California

California Push for Coal Divestment Mostly About Politics

Insurance commish wants companies to "voluntarily" divest from coal

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Unlike the sellers of most other products or services, insurance companies receive payments from their customers in exchange for future promises. If you wreck your car, they will pay for the damage. If you die, they will pay out a benefit to your heirs. Because of that reality, insurance commissioners have a role in assuring companies that write policies have the wherewithal to pay those claims. No one disputes that notion, including the insurance industry itself.

This "solvency" issue gives state commissioners broad authority. In the dozen or so states where insurance commissioners are elected, these officials often have their eyes on higher office. For instance, insurance officials and some Sacramento observers argue California's ambitious commissioner—Dave Jones, a former Democratic assemblyman who is mulling a race for attorney general—is imposing a politically motivated diktat on companies and dressing it up as a campaign for solvency.

The issue: Jones is calling for insurance companies to divest "voluntarily" from their investments in thermal-coal companies and in utility companies that make heavy use of coal. He has vowed to publicize—some say "shame"—insurance companies that don't comply with the request. Given that 1988's Proposition 103 gives the California commissioner vast powers to prescribe which factors companies use to adjust rates and to approve or deny proposed rate increases, insurance officials wonder about the voluntary nature of the policy.

The "Climate Risk Carbon Initiative" divestment request applies to direct investments in companies that gain more than 30 percent of their revenues from thermal coal. In practice, these are some of the most conservative investments around, including monopoly utilities whose returns are set by regulation. It also requires insurance companies that do business in the state to answer a variety of questions about such investments, even if they are headquartered outside California. The goal is to pressure companies to divest from these holdings.

"The commissioner decided to request voluntary divestment from thermal coal enterprises this year following consideration of recent studies that show coal investments represent significantly higher financial risk than other investments over time," the California Department of Insurance explains. "Moreover, since 2011, coal prices, cash flows, and company valuations have fallen sharply, thus adversely affecting and bankrupting numerous coal companies."

"Politics," the department says, "has nothing to do with the decision to ask insurers to divest from thermal coal."

That sounds reasonable, but insurers typically make conservative investment decisions. Jones and other advocates for divestment make it seem as if these companies are heavily invested in high-risk stocks. They suggest these companies will be stuck with enormous "stranded assets" as the nation moves away from coal-based energy and toward alternative-energy sources. But insurance companies hold few coal-related stocks and bonds as a percentage of their overall investments. Even if the "stranded asset" argument were correct, it would barely cause a blip in their portfolios.

In a letter to the insurance commissioner last year, a major insurance-company trade association reminded him: "For regulated utilities, the risk of loss due to stranded assets is remote. Utility companies operate on a cost-plus system. Precedent is in place that supports the recovery of all costs deemed to have been prudently incurred."

By contrast, some of the investments the insurance commissioner prefers—in "green" energy, for instance—are risky. As my R Street Institute colleague R.J. Lehmann noted in an article last year, "Greentech Media publishes an annual list of solar company failures and has noted that '(k)eeping track of failing solar companies in 2011 and 2012 bordered on full-time work.'"

Why hasn't the insurance commissioner called for divestment from these companies?

The answer seems obvious. California's government has embraced climate change in a big way. Gov. Jerry Brown (D) has addressed the United Nations and a conference at the Vatican, where he has depicted the issue in stark terms. In his view, the future of human existence is at stake. California has passed a first-in-the-nation cap-and-trade system to roll back industrial emissions to 1990 levels, along with other legislation designed to decrease public use of petroleum products dramatically. It's a popular cause here, and isn't lost on any up-and-coming politician.

Whatever one's view of man-made climate change, it remains an iffy proposition to suggest it is threatening the long-term solvency of major insurance companies. These investments already reflect the risks involved in the energy sector. Every knowledgeable investor knows about the changing regulatory climate. Private investors are better able than government planners to evaluate such matters and make decisions accordingly.

Indeed, as I pointed out in my recent R Street study, one of the nation's most widely respected investors, Warren Buffett, recently rejected calls by an activist group and investor in his Berkshire Hathaway Corp. to report on climate-change risks. For instance, many activists argue that insurance companies aren't properly pricing these risks and aren't being aggressive enough in tackling the potential long-term problems. Buffett believes in climate change but doesn't see a risk in his company's insurance holdings.

"As a citizen, you may understandably find climate change keeping you up nights," Buffet said in his company report. "As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries." Buffett suggested even an uptick in the frequency or severity of climate-related catastrophes wasn't much of a problem for the insurance industry, given that rates are set annually. Moreover, as a major provider of reinsurance—that is, insurance for insurance companies—Berkshire might actually benefit from more demand driven by climate change, given that reinsurance prices have been falling for years.

