The most famous drivers of the climate crisis are well known: Fossil fuel companies, Wall Street, science deniers, and the super rich, to name a few. But for decades, another climate villain has lurked in the shadows: The insurance industry that is knowingly ensuring an ecological disaster.

“Without insurance, new coal fired power plants wouldn’t get built. Without insurance, oil refineries wouldn’t refine,” said Douglas Heller, insurance expert at the research and advocacy group Consumer Federation of America. “That doesn’t mean that the insurance industry is solely responsible for fossil fuels. But it’s a part of the equation.”

The problem is not just that insurance companies offer coverage to fossil fuel projects, but they also use millions of people’s premiums to invest in — and provide capital to — the fossil fuel industry’s expansion.

State insurance commissioners have the power to expose and curtail these activities. But because the fossil fuel industry has pumped tens of millions of dollars into state politics, most states other than California have refused to do so. Meanwhile, the Republican stronghold of North Dakota — one of America’s largest producers of coal — is now exploring providing government-supported insurance to the fossil fuel industry.

But now there’s some good news: Insurance regulators and legislators in New York and Connecticut, both of which are key states for the insurance industry, have taken steps to fight back — suggesting a new front could be emerging in the war on global polluters.

A Vicious Cycle

In one sense, the insurance industry should be a natural opponent of climate change, considering how much the cataclysm threatens the insurance business, as evidenced by 2021. From the California wildfires to Hurricane Ida (which left an inch of water in my New York City bedroom), natural disasters prompted tens of billions of dollars of damage claims on insurers.

These disasters, and their impacts on the insurance industry, were all made more severe by climate change. And as climate change worsens, its effect on the industry is only expected to grow. This will harm not only the companies’ bottom lines but also hurt consumers, since greater losses from more extreme weather events will force insurers to raise premiums to avoid bankruptcy.

And yet, the industry is nonetheless driving climate change in two key ways.

The first is that the industry provides insurance for fossil fuel extraction projects, allowing investors to support them by protecting against catastrophic losses. The second way is through its investments. Insurance companies turn a profit in part by investing their revenues in other companies. Billions of dollars of those investments go to the fossil fuel industry.

In a vicious cycle, the costs of these investments are passed on to insurance buyers. As increased extreme weather events caused by climate change force insurers to pay out greater amounts in claims, the companies are predicted to raise rates to cover their losses — and then may reinvest those premium dollars in fossil fuels.

“Consumers pay higher premiums to cover the climate risk that was generated by those companies, and then when [insurers] get our premiums, they’re going to go invest back in those companies,” Heller said.

Among the industry and its regulators, there is a “growing recognition” that through these roles, insurance is exacerbating the climate crisis, according to Heller.

Regulators Get Real

Unlike other financial areas such as stocks or banks, there is no federal agency charged with regulating insurance. Insurance regulation in the U.S. is largely the responsibility of each state’s insurance commissioner. If anyone is going to address the insurance industry’s entanglement with fossil fuels, it will be them.

But over the last four years, fossil fuel donors have poured more than $19 million into races for elected insurance commissioners as well as governors who appoint insurance commissioners, according to data compiled by the National Institute on Money In State Politics. That flood of cash has coincided with state insurance regulators doing almost nothing about the climate crisis.

“Most state insurance regulators are not doing much publicly on climate risk,” said Yevgeny Shrago, policy counsel at the advocacy group Public Citizen’s climate program.

Insurance commissioners generally work through non-binding guidance and recommendations, but even non-binding asks can prompt significant changes in behavior.

“Even a guidance or request is given significant weight and deference by the industry, because it’s coming from the regulator who holds their license,” former California insurance commissioner Dave Jones told The Daily Poster.

Jones, who is now the director of the climate risk initiative at the UC Berkeley law school, knows this to be true from firsthand experience. In 2016, when he asked all insurance companies licensed in California to voluntarily divest their holdings in thermal coal, the companies discarded over $4 billion of thermal coal holdings.

A New Nationwide Leader

Jones was the first insurance commissioner to take serious steps to address the industry’s involvement with fossil fuels by asking insurers to divest from coal. For several years, he was all alone among regulators in taking action.

But in 2021, two other states started to pick up the slack, and the front lines of climate insurance regulation moved to the East Coast.

In November, New York’s Department of Financial Services, led by acting superintendent Adrienne Harris, issued regulatory guidance asking insurance companies to consider climate risk in every aspect of their business, and make business plans to mitigate or manage those risks, and lessen their own contributions to climate change.

The guidance called for insurers to “do their part” to transition away from carbon-intensive forms of energy and “support communities’ resilience to climate change.”

It also set out an expectation for insurers to take account of social inequities, noting that the department particularly expects insurers to support “disadvantaged communities” that are most vulnerable to climate change.

Over time, the department plans to move from merely advocating these changes to actively enforcing them against non-compliant insurers, the guidance says.

With this guidance, New York has become the nationwide leader in using insurance regulation to tackle climate change, Jones said, noting the state’s plan "really reflects the most advanced iteration of regulatory best practice in the U.S. with regard to insurance regulation.”

Like Jones’ request that California insurers divest from coal, New York’s guidance is non-binding, but Shrago expects that many insurers will comply. “There’s going to be a ton of insurers who’re going to look at that and say… ‘It’ll please our regulator to do it, so let’s just do it, and then we’ll get some credit for some other stuff,’” Shrago said.

Connecticut Taking Action

Connecticut, known as the “insurance capital of the world,” is also taking action with a new law passed in June.

The law requires that the state’s insurance commissioner push insurers to increase their climate change preparedness and to comply with the state’s ambitious emissions reductions targets.

The commissioner, Andrew Mais, is required to submit a report to the legislature detailing his efforts towards these two goals by April 2022. The regulations produced by this law are likely to be similar to those recently implemented in New York, Shrago said.

Though few other states are moving to seriously address the insurance industry’s impact on climate change, New York, Connecticut, and California hold enough sway to prompt significant changes.

“By premium volume, those two [California and New York] can reach about 80 percent of the insurance industry,” Jones said.

But the 20 percent of insurers that regulations in New York and California don’t reach still represent hundreds of billions in premiums annually. That means expanding climate action to additional states remains important, Jones said.

Doing so would “reach smaller insurers and regionally active insurers in a way that California or New York alone can’t,” Jones said.

A Public Option For Coal

One state is not only abstaining from taking action on climate change, but is actively moving in the opposite direction. Earlier this year, North Dakota, which is one of the top coal-producing states, passed a bill mandating that the state’s insurance commissioner look into creating publicly-funded insurance for the coal industry.

With insurance premiums rising across the industry, and some coal producers unable to secure insurance at all, Gov. Doug Burgum said that the bill would create “a level playing field based on science, not ideology.”

Unsurprisingly, advocates of greening the insurance industry were not impressed by this bill.

“That will simply stave off the reckoning that is already occurring with regard to coal, which is that we can’t burn coal if we’re going to survive as a planet,” Jones said.

While North Dakota’s bill is a countercurrent, overall momentum on the issue is with California, New York, and Connecticut, Heller said.

“The insurance industry has really tried to keep itself out of the discussion, because they’ve always known that they have a lot of front-end profit that precedes this downstream pain,” he said.

That is now changing, as the impact of climate change makes itself felt through disasters like the California wildfires and Hurricane Ida.

“We’ve reached a point where the catastrophes are no longer delinked from climate change,” said Heller, “and so the insurance for those catastrophes has become much more obviously centered in the debate.”

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