AMID PANDEMIC, INSURERS GRAPPLE WITH CARBON ASSET RISKS

NEARLY five years ago in Wulong, Chongqing, China, Maurizio Zavatta achieved a world record for the highest blindfolded tightrope walk at 698 feet and 1.9 inches. Many economies relying on fossil fuel—and companies supplying the power from them—have been doing that since 2015.

It was the year more than 70 countries committed to cut greenhouse gas emissions (GHG) to net zero by 2050. For more than a decade, it’s been a tightrope walk between supplying power and keeping fidelity to that goal.

But while the Philippines may not be one of the largest carbonemitting countries in the world, it is known to be one of the most vulnerable countries to the impact of GHG emissions on sustainable development.

Despite this, the Philippines has yet to finalize its commitment in cutting GHG emissions after it became a signatory to the Paris Agreement. Nonetheless, the Philippines has set a higher ambition of cutting these emissions by 75 percent by 2030 based on the latest draft text of the country’s Nationally-determined Contributions it submitted “in accordance with Decisions 1/ CP.19 and 1/CP.20 of the Conference of Parties of the United Nations Framework Convention on Climate Change (UNFCCC).”

‘Soft’ market

MANY countries, such as Japan, China and Korea, have already pledged to go carbon-neutral in a few decades and global insurance giants are becoming a driving force to help the global business community cut carbon emissions by phasing out the underwriting of carbon assets.

Independent advisory firm John Foord CEO Andrew Slevin told the Businessmirror that insurers are playing behind-the-scenes role by raising insurance premiums in carbon assets, such as oil and gas infrastructure, or in some cases refuse to insure them at all.

Over the last decade, Slevin said the cost of operating and underwriting the risk of carbon-producing traditional energy infrastructure has been less lucrative to insurers, prompting the shift to insuring low-carbon alternatives.

“What’s happening now is that the market for non-renewable energy infrastructure is entering a longer term ‘hard’ phase, in which fewer insurers are willing to underwrite the risk on these carbon-producing assets and, as a result, insurance policy coverage is increasing in price or coming with increased conditions attached,” Slevin explained.

“This is the opposite of a ‘soft’ market in which competition to underwrite risk, such as for wind turbines or solar panels, is high and energy companies can therefore benefit from lower insurance premiums on that infrastructure,” he added.

Active dialogue

SLEVIN cited, for instance, global reinsurance firm Swiss Re, which has introduced policies pledging not to provide insurance policies to businesses with more than 30 percent exposure to thermal coal

utilities or mining.

The company has also announced that by 2023 they will no longer provide individual insurance cover for the world’s 10 percent most carbon-intensive oil and gas production companies.

In a statement last March, the insurer said another measure it has implemented “is the aspirational and new framework to engage with companies in the equity portfolio.”

“This includes taking an active dialogue with them to limit global warming to 1.5°C,” the company added.

“We believe that by engaging with the real economy and supporting the companies we invest in to develop a climate strategy and to manage related risks, we will improve our risk-adjusted returns, while also propelling the transition to a net-zero emissions economy,” Swiss Re’s Group Chief Investment Officer Guido Fürer was quoted in the company’s statement as saying.

Varying investments

APART from Swiss Re, several major financiers and insurers have also announced plans to diversify their investments away from coal and carbon-based fuel assets.

“Over the last 12 or 18 months, premiums across property damage policies within the downstream oil and gas sector have been going up on renewals significantly, for some by 5 percent to 10 percent but for many operators by 30 percent to 40 percent,” he said.

Slevin added that “this has disproportionately impacted poorly managed oil and gas facilities including in markets such as the Philippines that have high claims ratios, or that do not have detailed risk management processes and procedures.”

“The alternative for them is to decommission assets early, or self-insure, especially with older facilities.”

Energy infra

IN Asia and the Philippines, green underwriting or insuring risk of green assets like renewable energy infrastructure is a “growing market opportunity,” Slevin said. Citing information from Climate Action Tracker, Slevin said the Philippines is implementing its ambitious Paris Agreement target as the first country in the Southeast Asian region to set a moratorium on new coal, and is implementing several measures to support renewables.

