In support of a green economy

The fact that the United States and Canada account for almost a third of company single large insured loss events out of 113 worldwide is stunning. But it still leaves the rest of the world.

While no single country or offshore region has such a high concentration of large risk loss events, there are still plenty of examples to show that fossil fuel company losses are a worldwide problem – particularly in Europe.

Framing sustainability discussions

While large insured losses don’t necessarily provide a comprehensive view of the economic, environmental, and social impact of fossil fuel sector companies, this approach could be useful in informing broader observations, strategies, and policies.

The transition to a green global economy was a key topic on the agenda at last week’s 2021 World Economic Forum meeting in Davos.

The largely virtual summit devoted over a day’s worth of discussions to issues surrounding climate change, including how to restructure an economy based around the consumption of carbon-producing fossil fuels.

The real challenge, said business leaders and politicians, would be investing in the right areas at the right time.

At a minimum, PCS’ data of large losses shows how re/insurers are affected by the fossil fuel category, which could support changes in strategic thinking. It is clear the economic impact of such events is relevant to the broader economic, social, and governance (ESG) discussion.

Loss severity terms

Let’s start by defining terms. A large single-risk loss, according to PCS Global Large Loss, is an onshore event that generates projected industrywide aggregate insurance claims of at least $250m. And under PCS Global Marine and Energy, it’s an offshore loss of at least $100m.

Where possible, we’ve included events with less than $100m in aggregate insured loss, as long as we have a credible loss estimate. This just helps us get a better view of what’s happening in the space.

Further, we’re looking specifically at companies directly engaged in the fossil fuel industry – which includes mining and extraction, refinery and other manufacturing operations, and materials transportation.

It doesn’t include companies that consume large amounts of fossil fuels, which is why some seemingly relevant losses, such as the 2012 Costa Concordia marine insurance loss, are not included.

By looking at large insured losses, we potentially miss uninsured losses (including sovereign). So, there could be economic, environmental, or social impact not captured by a review of the insurance industry. 

Europe is hard to miss

While the United States and Canada, as mentioned above, have been home to heavy industry-wide insured losses related to fossil fuel company events, activity in Europe is hard to miss.

The region has experienced only five fewer fossil fuel large insured risk losses than the United States and Canada, although the aggregate insured loss is nearly 50 per cent lower.

For insurance industry purposes, at least, the events have been smaller in Europe. Most were offshore, in the North Sea.

Onshore, Germany had as many events as the North Sea (seven), with a modestly lower aggregate insured loss. The UK had only two such large losses, but the re/insurance industry implications, as shown below, are profound.

European Fossil Fuel-Company Large Single Risk Loss Events (Onshore and Offshore)

Country	Number of Events	Aggregate Insured Loss	Notes
North Sea	7	$2.7 billion	Offshore
Germany	7	$2.2 billion
UK	2	$1.6 billion
Russia	3	$1.5 billion
Other offshore	2	$800 million	Offshore
Countries with one loss	6	$2.7 billion

Reduced reinsurance impact

While large onshore and offshore insured losses account for 19% of events, their re/insurance industry impact is much less substantial.

European losses account for only 18 per cent of aggregate insured losses going back to 2011, compared to 33 per cent for the United States and Canada. Other significant impacts by region include 18 percent for Asia and 13 percent for Middle East.

The insurance risks associated with fossil fuel companies may seem to have hit the United States and Canada disproportionately, but the issue is clearly worldwide in scope.

In the European market, historical fossil fuel company losses are difficult to ignore when evaluating the sector for future participation, a concern that could inform future risk and capital management decision making.

However, this could be seen as a transitional step for the industry, hopefully leading to increased support for renewables in the years to come.

Tom Johansmeyer, ARM, is head of PCS, a Verisk Business