Governance by Insurer

A not so hypothetical question:

How would you like to run your company with no insurance on your activities? Your firm and owners/officers would be fully liable for any problems that arise.

Want to see a CEO panic?

Yes, we have activist judges, but we also have activist insurance companies.

Why are NFL owners spending on research into new helmet designs? The story is they got down to a single insurer that was willing to write health insurance for players, and that insurer threatened to walk. Fix the helmets or you pay out of pocket for your players’ healthcare costs. There are in fact ways for major league sports teams and owners to go bankrupt.

Lloyds of London is the dining room in the House of Risk. This is where people with exceptionally large and expensive risks go to get coverage from private investors. It’s where insurers go to spread some of the risks they have taken (reinsurance) when a bad result could put them out of business. Companies and some wealthy individuals bring their risks to the table, and hope that investors will feast. Got an oil tanker in the Strait of Hormuz? Passengers on a flight to Mars? A new medical technology that will either cure cancer or blow up half of the world? It’s all about Lloyd’s.

This week, Lloyds essentially announced the end of the coal industry as well as much of the oil industry.

Lloyd’s of London is ending investment in thermal coal-fired power plants, thermal coal mines, oil sands, and new Arctic energy exploration activities as part of its sustainability targets.

My interpretation of “ending investment” is that they will cease investing and writing insurance for these industries. If that’s true, it will mean the costs of these activities will become prohibitively expensive. (If one thinks about it, there’s really little difference between investing in a stock and taking a bet that an oil tanker won’t sink. In both cases, one is putting money at risk in the belief that the operator of the business will be diligent and careful. And then you write the agreement carefully to exclude risks that are unforeseen and quite unpredictable, the so-called “acts of God.”)

LLoyds is doing an orderly wind-down of this business, and no new policies or investments will be undertaken beyond 2025.

So, it doesn’t matter if Trump offers oil land leases in Alaska if no one can afford to operate there.

Insurers are unafraid to go where politicians fear to tread.

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