These actions would halt emissions growth and potentially curb the Philippines’ emissions by up to 35 percent below current policy projections in 2030, though the current reality is that the Philippines is not yet on track to achieve this target as emissions continue to increase, according to the Climate Action Tracker.

Although Slevin said it is

“likely” for insurers in the Philippines to similarly be raising premiums on carbon-producing assets, local non-life insurers have yet to put this into practice.

Topping concerns

UNLIKE the global insurance giants, Philippine Insurers and Reinsurers Association (Pira) Executive Director Michael F. Rellosa said non-life insurers in the Philippines are not yet phasing out the underwriting of carbon assets as he expressed concern that this move may hurt their premium incomes.

“If you are writing a coal plant and then suddenly you won’t just because you want to be green e medyo mahirap [slightly difficult]. So I think, me, personally, this is going to be a slow and steady process. I would say there’s a certain awareness of it. I would say there’s a slow acceptance of it but we have to turn this into actual practice,” Rellosa told the Businessmirror.

He said it would not be easy for non-life insurers to make the shift and phase out carbon-producing assets especially at this time when the industry is still recovering from the financial impact because of the Covid-19 pandemic. This is on top of the pressure for them to meet the capital build-up and net worth requirements under the amended Insurance Code.

Hurting industry

UNDER the law, new insurance industry players are required to have P1 billion in paid-up capital, while existing insurance companies doing business in the country need to meet the minimum net worth requirement of P1.3 billion by December 2022.

However, Rellosa is confident that the industry will follow in the footsteps of the global insurance giants to phase out carbonproducing assets in their portfolio, but pointed out it would be hard to say when this would happen.

This, as he pointed out that nonlife insurers have already started realizing that the adverse effects of climate change could also hurt the income of the industry since Super Typhoon Yolanda hit the country in 2013.

“Siguro it’s only in the last five years to eight years or specifically when Typhoon Haiyan or Yolanda struck the country that insurance companies became more conscious about the impact of climate change on their bottomline. This is the first experience [where they saw that there is an effect, after all],” he said, partly in Filipino.

For 2013 alone, the non-life insurance industry incurred a whopping loss ratio for typhoon insurance of -21,832.65 percent, based on the Insurance Commission data given by the PIRA to the Businessmirror.

Loss ratio represents the ratio of losses to premiums earned. Losses include paid insurance claims and adjustment expenses.

Environment-friendly

FROM 2011 to 2017, the non-life insurance industry posted a total loss ratio for typhoon insurance of 268.49 percent after its losses amounted to P3.896 million, more than twice as large as its premiums earned at P1.45 million. For the same period, the industry’s total loss ratio for flood insurance reached 130.4 percent while the industry clocked a total loss ratio of 33.09 percent for earthquake fire and/or shock insurance.

“Obviously, climate change has a big effect on the way beings live and work and the insurance industry is starting to understand that, but locally medyo huli tayo [we are a bit late],” Rellosa said. “But PIRA, the association, is doing everything it can to drum up awareness of this to most of our member companies.”

While local non-life insurance industry has yet to follow the global giants on phasing out carbon assets, PIRA is one of the two signatories in the Philippines in the global campaign to promote environment-friendly practices in the insurance industry.

Rellosa said they are also still working on their plan to implement a Philippine Catastrophe Insurance Facility to increase the country’s financial resilience against natural disasters.

Investors in green bonds

APART from this, Rellosa said PIRA is supporting the World Wildlife Fund and the United Nations Educational Scientific and Cultural Organization to promote world heritage sites.

The association is also working with Earth Security Group to protect coastal ecosystems, which include mangrove forests, seagrass meadows and coral reefs

in a bid to prevent the detrimental effects of storm surge just like what happened in 2013.

In its quest towards a greener world, PIRA is not alone in this journey.

In fact, Insurance Commissioner Dennis B. Funa told the Businessmirror that the insurance industry is one of the leading investors in green bonds in the country.

According to Funa, the IC issued Circular Letter 2019-19 allowing insurers to invest in “environmental and solid waste managementrelated facilities, such as, but not limited to, collection equipment, composting plants, landfill and tidal barriers, among others and “climate change mitigation and adaptation infrastructure projects and related facilities.”

