Far from the chaos of the Greek fires and the historic floods in Beijing, insurers and reinsurers are gathering in Monte-Carlo for the Rendez-Vous de Septembre (RVS), one of their major industry meetings. It is in Monte-Carlo that professionals take the pulse of the market before renewing reinsurance treaties, while also discussing the major challenges facing their industry. With natural disasters already costing almost US $50 billion in the first half of 2023 (1), climate change is now emerging as the number one challenge (2). Rather than allowing climate change to carry on driving up the costs of reinsurance, Reclaim Finance is calling on the major reinsurers to adopt the necessary measures to ensure that their treaties do not support the development of new fossil fuel projects.
Negotiations begin in Monte-Carlo
Insurance treaties, which are renewed once a year between insurers (clients) and reinsurers (suppliers), are at the heart of the Monte-Carlo meeting, which this year takes place against a backdrop of intensifying climate change. It is the reinsurers that pull the strings during these long negotiations. Insurers take out reinsurance treaties (3) to reduce the volatility of their results in the face of extreme events, particularly those caused by climate change. In this way, they are protected against the costly payouts for the kind of claims that can impact entire insurance portfolios, such as hurricanes, floods or fires (4).
Passing on the cost: a domino effect
When reinsurers increase the price or even exclude certain risks from reinsurance treaties, insurers have to review their exposure to these risks (for example by reducing their guarantees) and revise the pricing of their contracts (by increasing their cost).
The same mechanisms can be applied to cover the fossil fuel sector. Adding an exclusion in the conditions of reinsurance treaties for the risks linked to coal (5) or oil and gas (6) developers would make it riskier for an insurer to provide cover for these companies. Indeed, if an insurer wishes to cover these companies, it would assume 100% of the risks, and therefore the potential damage, associated with the insurance contract, without the protection provided by the reinsurer against exceptional damage.
Reinsurance treaties, a missing element in sectoral policies
Although reinsurance treaties represent more than 70% of reinsurers’ turnover (7), they are outside the scope of the policies which reinsurers have adopted in the energy sector to meet their commitments to achieving net zero by 2050 to limit global warming to 1.5°C.
In fact, the four major European reinsurers Munich Re, Swiss Re, Hannover Re and SCOR have only committed to no longer provide insurance or reinsurance for new coal projects or new oil and gas fields through their facultative reinsurance cover and direct insurance activities. As a result, the commitments made only concern a tiny part of their business, and the fossil fuel expansion is still underway thanks to their treaty reinsurance.
Rate increases, a sticking plaster on a wooden leg
To protect themselves from the intensification of climate change and remain profitable, reinsurers are taking it in turns to increase their rates (8). This sudden increase in prices, or “favourable market conditions” as they put it, is unsustainable. Insurers will not be able to pass on this increase indefinitely. In the United States, home insurance policies have already become unaffordable in several states (9). Some insurers are even refusing to provide home insurance policies to new customers in high-risk areas (10).
Rather than increasing the price of their reinsurance treaties to cope with climate change, the major reinsurers should take the first step in prevention. That is they should exclude the risks associated with companies developing new fossil fuel projects from their reinsurance treaties. This is essential to protect society from the impact of global warming of more than 1.5°C, and also necessary if they are to meet their commitments to achieve net zero by 2050. A commitment that no reinsurer has yet been able to make (11).
