Public Policy Analysis & Opinion
By Kevin P. Hennosy
AN INSURER’S PUBLIC POLICY: BE A STEWARD OF THE EARTH
Chubb battles climate change through science-based products, services and example
On July 1, 2019, Chubb Limited, the commercial insurance giant, announced that the company would neither offer coverage for, nor invest in, coal-oriented business enterprises. According to a news release distributed by the company:
“With the new policy, the company will no longer underwrite the construction and operation of new coal-fired plants or new risks for companies that generate more than 30% of their revenues from coal mining or energy production from coal. Insurance coverage for existing coal-plant risks that exceed this threshold will be phased out by 2022, and for utilities beginning in 2022.”
Furthermore, the company clarified general restrictions on its investment activities: “Chubb will not make new debt or equity investments in companies that generate more than 30% of revenues from thermal coal mining or energy production from coal.”
An inconvenient storm
When news of Chubb’s policy statement on coal began to spread, this writer began to ask the question: What might have been?
In the summer of 2005, the National Association of Insurance Commissioners (NAIC) announced that former Vice President Albert Gore would attend its Fall National Meeting in New Orleans, Louisiana. At that meeting, Al Gore planned to deliver the presentation that became best known through the documentary entitled An Inconvenient Truth.
Gore’s presentation would provide him with an audience of the insurance sector’s government relations representatives—mostly lobbyists—whose companies or trade associations could further environmental-oriented public policies and encourage regulatory reforms to private sector activities that drive climate change.
Certainly, one can imagine the collection of slightly—or more-than-slightly—hungover lobbyists and regulators rolling their eyes and whispering catty comments about the former vice president. Whispers would have carried the usual jokes: “I had to shovel four to six inches of ‘global warming’ several times last winter!” Some of the NAIC wags promised to practice spitball marksmanship on “Wooden Al”—but they never got the chance.
Hurricane Katrina hit New Orleans and the Gulf Coast several days before the scheduled 2005 NAIC Fall National Meeting, which the association cancelled because water covered most of the city.
Al Gore never appeared at the NAIC, so once again the association managed to avoid truth—as the NAIC is wont to do.
Generally, this column refrains from commenting on carriers’ products or investment portfolios. The exciting world of insurance public policy should sate the need for enthusiasms of most readers.
In this case, Chubb’s decision to reshape its product design and investment policy seems so driven by a public policy that the jurisdictional boundaries of this column may bend for one issue. So, this month’s installment strikes out beyond the tales of some smarmy state official who makes their desire for an “industry job” abundantly clear. Chubb’s initiative leaves those parochial abuses of public policy in history’s dust.
The Chubb coal initiative is only one part of the company’s ongoing attempt to address climate change using its concentrated economic power and the insurance mechanism. Consider the following statement from Chubb Limited’s Chairman and CEO Evan G. Greenberg: “Chubb recognizes the reality of climate change and the substantial impact of human activity on our planet.”
Greenberg continued, “Making the transition to a low-carbon economy involves planning and action by policymakers, investors, businesses and citizens alike. The policy we are implementing today reflects Chubb’s commitment to do our part as a steward of the Earth.”
Chubb touts itself as the “world’s largest publicly traded property and casualty insurance company.” Also, the company executes operations in at least 54 countries and territories. Furthermore, Chubb is a signatory on the United Nations (UN) Global Compact, the world’s largest corporate sustainability initiative.
As a signatory of the UN compact, Chubb commits to aligning its business operations with 10 principles, which address the environment, human rights, labor, and anti-corruption. (Which begs the question: How does Chubb interact with the NAIC?)
The Chubb commitment to combat climate change reminds this writer of Nationwide Insurance founder Murray D. Lincoln’s commitment to consumer cooperatives. Lincoln was a spectacularly successful insurance executive, and if one wanted to strike up a conversation with him, asking about consumer cooperatives was the way to achieve that goal.
Chubb integrates pro-environmental policies into its business model. According to a description of Chubb’s environmental policy on the company’s website, “Chubb makes sustainability and preservation a high priority, integrating environmentalism into many aspects of our business, from our products and services to our day-to-day operations, as well as within our philanthropic commitments.”
The public policy aims of Chubb’s environmental policy are clear, but the business approach appears to be tied to the company’s view of superior risk measurement, mitigation, transfer, and distribution. Chubb uses the tenets of insurance mechanisms to improve the environment and strengthen the company’s bottom line.