Level set

IN a copy of his yet-to-be-published book emailed to the Businessmirror, Funa said the IC in 2019 approved requests related to green bonds, including $90 million in fixed rate green bonds issuance of International Finance Corp. (IFC); P3 billion fixed rate Asean Green Bond issuance of

Arthaland Corp.; and, P1-billion investment of Insular Life in IFC Green Bond issuance.

Funa also underscored the country’s need for green finance to fight climate change while calling for more expenditures targeting sustainable development. This, he said, shifts away from greenhouse gas, fossil fuel, carbon emissions and natural resource intensive industry.

“Climate change is the great challenge of our time. The Philippines is vulnerable to this challenge with numerous typhoons devastating the country every year,” he said.

Philippine Life Insurance Association Inc. (PLIA) President and Sun Life Philippines CEO and Country Head Benedict C. Sison said there is neither an industrywide nor an association-level set of initiatives to support the transition to low-carbon economy but he said multinational life insurance companies are driven by either their regional or group offices or their multinational bancassurance partners towards ESG (Environmental, Social, and Corporate Governance) objectives.

Ahead of schedule

LOCALLY, Sison said some life insurance companies, including Sun Life, have put up green office buildings that conform to internationally-recognized green building certification system or LEED (Leadership in Energy and Environmental Design).

Sison said Sun Life Center in Bonifacio Global City was one of the first Platinum-certified LEED buildings in the country back when it was constructed in 2011.

“Being a smart building, it has several energy-efficient features, such as a green roof that collects rain water for flushing toilets, double-glazed glass windows with argon gas to help lessen the heat going into the building, and a host of other features to help save energy,” he said.

Investing in green building and energy efficiency has been Sun Life’s way to meet its global goal of reducing greenhouse gas emissions, he said, adding that Sun Life has already met its 2020 target of a 20-percent reduction one year ahead of schedule and they are now working towards a further 30 percent reduction by 2030.

On top of this, Sison said Sun Life has more than CAD$19 billion in assets under management invested globally in sustainable real estate and infrastructure.

Novel plans

IT is also the first life insurer globally to issue sustainability bond enabling it to raise CAD$750 million to support essential services, renewable energy and energy efficiency projects.

“In the Philippines, we have provided long-term funding for several renewable energy projects over the last five years,” he said.

Moving forward, Sison also expects the insurance industry would be “more deliberate” in including more ESG practices in their plans.

Nonetheless, Slevin believes phasing out the underwriting of carbon assets is the way to go as this would benefit the insurer and the insured in the long-run.

“By insurers underwriting more risk on more “green” assets, such as renewable energy infrastructure (i.e. wind turbines, solar panels, hydrogen, etc.), asset owners will over time benefit from lower premiums,” he said. “As insurers shift to green assets, they will attract more capital, better meet staff expectations on ESG and be more attractive for investment as the sector continues to enjoy rapid growth.”

Early decommissioning

MOREOVER, Slevin said John Foord can also help both insurers and companies taking out insurance on green assets to survive in their transition towards going green.

Slevin also recognizes that companies may also be worried that early decommissioning of infrastructure will represent a significant impact on their balance sheets.

Before companies take out insurance on their green assets, he said they “should first have comprehensive valuations done by an independent firm like John Foord to ensure sums insured are correct.”

“Given the speed at which green energy infrastructure is developing and costs changing, it is important to check that current reinstatement cost estimates are up to date,” Slevin said.

Towards renewables

FOR Slevin, “this is an obligation on the asset owner rather than on the insurer or broker, and is important in the event of a loss where there may be a dispute with the insurer on the asset’s value (which could result in a lower pay-out for the asset owner).”

As for insurers, he said John Foord can help them survive the transition to green underwriting as they seek more supportive information on the values at risk they are being asked to underwrite in policies.

“A lot of facilities have not conducted independent assessments in over 10 years, and as independent assessors of asset reinstatement costs with specialist knowledge of the energy sector, at John Foord we have been able to provide more transparency on reinstatement costs for owners and insurers,” he said. “This is making it clearer to insurers how to price risk and is often demonstrating the falling costs of renewable assets, which in itself is an incentive to move away from carbon-intensive assets and towards more renewables.”