Charles. (Two other net-zero alliances were mobilized as well: the Net-Zero Asset Owners Alliance, for institutional investors, and the Net-Zero Asset Managers Initiative. The alliances overlap, and some companies belong to more than one.)

Even before the Glasgow meeting, alliance members were speaking enthusiastically of their plans to stop insuring companies with big greenhouse-gas emissions.

Climate-change advocates were skeptical, but the alliance began making waves. The investment arm of Legal & General, a British insurer, dumped AIG’s shares from its portfolio when the US insurer failed to state any policy on coal, or to disclose the greenhouse-gas emissions of its holdings.

Trans Mountain, the Canadian operator of a pipeline carrying crude from the oil sands of Alberta, sought regulatory permission to remove the names of its insurers from its public filings, saying the insurers didn’t want to be associated with it and would charge “a significantly higher cost” if they were named.

And an Australian contractor to India’s Adani Group told the Australian parliament that a major coal-mining-and-rail project in Australia couldn’t get insurance, with 33 insurers declining to provide liability coverage.

“The worldwide insurance market is removing its support for coal-related projects,” the contractor testified.

Then came a major setback. The Russian invasion of Ukraine disrupted energy markets and fueled new demand for coal. But the alliance may still have the last laugh. In January, when reinsurance contracts were negotiated for another year, prices went way up and terms got tougher.

“A hard market is here,” announced Standard & Poor’s Global Ratings in a report titled, “Pricing Momentum Is Helping Reinsurers turn the Corner.”

“It seems that the global reinsurers have run out of patience after trying to catch up with the increasing cost trends over the past several years, resulting in multi-decade-high rate increases,” S&P said. It saw the hard market as beneficial, because it would give the reinsurers a chance to price risks properly and rebuild their depleted capital.

But good news for the credit analysts looked like price fixing to the state attorneys general. They cried foul, accusing members of the Net-Zero Insurance Alliance of singling out “selected clients” and placing “environmental considerations—not actuarial ones—on the continuation of their insurance coverage.”

That may not be the best argument to use against alliance members, though. They have decades of research showing that a company’s history of environmental damage is fair game for the actuaries who project costs. Since the high-emissions customers are the ones driving the natural disasters that insurers must pay for, their premiums should reflect that.

Some of the Net-Zero Insurance Alliance’s members left the group in response to the antitrust accusations, including Munich Re. But its CEO, Joachim Wenning, said that was only because collective action was exposing the company to antitrust risk, so “it is more effective to pursue our climate ambition to reduce global warming individually.”

Munich Re still has the same carbon-reduction goals as before, he said. “Our climate commitment is unwavering. We follow scientific recommendations. To date, we are decarbonizing even faster than what is required to reach net zero by 2050.”

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The author of this piece is Mary Williams Walsh. Mary is the managing editor of News Items. Prior to joining News Items, she worked at The New York Times as a reporter covering the intersection of finance, public policy and the aging population. Her work included pensions; public debt; bankruptcy, especially Chapter 9 municipal bankruptcy; and insurance, including insurance provided by governments. Before joining The Times, she worked for The Wall Street Journal and The Los Angeles Times, mainly in foreign bureaus.