Munich Re, one of the world’s largest reinsurance companies, announced on August 5 that it will limit its investments in the stocks and bonds of companies that derive more than 30% of their business from burning coal. In doing so, it is joining with several other major insurers who have adopted similar policies, including Axa, Allianz, and Zurich.
“In the individual risk business, where we can see the risks exactly, we will, in the future, in principle no longer insure new coal fired power plants or mines in industrial countries,” says Munich Re CEO Joachim Wenning in a commentary published in German daily newspaper Frankfurter Allgemeine Zeitung on Monday.
The new policy may mean Munich Re gives up millions of dollars in premiums that would otherwise come its way, but Wenning says it is all part of a corporate policy to support the objectives of the 2015 Paris climate accords. Call it short term pain for long term gain. The company believes its losses in revenue today will be more than offset by the economic benefits of not turning the Earth into an uninhabitable cinder in the future. CNBC reports a big factor in the new policy is pressure from institutional investors to divest from companies whose business activities are contributing to climate change.
Most of us are not familiar with how the insurance industry works but it’s actually pretty simple. It’s little more than a specialized form of gambling. When you buy fire insurance, you pay a little bit of money each month now so in case your house burns down in the future, the insurance company will pay you to rebuild it. The insurance company is betting it can take those monthly premiums, invest them wisely, and earn more money than they will have to pay out if in fact your house burns down.
The secret to the insurance game is to spread the risks over as many people as possible. That’s where reinsurance come in. Just as a bookie will “lay off” some bets on a large event like the Super Bowl with other bookies to spread the risk in case one team beats the odds, insurance companies pay part of their premiums to reinsurance companies like Munich Re to protect them from catastrophic losses.
Many people think the secret to taming climate change is a carbon tax or voting for certain leaders who promise change, but down in the trenches where the real world of commerce takes place, it is insurance companies who call the shots. Can’t get insurance to build that $1 billion condo tower in South Florida? No deal. Can’t get insurance for that new coal fired generating plant in Bratislava? Sorry, no power plant for you.
The world of commerce is ruled by insurance. Banks won’t loan money without it. Every lender wants assurances the money they are putting out will be repaid no matter what happens. Without insurance, credit dries up and commerce comes to a screeching halt.
Some may consider what the insurers are doing as tepid steps forward when a full sprint is what the world needs. For instance, Munich Re is not stopping all insurance policies for companies who make money from burning coal right away. In the first case, the new policy only applies to companies who derive more than 30% of their business from coal. In the second case, Munich Re says there may be exceptions on a case-by-case basis for existing customers or in emerging markets.
Allianz is another giant reinsurer that is going down the same road. This spring, CEO Oliver Bäte announced his company will get completely out of coal businesses of all kinds by 2040. It has already stopped insuring new construction of coal fired generating plants and coal mines. It has also cancelled policies for ports whose primary business is shipping coal. The move will cost Allianz about € 50 million a year according to Frankfurter Allgemeine.
What the insurance industry is doing is alerting the commercial world that the policies of the Paris climate accords will be factored in to future premiums going forward. “We want to support our customers in this change towards a climate-friendly approach,” Wenning writes.
In the world of business, this is known as sending pricing signals. Utility companies don’t tell people when to use electricity or how much to use. They simply make it more expensive under certain conditions and let customers decide for themselves. Munich Re is doing much the same thing. It is sending pricing signals to the business community to let it know the cost of business is going up if they continue to rely for their income on burning coal. What they do with that information is up to them.
The question now becomes whether such free market policy solutions are enough to save humanity from extinction. For people like the Koch Brothers and those who have drunk deeply of their particular brand of free market Kool-Aid, there is no other way. Others argue that is does little good to be waiting for free market solutions to work after the Titanic has already hit the iceberg and its deck are awash with frigid North Atlantic seawater.
Who is right? “We’ll see,” said the Zen master.