Pressure is building on the insurance industry to step away from the coal industry, potentially making some operations unviable.
Since the Paris climate accord was signed in 2016, major insurance companies have signaled their intention to walk away from thermal coal, both in terms of underwriting and direct investment.
This adds up to a very real risk for major power generation companies and miners with coal interests. The sector is rapidly heading towards a scenario where the availability of competitively-priced insurance cover from reputable insurance companies will be restricted.
But cover is only one part of the equation. Insurance companies are also very large institutional investors and shareholder activism is seeing them divest holdings in companies deemed environmentally unfriendly – Lloyds of London has already made an announcement to that effect. Lobby groups such as Unfriend Coal are ensuring the issue maintains momentum.
The Paris accord is having a particular impact on European insurers. Zurich has already announced it will not renew cover where a company has more than 30 per cent of its revenue arising from thermal coal activities and we are expecting statements from other major insurers.
This may not be a problem for global mining companies with diverse revenues but for those operating two or three mines, it could prove drastic.
There is also the complicating factor of re-insurance. Let’s say Zurich writes $50 million of cover for a coal miner – but 10 per cent of that flows to a re-insurer on what’s called a ‘treaty’ basis. Essentially it happens automatically without the re-insurer taking any direct action. But the next wave of reinsurance treaties falls due for renewal on June 1 this year and we’re anticipating announcements from such giants as Munich Re and Swiss Re on their attitudes to coal.
Every insurance company looks to offset some of the risk it takes into the re-insurance market. Munich Re and Swiss Re have been highly involved in the natural resources space up to now but it may well be that Australian companies such as QBE, CGU, Allianz or Vero won’t have the same ability to get re-insurance for coal mines.
If that was to pan out, these domestic insurers would have two choices – to not insure the risks at all, or reduce the amount of capacity they’re prepared to offer.
For smaller miners, that could well threaten the viability of their operations – insurance costs would quickly become prohibitive – but there’s also the impact on their funding. Smaller and mid-tier miners who are reliant on banks to finance their acquisitions or operations need to have insurances in place required by the lenders – otherwise they will default against the terms of their loan agreements.
Not all coal is created equal. Coking coal burns hotter, produces less ash and is less harmful to the environment, hence the focus on thermal coal, which is like burning dirt. While most insurers will appreciate the difference, it gets complicated when a company has both coking and thermal assets – they won’t be able to place their thermal operations with one underwriter and coking with another.
There are certainly reasons for Australian miners to be concerned, particularly companies such as Whitehaven and South32. Rio Tinto has already signaled it is trying to divest its thermal coal assets but they should also be aware of historical liabilities that are required to carry over. It’s perhaps not as simple as selling the assets, wiping their hands and walking away. Organisations acquiring these operations will also be getting into a very challenging environment.
Filling the void
As major European, British and Australian insurers exit the space, there are a number of options. Given the United States hasn’t signed up to the Paris accord, insurers domiciled there may not feel the need or pressure to ascribe to the wider thinking and offer the sector some added capacity. Insurers in emerging jurisdictions, such as China, also may not have the same environmental concerns and be less sensitive to pressure from lobby groups or stakeholders.
While coverage could be obtained, confidence levels around the satisfactory resolution of often complex claims is less certain, especially where risks are underwritten by emerging markets. There’s no doubt that insurance premiums, already substantial, certainly have the potential to rise dramatically under this scenario.
But there is another possibility; some form of mutual body could be created or an existing mutual such as FM Global or Bermuda’s OIL may step in, given they have no direct shareholders demanding action on sustainability issues.
When a similar issue struck the oil industry in the 1970s, the major producers banded together to form Oil Insurance Limited (OIL). Without any shareholders to demand action on sustainability, OIL may possibly step in to the coal market too – or the sector may form its own mutual body.
This is a big loop for insurers. Burning thermal coal is deemed to cause global warming, which equals rising sea levels, causes floods and results in claims. Insurers are learning that if the problem is nipped at the source, by not burning coal, these other issues may not come to pass.
There is still a lot at play in this situation. The next six months will be very interesting to see.
Gavin Wilby is an account director specialising in mining for Willis Towers Watson.