Calif. issues first ever stress test to evaluate climate risks to insurers

Despite legal threats, Commissioner Dave Jones moved forward with his climate-risk initiatives.

The first-in-the-nation stress test specifically assessed companies financial ties in fossil fuels. (Photo: rivalstrife/iStock)

In an unprecedented move, California has become the first state to conduct a climate-related financial risk stress test and analysis of insurance companies’ investments in fossil fuels. The test was issued by the California Department of Insurance (CDI) and Insurance Commissioner Dave Jones.

2° Investing Initiative, a global think tank on climate risk, conducted this analysis for insurers in California’s insurance market with over $100 million in annual premiums. The insurers analyzed in this test have over $500 billion in fossil fuel-related securities, $10.5 billion of which consists of investments in thermal coal enterprises.

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Stress test results and analysis

CDI has published the results and key figures of the scenario analysis titled, “Assessing Climate Change Transition Risk in Insurer Portfolios.”

Individual insurer reports will be made available to all 672 insurance companies operating in California with over $100 million in annual premiums. The top 100 companies based on the size of their investment portfolio will be expected to issue a response to their individual report.

These reports will explain how investment plans align with different climate scenarios, where the individual insurer ranks among its peers, and which securities are driving the climate risk exposure of their investment portfolios.

The CDI advises that these results will also help insurance companies apply the recommendations of the Financial Stability Board’s task force on climate-related financial risks, chaired by Michael Bloomberg.

Weighing the test’s impact

In 2016, Commissioner Jones launched the Climate Risk Carbon Initiative which established that insurance companies divest from thermal coal and publicly disclose their holdings in oil, gas, coal and utilities, due to potential climate-related risks.

In the last year since this policy came into effect, California Insurance Commissioner Dave Jones faced litigation threats from 12 state attorneys general and one governor over his recent policy actions on climate-related protections.

Despite these pilling legal threats, Jones issued the stress test earlier this week.

“The climate-related financial risk to insurers’ investments in thermal coal, other fossil fuels, and fossil fuel enterprises should not be ignored,” Commissioner Jones issued in a statement.

“As a financial regulator, I want insurers to consider climate-related financial risks, including risks to their investments. In order to make sure they are considering these risks, we have undertaken an analysis of the climate-related risk to insurers’ investments.”

For more information on CDI’s climate initiatives, visit the California Department of Insurance website.

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