Back in 2022, two insurance majors said they would reduce the amount of business they do with Big Oil. Allianz and Swiss Re both motivated the move with their net-zero efforts that they wanted to extend to their clients if they wanted to continue being their clients.
One would think this could be a pretty effective strategy to get oil companies to become cleaner, but climate activists disagree. For them, what the insurance industry is doing is not enough. So they're staging protests to force more radical change: a complete drop of oil and gas companies by the insurers.
Euronews called insurance "the Achilles heel of the fossil fuel industry" back in February, citing an Extinction Rebellion activist as the radical climate group staged a week-long push against insurers to stop insuring oil and gas projects.
"If fossil fuel companies have no insurance for their massive projects, the entire financial risk falls on their shoulders, so if something goes wrong, they are liable for whatever happens," Steve Tooze told Euronews at the time.
It is difficult to argue with the point. Indeed, companies that are solely responsible for the entire financial risk of a project would be a lot more careful in how they handle that project. They would, in fact, be very careful when deciding whether to take on the project at all—which is what the activists are banking on. Related: SLB Announces $8-Billion Deal as Mergers Extend to Oilfield Sector
What is doubtful in this scenario, however, is that the insurance industry would be willing to drop clients that bring it between $1.6 billion and over $2 billion in premium income annually, per the Euronews report. And that's just insurers on the Lloyd's of London market. According to British consultancy Insuramore, as cited by Energy Voice, in 2022, total gross premiums from the oil and gas industry were at $21.25 billion.
"The insurance industries have a kind of superpower and they could make it almost impossible for fossil fuels to continue to operate," Extinction Rebellion's Steve Tooze said back in February. They probably can. But will they?
"By 2030, Swiss Re's oil and gas re/insurance portfolios will only contain companies that are aligned with net zero by mid-century. For our treaty business we are developing an oil and gas approach by 2023," the insurance major said in 2022.
Allianz will "no longer invest in and underwrite new single-site or stand-alone oil and selected gas risks, oil and gas activities related to the Arctic and the Antarctic as well as extra-heavy oil and ultra-deep sea risks," the other major declared.
Neither company, then, is willing to give up oil and gas entirely, possibly thanks to the premiums that business brings in. There is a simple reason for that. There is no other business that can fully replace those premiums.
On the contrary, insurers are losing money on the business they do with wind and solar companies because of weather-related events and, in the case of offshore wind, what one publication called "engineering deficiencies." That goes hand in hand with the higher premiums insurers are slapping on EVs because of the huge write-off risk for these vehicles compared to ICE cars.
So, what Extinction Rebellion's Tooze says about the insurance industry's superpower may be right, but the threat of reputation damage is unlikely to be enough to make that industry use its superpower to kill oil and gas. Because oil and gas are cash cows in troubled times of mounting losses because of "engineering deficiencies" and hail.
Even so, insurers are caving, whether due to the fear of reputational damage or because they genuinely believe it is immoral to cover oil and gas projects. As many as 28 insurance companies last year declared they would not provide coverage for the Eastern African Crude Oil Pipeline project.
The declaration came after climate activist protests against the infrastructure project that is set to be the biggest one in Africa, and that will transport oil from Uganda to the coast of Tanzania. It was a development that radical activists such as XR should celebrate because, without insurance coverage, the EACOP may never get completed—there are not a lot of insurance companies that can afford to cover such a massive project.
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However, the one thing that those calling for insurers to stop doing business with oil and gas seem to forget is the number one rule of markets. Where there's demand, supply will find a way. The world's oil demand keeps breaking records even as the transition away from hydrocarbons gathers pace. And this means that producers will find a way to get their projects done despite insurers' net-zero declarations.
Lending is a case in point. As some banks started reducing their exposure to the oil and gas industry under net-zero pressure, private equity stepped in to fill the void. Insurance is trickier because there is no private equity equivalent in that industry, but then again, insurers would be hard pressed to give up a business that brings in billions every year. They need these billions, too, for payouts for the engineering deficiencies of offshore wind and the hail storm devastation of solar installations.
By Irina Slav for Oilprice.com
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