These companies' futures depend on their ability to evaluate risks and benefits. They all have teams of actuaries and risk-management professionals who have a vested interest in making the most sophisticated guesses about future events. Elected officials, by contrast, are more apt to be swayed by political winds. A previous Republican insurance commissioner and gubernatorial candidate, Steve Poizner, in 2010 tried to force insurers to divest from investments in multinational companies that did business in Iran. This type of thing is nothing new.

"Divestment comes at the expense of meaningful action," wrote Frank A. Wolak, director of the Stanford University Program on Energy and Sustainable Development. "It will do nothing to reduce global greenhouse emissions. It will not prevent these companies from raising capital." And indeed, the state government's push for divestment in non-insurance areas—i.e., forcing the California Public Employees' Retirement System to take a similar approach—has been met with a similar backlash.

One can never know the motives of insurance commissioners, past or present. But it's a safe bet that private investors making their own decisions with their own money are almost certainly more trustworthy than politicians making investment decisions based on the latest political winds. By all means, commissioners should work to assure that insurers can fulfill whatever claims are made in the future—but they shouldn't bootstrap that legitimate authority into a politically motivated crusade.

This column originally appeared in CalWatchdog.

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13 responses to “California Push for Coal Divestment Mostly About Politics

  1. He has vowed to publicize?some say “shame”?insurance companies that don’t comply with the request.

    No consumer is going to give a shit when deciding on an insurance carrier, not even in California. Commissioners fucking with rate adjustments, on the other hand, might have an impact.

    1. IT’S ALL FOR THE GREATER GOOD, STOP COMPLAINING

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  2. Because of that reality, insurance commissioners have a role in assuring companies that write policies have the wherewithal to pay those claims. No one disputes that notion, including the insurance industry itself.

    Followed immediately after by an example of exactly why granting that power to government can be problematic …

  3. Moreover, as a major provider of reinsurance?that is, insurance for insurance companies

    *Considers launching into tirade, reconsiders and reaches down into desk drawer for bottle to ‘Irish up’ coffee. Grumbles in disappointment that bottle is empty, goes back to reading*

    Reinsurance is not insurance on insurance – it is a transfer of a certain amount of the risk, and a certain amount of the premium and even the control of the underlying matters to reduce the risk/burden of the primary insurer. I will refrain from going all lecture-y on catastrophe bonds, risk swaps and the like.

    /ARe

    1. Disregard my entire comment if this is supposed to be the Friday Funny…

      1. The entire state of California is a 7 day a week funny.

        And also a 7 day a week tragedy.

  4. Stop complaining. Divestment is purely voluntary and is a growing effort to use the marketplace as a way to address a potential catastrophic problem. You don’t have a problem with the marketplace, do you? Or is it only libertarians who can use it.

    Rand Paul famously said that he would repeal those parts of the Civil Rights Act that forced private businesses to desegregate. And his reasoning was that pressure in the marketplace, including protests, would force that desegregation.

    Environmentalists are doing the same. Get over it. It’s not only for libertarians.

    1. Purely voluntary? Like 60-day farm stints in your worker’s paradise Venezuela are purely voluntary? Did you even read the FA? Specifically: Given that 1988’s Proposition 103 gives the California commissioner vast powers to prescribe which factors companies use to adjust rates and to approve or deny proposed rate increases, insurance officials wonder about the voluntary nature of the policy.

      Gah. I feel like I’ve lowered my IQ just by responding to you.

    2. What sort of catastrophic problem are referring, Jackass?

      The fact that global temps have been trending down for the last 10000 years?

      Or maybe you are talking about the enormous uncertainty in the doubling sensitivity of CO2, which keeps trending down?

      Model divergence perhaps?

      No tropospheric hot spot as predicted?

      Satellite temps being basically flat since they were available?

      No polar amplification?

      Etc.

      Science denying dumbass, you are.

  5. “As a citizen, you may understandably find climate change keeping you up nights”

    Words fail.

  6. Good article and one more very good example of why SMALL government is better. Human nature is such that given the opportunity, most/many (especially politically motivated) people will abuse power to further their agendas.
    This is not about Dems or Repubs. It is about all people regardless of political leaning. Power corrupts, absolute power… You know!

  7. RE: California Push for Coal Divestment Mostly About Politics
    Insurance commish wants companies to “voluntarily” divest from coal

    California’s insurance commissioner is quite correct. There is to be no choice for the little people in the People’s Republic of Kalifornia. That is not what the Golden State is about and hasn’t been for many years. The insurance commissioner has been put into office for a reason, and that reason is to control the masses and their unwise decisions. If the little people do not divest from coal, then the insurance commissioner will have no alternative but to call the environmental police and have these neanderthals marched off to the local gulag for further re-education. But the little people who refused to divest will only have themselves to blame for their incarceration. The State has more wisdom than all of them put together and should take corrective action when needed. After all, coal is not a politically correct form of energy anyone in any socialist state should use. Our obvious betters have said so, from academia to Hollywood to the halls of the Politburo.
    One must question the sanity of these people who wish to use coal at the expense of the collective.

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