© Reuters. FILE PHOTO: A leaf sits on a pile of coal in Youngstown, Ohio, the United States, Sept. 30, 2020. REUTERS / Shannon Stapleton / File Photo
By Carolyn Cohn and Simon Jessop
LONDON (Reuters) – Major reinsurers have already pulled out of providing bespoke coverage for coal projects as part of an effort to meet global climate change commitments, but now comes the difficult part – finding ways to exclude coal from bulk purchase contracts known as "contract" reinsurance .
Reinsurance companies help share the burden of insurance risk by writing frontline insurers. Any restrictions they impose will affect the insurance policies that are offered to companies.
Most reinsurers have withdrawn from offering insurers tailored or direct coverage for coal projects, but many still draw the industry through contract reinsurance, which bundles hundreds of insurance policies from insurers.
The process of unbundling treaty reinsurance to find coal exposures is difficult, yet there is growing pressure from investors and regulators on the industry to do more to incorporate the growing risks of climate change into their insurance benefits. Swiss Re (OTC 🙂 is already doing this.
If more reinsurers cut this coverage, specialist commercial insurers such as those in the Lloyd's of London market will be affected, as will coal suppliers or companies that derive even a small part of their revenues from coal.
"The first consequence is that it is harder to get insurance, the second consequence is that it is expensive, the third consequence is that there are all sorts of reservations and in extreme cases it may not be offered to you," Paul said Merrey, insurance partner at KPMG.
For example, a railroad company in Adani Enterprises' giant Australian coal project last month asked the Australian government to help it get insurance it couldn't get on the market.
Five of the world's six largest reinsurers – Swiss Re, Munich Re, Hannover Re, SCOR and Lloyd & # 39; s of London – have already reduced tailored coverage for coal projects. But only Swiss Re announced in a statement in March that it would go further and streamline its stance on treaty reinsurance.
Munich Re and Hannover Re informed Reuters that they are working with their insurance customers to further reduce their own exposure.
"We want to conduct a dialogue and drive changes forward together," said Jean-Jacques Henchoz, CEO of Hannover Re, but added: "It won't happen in a few weeks, it will take a while."
Munich Re and Hannover Re said they are working on evaluating the content of their treaty reinsurance books.
"For coal we are very confident that we will create transparency here, but of course that is much more difficult than in direct and facultative business," says Michael Menhart, Head of Economy, Sustainability and Public Affairs at Munich Re. Optional refers to the individual risk coverage.
Lloyd & # 39; s of London, which has around 100 syndicate members and first launched a strategy on coal last year, said via email it would be producing more guidance later this year. Scor did not respond to a request for comment.
For the global reinsurance industry as a whole, treaty reinsurance typically makes up the bulk of the business in the over $ 500 billion market, industry sources say.
Swiss Re has announced that it will introduce thermal coal exposure thresholds in its contract business with insurers as a first step towards a full phase-out by 2040, although it has not yet set the thresholds.
"We worked internally with contract departments around the world to understand their coal exposures," said Martin Weymann, head of sustainability, emerging and political risk management at Swiss Re.
"We took a lot of time to filter out which risks are most exposed."
Hannover Re's Henchoz said regarding the exclusion of coal from contract business it was important to scratch under the surface and try to be very specific about how an official goal can be achieved.
Lloyd & # 39; s, which industry sources say tends to be more cautious than major European reinsurers on climate action, said its consortium members are moving away from fossil fuels. Lloyd & # 39; s said the market wants to "make sure that existing customers have time to transform their business and that we don't create unnecessary cliffs".
ShareAction advocacy group said in a recent report that the fact that contract reinsurance can cover coal could undermine advances by restricting tailored coverage.
Even if more of the big reinsurers move to stop contracting coal, it could take some time for the effects to work its way through the system as other reinsurers try to fill the gap.
"There could be some opportunistic players in the short term," said Weymann of Swiss Re, adding that shareholders were leading the pressure for longer-term change.
However, Isabelle Santenac, Global Insurance Leader at EY, said that rather than marginalization, the industry should use its leverage to connect with corporate clients to help them accelerate the transition to a greener economy.
"If you stop working for these companies, these companies will find another insurer to take that risk and then you can say, 'What has changed for the planet? Nothing'."