Walter Murphy began his career in the U.S. political world, working as a research analyst at Congress before transitioning to the insurance industry. He spent almost twenty years in the property & casualty market, working for ISO, AIG and QBE in product development and compliance roles. He currently is an Environment, Societal & Governance (ESG) Risk Associate at BMO Capital Markets, where he helps manage ESG risk for the bank’s first line of defense (1LOD).

Praveen Gupta: You recently mentioned that the Florida state fund is now bigger than the private sector as more and more insurers refuse to provide homeowner insurance. Could you expand on that?

Walter Murphy: That’s correct. Florida’s state-run insurance program, which is supposed to be an insurer of last resort, has become the state's largest insurer. Since more and more private carriers have become insolvent or have withdrawn from Florida, Florida Citizens Property Insurance Corp. has become the largest property insurer in the state. It has grown to provide nearly 20 per cent of Florida’s property insurance. Insurance costs have risen tremendously due to the intensity and frequency of hurricanes battering the state, resulting in more carriers to exit the state rather than deal with rising costs. If the state-run program does not have enough funds to cover insurance claims because of hurricanes, then Florida taxpayers must cover the balance.

PG: Given the growing hurricane activity on the Florida coast, is the climate risk exposure only bound to rise?

WM: Indeed. The Atlantic hurricane season starts earlier and ends later due to the warming of the oceans in the Atlantic Ocean as well as the Gulf of Mexico. As you know, this warming of the oceans increases the intensity of the storms and dumps more rain than ever before. Another climate risk exposure that is particular to Florida is, of course, the issue of rising seas. Not only are properties that are situated on Florida’s coasts vulnerable, but because Florida is mostly lowland and just above sea level, there is now the threat that as oceans rise, seawater will begin permeating the geology and begin mixing with and polluting the groundwater.

“A recent report by First Street Foundation, a non-profit focusing on climate risk research, found 23.9 million properties in the US are at risk from damaging winds, 4.4 million properties at risk from wildfire, and a further 12 million properties have a significant risk of flooding.”

PG: It does not stop with Florida?

WM: It’s not just in Florida. You will see this in other parts of the country as well. California (wildfires), Louisiana (hurricanes/flooding), Texas (wildfires/hurricanes) are all feeling the stress of climate change and seeing large insurance carriers either dramatically raising rates or have abandoned the marketspace entirely. And it will not be relegated to coastal states. The Midwest is seeing more intense weather events – flooding, tornados, wind, hail – impacting insurance prices. A recent report by First Street Foundation, a non-profit focusing on climate risk research, found that 23.9 million properties in the US are at risk from damaging winds, 4.4 million properties are at risk from wildfire, and a further 12 million properties have a significant risk of flooding.

PG: How much of this is about politics? One impression emerging is that the state regulators do not wish to see the insurance rates going up too fast. And are these rates not profitable enough for insurers to stay in the game?

WM: Politics certainly plays a part in all of this. Insurance is regulated at the state level, so there is an insurance regulator in each state whose main role is to ensure that insurance rates and premiums remain affordable and that there is adequate coverage. Climate change is and will continue to make regulators’ jobs harder and harder. As more frequent and costlier weather events occur, private carriers are being put more and more under strain. And it’s not just the small and medium-sized enterprises. The major carriers are also struggling and rethinking where they want to off coverage.

Take California, for example. In 2023, State Farm, one of the US’ biggest insurance providers, announced it would stop selling new home insurance policies in California due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market. This was due to the devastating wildfires and floods in recent years and the ever-looming threat of a major earthquake. For years, the California Department of Insurance would not allow carriers to price climate risk into their rates. The Department finally had to acquiesce because it could not afford to lose any more carriers to flee the state. It allowed insurance companies to consider climate change when setting their prices, which, of course, raised homeowners rates even higher.

“U.S. insurers currently have approximately $582 billion invested in fossil fuels, including nearly $90 billion in coal alone.”

PG: But then insurers are aiding and abetting climate breakdown by investing in and insuring the fossil fuel business?

WM: Unfortunately, that is still the case. In the United States, the insurance industry continues to support existing and expanded fossil fuel projects with few restrictions in place limiting – or excluding – either. U.S. insurers continue to underwrite polluting projects while making investments in an industry whose continued expansion poses multiple serious dangers to overall economic stability and to insurance services in particular. Many U.S. insurance companies are beginning to limit the scope of coverage they will provide – or pull out of markets entirely – due to their assessments of the likelihood of coming “catastrophic risk” caused by climate change. At the same time, and despite evidence that new and expanded oil, coal, and gas development is incompatible with global climate goals and long-term economic stability, the U.S. insurance industry is continuing to support fossil fuel expansion: U.S. insurers currently have approximately $582 billion invested in fossil fuels, including nearly $90 billion in coal alone.