The company even publishes an annual report that recounts its efforts to improve the environment and address climate change. The Chubb 2019 Environmental Report begins with the following policy statement: “Chubb recognizes the reality of climate change and the substantial impact of human activity on our planet. Our environmental initiatives—in our business, our operations and our philanthropy—reflect our desire to do our part as a steward of the Earth.”
Later, the report notes Chubb’s standing as a global leader in environmental liability and pollution risk; therefore, the firm asserts that assessing these risks is a “core competency.” Chubb claims to use that expertise in myriad ways. “In the U.S., Chubb is also a leader in meeting the insurance and risk engineering needs of clean technology companies, including renewable and alternative energy providers, manufacturers and software and hardware companies.”
The 2019 report also cites a 2018 letter to shareholders from Greenberg. In that letter, he discussed how climate change impacts perils that produce financial losses submitted to the business of insurance as claims.
“Climate change is a reality and its effects can be seen by an increased frequency and severity of natural catastrophes. Climate change is contributing to higher sea surface temperatures, rising sea levels and an increasing trend in extreme weather events, including floods, droughts, winter storms, heat waves, wildfires and hurricane intensity,” observed Greenberg.
The report recounts a discussion presented in Greenberg’s letter of how human activity drives climate change. “Mr. Greenberg also described how such extreme weather events are colliding with the realities of urbanization, including suburban sprawl and the desire of people to live near water and wilderness, as well as government policies that insulate people and society from the costs of their decisions”
Greenberg observed in his letter “Given the long-term threat and the short-term nature of politics, the failure of policymakers to address climate change, including these issues and the costs of living in or near high-risk areas, is an existential threat.”
Chubb is not the only insurer that attempts to change public behavior, in the absence of affirmative public policy, to confront climate change—but the firm’s appeals are more direct and full-throated than others. Furthermore, Chubb champions modernity, which depends on the scientific method to assess conditions and achieve results.
The Chubb action harkens back to the historic activities of the National Board of Fire Underwriters (NBFU) in the late 19th and early 20th centuries. In those times, when cartel behavior by insurers was not yet subject to antitrust enforcement, insurers used their economic power to pressure municipal governments to adopt policy changes to reduce the instance, persistency, and intensity of urban fires.
The NBFU used products, actuarial analysis, underwriting, and consultations to encourage the formation of science-centered fire prevention codes, professional fire departments, and public water systems. Furthermore, the NBFU launched Underwriters Laboratories to conduct replicable testing on materials and devices.
Yes, the NBFU overstepped its ethical bounds when it came to cartel pricing—mistakes were made! No one should forget or excuse those anticompetitive actions; however, application of scientific expertise to mitigate the risk of loss from fire served the public interest.
Once again, Chubb’s aggressive environmental policies are more than PR fluff. Senior management integrates environmental responsibility into the firm’s everyday and utilitarian practice in the business of insurance. As the 2019 Environmental Report emphasizes in a pull-quote: “We recognize that climate change and weather patterns are integral to our underwriting process.”
The Chubb crusade against climate change includes many recognizable elements of the business of insurance. The company applies material effort and resources to improve catastrophic event models. The firm creates products and services that provide incentives to customers to mitigate environmental risk through “green,” “clean,” and responsible operations. Chubb works with regulators to foster pricing plans that reflect environmental risk based on sound actuarial evidence. As noted above, the firm uses its investment portfolio to deny capital to polluters, fund green enterprises, and produce investment returns for operations and shareholders.
Chubb presents a compelling argument for insurers taking a leadership role in fighting climate change based on the adage about “doing good and doing well.” No one will confuse Chubb or any member of the Greenberg clan with a communist cell or Fuzzy-Thinking Fellow Travelers. The firm and family hold impeccable capitalist credentials that other companies and executives aspire to.
What seems to set the Chubb commitment to environmental protection apart is the belief that successful capitalism is not dependent on failed concepts like “creative destruction.” Furthermore, the law of large numbers, which governs successful
insurance operations, requires insurers to demonstrate concern for the well-being of humankind beyond concerns expressed by other business sectors.
A century ago, the Supreme Court of the United States in German Alliance Ins. Co. v. Lewis, 233 U.S. 389 (1914) described how insurance differs from other business contracts. The risk spreading dynamic inherent in the insurance mechanism creates a shared interest across the population—both insured and uninsured. “Contracts of insurance, therefore, have greater public consequence than contracts between individuals to do or not to do a particular thing whose effect stops with the individuals.”
When it comes to battling climate change, Chubb seems to understand and respond to that special standing held by the business of insurance.
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.