Divestment plan would only harm policyholders

MOST people want their insurance to be affordable and price increases kept as small as possible. But California’s insurance commissioner is advocating policies that could make insurance companies less financially stable with obvious repercussions for consumers.

Through his Climate Risk Carbon Initiative, Commissioner David Jones has called on insurance companies operating in California to “voluntarily” divest from coal companies. Jones has also called on larger insurance companies to disclose any investments in oil and gas companies, an obvious indication the California regulator plans to seek divestment in those companies at some point.

Jones’ efforts, which recently drew fire from Oklahoma Attorney General Mike Hunter and Insurance Commissioner John Doak, are done in the name of combating global warming. Yet divestment will have no impact on global warming, even if one blindly accepts all claims made by proponents of that theory. But it will have an impact on people who buy insurance.

That’s because insurance companies invest part of the money they collect in premiums. State insurance regulators take those earnings into account when determining if an insurer’s rates are sufficient to cover customers’ claims. In some cases, low investment earnings can lead state regulators to reject a rate filing because the proposed rate is too low.

Insurance companies with a diversified portfolio of investments are less likely to face wild swings in earnings, which benefits consumers by facilitating stable rates.

That’s where Jones’ divestment strategy becomes problematic, because he is expressly urging insurance companies to have a less-diversified portfolio.

Jones argues coal companies are not only bad for the environment, but will inevitably lose value because of a changing marketplace and environmental regulations like those Jones favors. But insurers aren’t going to typically invest in companies whose stock prices are expected to only decline.

In effect, Jones is arguing a single politician in California can better predict stock prices than the collective judgment of countless investors nationwide. That doesn’t pass the laugh test.

In 2015, Bradford Cornell, a professor at the California Institute of Technology, authored “The Divestment Penalty: Estimating the Costs of Fossil Fuel Divestment to Select University Endowments.” Cornell concluded fossil fuel divestment would cost Harvard University’s endowment $108 million annually. At Yale, the impact was $51 million and at MIT, $18 million.

There’s no reason to think similar divestment efforts would not have similar negative impact on insurance companies’ earnings. And those lower returns would ultimately require higher premiums from consumers.

Also, it’s not as if divestment means no one will invest in coal, oil or natural gas production. As Forbes Senior Editor Chris Helman wrote in 2015, “If some institutions divest and share prices go down, other investors will see that as a good reason to add to their allocations. Indeed, any smart investor would view low commodity prices as an opportunity to buy, not sell.”

Put simply, Jones’ plan could force people to pay higher rates for insurance in order to indirectly subsidize the purchase of energy stocks by other market investors. That plan might be welcomed by those investors, but it should be strongly opposed by consumers.