PG: Not only does the insurance sector need to divest from fossil fuel, but also rethink its operating model – as climate change clearly has disrupted the old way of doing business?

WM: The insurance and reinsurance sectors are facing what many other financial and industrial sectors are facing, and that is the concept of “double materiality”. Double materiality considers both the effects an organization has on the climate and environment and the potential impact of these factors on its financial performance. A double materiality approach recognizes that organizations contribute to, and are affected by, climate change.

The insurance and reinsurance sectors continue to underwrite fossil fuel projects and continue to invest premiums in fossil fuel companies, thereby exacerbating the climate risks (hurricanes, flooding, wildfires, etc.) that directly affect their business. They have and continue to contribute to climate change. In double materiality, the insurance sector is also highly vulnerable to transition risk. As the world accelerates its energy transition pace to move from a fossil fuel-based economy to one run by renewable energy, all those fossil fuel assets that the insurance and reinsurance sector continue to hold and finance become highly vulnerable to becoming stranded assets. Any energy sector asset, be it coal, oil, gas reserves, or fossil fuel power generators, is vulnerable to stranding due to climate factors.

PG: Why aren’t the likes of pollution and biodiversity loss factored as externalities when pricing risks?

WM: I think you are beginning to see more traction when it comes to the plight of biodiversity loss and what it not only means for the insurance sector but for humanity in general. Deforestation, land-use change, overfishing, pollution, climate change and the introduction of invasive alien species have resulted in biodiversity losses. One million known species could go extinct within decades. At the same time, more than half of the world’s economic output depends either highly or moderately on nature and its benefits, such as fertile soils, food supply, clean water, climate control, erosion prevention and flood control.

“The potential economic loss from the biodiversity crisis is driving a need for insurers to better assess related risks.”

The Taskforce on Nature-related Financial Disclosures (TNFD) has really tried to bring more attention to the biodiversity crisis and how the insurance sector can price biodiversity into its risk models. The success of insurance underwriting always lies in the proper pricing of risk. The potential economic loss from the biodiversity crisis is driving a need for insurers to better assess related risks.

PG: This is an election year in the US. How would the political outcome influence the way insurers behave?

WM: Biden good, Trump bad. At the federal and international level, the presidential election will have tremendous bearing on the future of U.S. climate policy. As I indicated earlier, since insurance is regulated at the state level, it’s the down ballot elections that matter more – insurance commissioner, state legislature, governor. But I am not sure politics is really the main influencer when it comes to financial institutions and insurance companies turning away from fossil fuels. 

Policy and regulations certainly do have an effect, but I think change is being driven more by economics and by choices being demanded by society. More people than ever believe that humans have affected the climate and are buying products and investing more of their money into green and sustainable products and services. Most renewable energy is now cheaper than or on par with fossil fuels and is getting cheaper every year. Economics and society are accelerating the transition. Pro-environment governments and their aggressive climate policies certainly would be welcome.

PG: ESG does not get even lip service. Any prospects for moving the needle there?

WM: Well, in America, ESG was all the rage until Republicans heard about it. Then ESG became a dirty three-letter word as a symbol for being “woke”, and it has become Republicans’ bogeyman. As you know, a considerable amount of anti-ESG legislation has been introduced throughout the country, and some of it has been signed into law in “red states”. We’ve also seen the abuse of the term – products and financial services listed as “green” or “ESG-friendly”, which has led to a considerable rise in claims of greenwashing. 

Ultimately, I think the principles of ESG will continue to be touted and incorporated in financial institutions and the insurance industry simply because they are values that are proven to increase financial, societal, and environmental impact as well as ensure long-term competitiveness. In fact, I think ESG considerations are becoming more – not less – important in companies’ decision-making simply because more of society is insisting upon these values and insisting that they be incorporated into companies that they work for and interact with in their daily lives.

PG: Many thanks Walter for these fantastic insights. It is really critical that the U.S. sets its house in order on the Climate and Bio-diversity front. I quite agree with you that your insurers cannot continue underwriting polluting projects and making investments in an industry whose continued expansion poses multiple serious dangers to overall economic stability and to insurance services in particular.