In March 2022, Hannover Re, the world’s third largest reinsurer (1), became the first of its industry to rule out its facultative reinsurance (2) and direct insurance products to new upstream oil and gas projects. Additionally, the German reinsurer will also exclude certain midstream oil and gas projects. It comes a year after the International Energy Agency (IEA) stated in its Net Zero Emissions scenario (3) that “beyond  projects  already  committed  as  of  2021,  there  are  no  new  oil  and  gas  fields” in their pathway to carbon neutrality by 2050. However, these major steps only apply to a small part of Hannover Re’s underwriting portfolio. The German reinsurer must now quickly extend the scope of its oil and gas policy to its reinsurance treaties.

Hannover Re sets exclusions for new upstream oil and gas projects and their related midstream infrastructure

By mid-2022, Hannover Re will exclude from its facultative division new upstream oil and gas projects. Coming into force mid-2022, these new measures will apply to all types of oil and gas, both conventional and unconventional (4).

Hannover Re will also refuse to provide facultative reinsurance products to midstream projects  which “exclusively support the transportation and storage (midstream) of new oil and gas reserves (greenfield)”.

The German reinsurer specifies its unconventional exclusions for 2 unconventional oil and gas sectors

Hannover Re complements its new oil and gas restrictions by specifying that it will not underwrite any new risks related to new and current oil and gas projects located in the Arctic (5). It will also refuse to underwrite risks related to the development of new oil and gas reserves in ultra deep waters below 5000 ft (1,500m).

THE POSITIVES

• Hannover Re becomes the first reinsurer globally to exclude new upstream oil and gas projects
  By becoming the first reinsurer to stop covering new upstream oil and gas projects, Hannover Re paves the way for the reinsurance industry to exit new upstream oil and gas projects. It is the first reinsurer to take into account IEA’s recommendations from the Net Zero Emissions scenario in its oil and gas underwriting restrictions.

• Both current and new Arctic projects are excluded
  Besides its oil and gas underwriting exclusions applying to new upstream oil and gas projects and their related midstream infrastructure, Hannover Re will not underwrite new risks connected with both existing and new oil and gas extraction projects in the Arctic area.

NEXT STEPS

• Treaty reinsurance remains out of the scope of the underwriting policy
  Even though Hannover Re refuses to provide facultative reinsurance (7) for new upstream oil and gas projects, it can still support oil and gas expansionists through its treaty reinsurance which represents the bulk of its reinsurance portfolio. Indeed, Hannover Re can still provide treaty reinsurance products to ceding insurers which cover companies planning new upstream oil and gas projects.

• Review metrics and definitions for unconventional oil and gas
  Hannover Re currently refuses to provide cover (treaty reinsurance excluded) for companies whose 20% or more of their reserves are tar sands reserves. Reclaim Finance advises financial players to use the Global Oil and Gas Exit List (8) which relies on production metrics rather than reserves (9) that is subject to more volatility for the following reasons : the amount of estimated reserves depends on several drivers such as the economic or political environment, the availability and price of technologies or oil and gas prices. This volatility does not allow to assess properly the impact of this exclusion threshold overtime.

  Moreover, Hannover Re defines the Arctic territory as territories up the 66.34° latitude, including the Arctic National Wildlife Refuge. This definition of the Arctic must be a first step towards a broader definition of the Arctic Region defined by the Arctic Monitoring and Assessment Programme (AMAP)(10).

  According to our research in September 2021, 28% of Arctic oil and gas fields were located outside of the Arctic Circle meaning that existing fields in this Arctic area could still be covered by Hannover Re’s facultative division.

Reclaim Finance welcomes Hannover Re’s new oil and gas underwriting guidelines which becomes the first example of reinsurer refusing to cover new upstream oil and gas projects in line with its net zero commitment by 2050. Hannover Re must now extend its oil and gas policy to its treaty reinsurance business.

For more information regarding Hannover’s sectoral policies on coal and oil & gas, you can refer to the following tools : the Coal Policy tool and the Oil and Gas Policy Tracker

Notes :

1. Reinsurance news, Top 50 Global Reinsurance Groups, 2022.
2. According to the International Risk Management Institute, facultative reinsurance is a form of reinsurance whereby each exposure the ceding company wishes to reinsure is offered to the reinsurer and is contained in a single transaction. The submission, acceptance, and resulting agreement is required on each individual risk that the ceding company seeks to reinsure.
3. IEA, Net Zero by 2050 – A Roadmap for the Global Energy Sector, 2021.
4. Hannover Re’s complete wording : “From mid-2022 onwards the facultative division will no longer take on any new covers for project policies associated with the exploration and/or development (upstream) of new oil and gas reserves (greenfield)”
5. According to the French Sustainable Finance Observatory scientific committee (document in French), the list of unconventional sectors includes: Arctic oil and gas, shale oil and gas, tar sands, ultra deep water oil and gas extracted below 5000 ft (or 1,500m), coal bed methane, tight oil and gas, extra heavy oil.
6. Hannover Re’s Arctic definition : the zone around the Arctic Circle which runs in a circle of latitude 66.34° north of the Equator. This includes the Arctic National Wildlife Refuge (ANWR) in the United States.
7. Hannover Re’s latest annual report : €1,064 million out of €19,224 million of GWP (Gross Written Premium). According to Hannover Re’s annual report, the facultative reinsurance division represents around 6% of its entire P&C Reinsurance portfolio.
8. Global Oil & Gas Exit List 2021 (GOGEL), developed by the German NGO Urgewald and updated annually.
9. Estimated oil and gas reserves can be defined thanks to the following classification :
   1. 1P or P90 or proved reserves : It is an estimate of recoverable volume with a probability of recovery greater than 90% under present technical & economic conditions.
   2. 2P  or P50 or probable reserves : It is an estimate of recoverable volume with a probability of recovery equal to or above 50% and less than 90%. It includes 1P reserves.
   3. 3P or P10 or possible reserves : It is an estimate of recoverable volume with a chance equal to or above 10% and less than 50% of being economically and technically feasible to extract. It includes 1P and 2P reserves.
10. AMAP, Geographical Coverage webpage.