Holding assets in oil exploitation and covering the risks associated with production facilities are activities insurers should abstain from participating in, according to Investors for Paris Compliance (I4PC), a group of activist investors.
The shareholder group has just published a report, Playing with Fire: Canadian Insurers & Fossil Fuels, highlighting the presence of several major Canadian insurers in the hydrocarbon industry. The Paris Agreement stipulates that signatory countries must commit to limiting warming to 1.5°C above pre-industrial levels.
Fossil fuels are one of the main contributors to climate warming, the authors write. "Higher resulting claims translate into higher premiums, and taxpayers also pick up the tab for infrastructure damages," reads the summary.
Worse still, due to recurring floods or wildfires, insurers now refuse to insure properties in the most vulnerable communities, and the cost of damages is passed on to uninsured property owners and taxpayers through public safety programs.
The report cites the example of Desjardins, which in February ceased offering mortgages to property owners in high-risk flood zones in the Charlevoix region. Other owners in the Ottawa-Gatineau area cannot insure their properties following floods in 2017 and 2019.
The major wildfires across the country in 2023 also have had an impact. In Kamloops, British Columbia, home insurance premiums have more than doubled in a year, according to the report based on a CBC news story.
No longer a risk, but a certainty
From the table of contents of the report, the authors quote Craig Stewart, vice-president of the Insurance Bureau of Canada (IBC). "As these events get worse and worse, it is possible that insurers won’t consider them accidents anymore… As soon as these weather events tilt over from being accidents to being predictable, then they’re not really insurable."
These remarks by Stewart are taken from a CTV News report broadcast on August 9, 2023, according to the source cited by I4PC and confirmed by IBC to the Insurance Portal.
I4PC recalls that the bills for catastrophic claims related to natural disasters reached $3.4 billion in 2023 for Canadian insurers. The $3 billion mark was exceeded for the second consecutive year.
As a result, "insurance companies are responding by raising rates to maintain profits" and continue to pay dividends to their shareholders, states I4PC. The average home insurance premium increased by 7.7% in Canada in 2023, and the increase even reached 18% in British Columbia, continues the organization.
In Australia and the United States, particularly in Florida and California, extreme weather events have prompted several insurers to leave these territories or impose premium increases that property owners cannot absorb. Profitability was absent in home insurance in 18 US states in 2023, compared to 12 states five years earlier.
Insurers’ share
Meanwhile, insurers invest in fossil fuels. According to I4PC's report, six of the seven major Canadian insurers analyzed held assets totaling $19.5 billion in the fossil fuel sector in 2023. "The insurance industry drives a damaging cycle, insuring and investing in the fossil fuel industry," according to I4PC.
However, it should be noted that Toronto-Dominion Bank (TD) alone holds assets of $15.4 billion in this industry. This financial institution is present in insurance, with a premium volume of $5.8 billion in 2023, according to its financial statements, but this represents only part of its activities. TD Bank's total revenues reached $50.7 billion in 2023, enabling it to declare a net income attributable to common shareholders of $14.4 billion.
Among other major Canadian insurers holding assets in this industrial sector are Fairfax Financial Holdings ($1.54 billion), Intact Financial Corporation ($1.48 billion), and Desjardins with $298.7 million. Two other insurers, Co-operators ($0.4 million) and Definity Financial Corporation ($0.3 million) have more modest holdings.
Several of these insurers also underwrite risks related to fossil fuel exploitation. Fairfax, which owns several insurance companies, including Northbridge and Crum & Forster, is pointed out.
Fairfax is among the top 10 global insurers in this industry. "Its subsidiary Allied World acting as an insurer of last resort for coal projects, including several in Asia," reads the report.
Commitments
Furthermore, five of the seven largest Canadian multi-line insurance companies have adopted a carbon neutrality target by 2050. Only two of them (Intact and Desjardins) impose restrictions on underwriting risks associated with fossil fuels.
"No insurance company with a net zero commitment should be underwriting any fossil fuel expansion projects," notes I4PC.
In terms of regulation, the Office of the Superintendent of Financial Institutions (OSFI) should require a credible transition plan and better disclosure of financed emissions from insurers. The exercise must include clear objectives and accountability measures, as well as penalties for insurers who do not meet their zero-emission targets.
The report suggests that regulators impose a capital surcharge for fossil fuel exposures that risk becoming stranded assets.
IBC's reaction
At the Insurance Bureau of Canada, it is noted that property and casualty insurers operate in a competitive market and each company makes its own strategic investment and underwriting decisions.
"The claims made within the Investors for Paris Compliance report paint an inaccurate picture of the considerations related to climate change-related risk management," says IBC through its spokesperson Brett Weltman.
"There are roughly 1.5 million Canadian households that are highly exposed to flooding but lack access to flood insurance. This is due, in part, to previous land-use planning decisions that have contributed to communities being built in high-risk and low-lying areas of the country, prone to flooding," adds IBC.
Property and casualty insurers have worked with the federal government and provinces to create a flood insurance program, which is set to be implemented in 2025. This program "is one of the most important steps Canada can take to better protect homeowners from the financial risks of climate change today," continues IBC.
Insurers are also working with regulators, including OSFI, regarding the disclosure of greenhouse gas (GHG) emissions and climate risks and opportunities starting at the end of fiscal 2025.
OSFI's B-15 guideline also requires insurers to develop transition plans that manage physical risks related to climate change and risks associated with the transition to a low-GHG economy, notes IBC.
"The transition to a low carbon economy must be undertaken in a thoughtful and measured way. IBC will continue to work with insurers, business leaders and governments as the country transitions to a resilient and low-carbon economy while maintaining a healthy economy," concludes the organization representing Canada's property and casualty insurers.
The reactions of the insurance companies mentioned in the report will be the subject of a separate article to come on the Insurance Portal.
