Editorial: California Insurance Commissioner’s Divestment Rationale “Doesn’t Pass the Laugh Test”

The push to inject politics into investment decisions has spread beyond just pensions and has permeated to other sectors as well. Most recently, 13 state officials signed onto a cease and desist letter to California Insurance Commissioner Dave Jones, who has used his position to pressure insurance companies to divest from traditional energy assets.

The editorial board of The Oklahoman spoke out against the initiative as well, explaining just why the Mr. Jones’ crusade is harmful to consumers far beyond the borders of California:

(…) insurance companies invest part of the money they collect in premiums. State insurance regulators take those earnings into account when determining if an insurer’s rates are sufficient to cover customers’ claims. (…)

Insurance companies with a diversified portfolio of investments are less likely to face wild swings in earnings, which benefits consumers by facilitating stable rates.

That’s where Jones’ divestment strategy becomes problematic, because he is expressly urging insurance companies to have a less-diversified portfolio.

The board also criticized the very idea of using divestment, arguing that the tactic would only lead to higher insurance premiums:

In 2015, Bradford Cornell, a professor at the California Institute of Technology, authored “The Divestment Penalty: Estimating the Costs of Fossil Fuel Divestment to Select University Endowments.” Cornell concluded fossil fuel divestment would cost Harvard University’s endowment $108 million annually. At Yale, the impact was $51 million and at MIT, $18 million.

There’s no reason to think similar divestment efforts would not have similar negative impact on insurance companies’ earnings. And those lower returns would ultimately require higher premiums from consumers.

Read the full editorial here.

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