ESG Exclusions in Reinsurance Treaties: Closing the Gap

ESG Exclusions in Reinsurance Treaties: Coal, Oil Sands and the Cedent's Underwriting Gap

Last reviewed: November 2026

ESG exclusions in reinsurance treaties are clauses that remove specified activities, such as thermal coal mining, coal-fired power generation, oil sands and Arctic energy exploration, from treaty cover. The cedent can still write those risks, but any loss on them falls outside the treaty.

When a cedent's underwriting appetite is wider than its treaty cover, it creates an underwriting gap. Risks inside that gap sit on the cedent's net account, often without anyone deciding that they should.

This guide is for CUOs, heads of outwards reinsurance, energy and property underwriters, and CROs at cedents, and for treaty underwriters drafting exclusions. It covers how the exclusions work, where gaps form and how to close them.

Key Takeaways

• ESG exclusions remove specified fossil fuel activities from treaty cover, but do not stop the cedent writing them.
• The underwriting gap is the difference between what the cedent may write and what its treaties cover.
• Exclusions usually rely on thresholds and dates, so the same client can be inside or outside cover depending on its revenue mix and the policy date.
• An exclusion in one treaty but not another shifts loss between panels, changing the inuring calculation.
• Market positions are diverging, so exclusions now vary more by reinsurer and region than they did a few years ago.
• The fix is operational: capture, screen, route and reconcile every exclusion in the underwriting workflow.

What Are ESG Exclusions in Reinsurance Treaties?

ESG exclusions are treaty clauses that exclude losses arising from policies covering defined environmental, social or governance-sensitive activities. In practice, most target carbon-intensive energy: thermal coal, oil sands and Arctic exploration.

They sit alongside traditional exclusions such as nuclear, war and communicable disease. The difference is that ESG exclusions are driven by reinsurers' own sustainability policies rather than insurability.

What Activities Are Usually Covered?

Exclusion wordings vary, but four activity groups appear most often. Each wording defines its own scope, so the list below is a guide, not a standard.

1. Thermal coal mining, often defined by a share of the client's revenue or production.
2. Coal-fired power generation, often defined by a share of generation or capacity, or by new plant construction.
3. Oil sands extraction and related infrastructure.
4. Arctic energy exploration, usually defined by a geographic boundary.

Some reinsurers extend exclusions to new oil and gas fields, controversial weapons or other activities. Others apply none.

Why Do Reinsurers Add Coal and Oil Sands Exclusions?

Reinsurers add these exclusions to align their underwriting with their published climate and sustainability commitments. Stakeholder, investor and reputational pressures have all played a part.

The trend accelerated around 2020 to 2022. Lloyd's, for example, announced in 2020 that it would ask the market to stop providing new cover for thermal coal, oil sands and new Arctic energy exploration from 2022, with a phase-out target for existing cover by 2030.

The picture has since become more mixed. Later Lloyd's guidance left policies to individual managing agents, and in 2025 its new leadership was reported to be giving the market more freedom on fossil fuel underwriting.

The Net-Zero Insurance Alliance, which had brought many insurers and reinsurers together on climate targets, was discontinued in April 2024 after major members left. UNEP replaced it with the Forum for Insurance Transition to Net Zero.

For cedents, the practical consequence is variation. Two reinsurers on the same panel can now have very different exclusion wordings, or none at all.

How Are ESG Exclusions Typically Drafted?

Most ESG exclusions combine an activity definition, a threshold and a date. The detail in each element decides whether a specific policy is covered.

The threshold is often where disputes start. A utility with a falling coal share can move from excluded to covered, or the reverse, depending on which year's figures apply.

What Is the Cedent's Underwriting Gap?

The underwriting gap is the set of risks that the cedent's guidelines allow but its treaties exclude. Every policy in that gap is a net risk unless separate reinsurance is bought.

Gaps form in three common ways. Each one can exist without any underwriter breaking the rules.

1. Appetite mismatch. The cedent's energy strategy allows coal-exposed clients, but one or more treaty panels exclude them.
2. Wording mismatch. Different treaties in the programme use different thresholds, dates or definitions.
3. Data mismatch. The underwriting system does not hold the revenue or generation data needed to test the threshold.

Gaps also matter for reinsurance programme leakage. An excluded risk written without a flag looks covered in management reporting until a loss arrives.

Worked Example: How One Exclusion Changes the Net Loss

The illustration below is simplified and uses USD millions. It shows how a single exclusion changes the net loss and shifts loss between panels.

Programme: a 50% property quota share, with a per risk excess of loss of 18 xs 2 protecting the cedent's retained share. Per risk recoveries are calculated on the net after the quota share.

Risk and loss: a diversified utility site that includes a coal-fired unit. A fire causes a covered loss under the policy of 30.

In Scenario A, the cedent retains only its 2 per risk retention. In Scenario C, the same loss sits entirely on its net account, a difference of 28.

Scenario B is the subtle one. Because the quota share exclusion removes an inuring recovery, the per risk panel pays 18 instead of 13, which is 5 more on the same loss.

The lesson for cedents: an exclusion's cost is not just the gross loss on excluded risks. It is the change in net loss across the whole inuring structure, and it can exceed the cedent's appetite on a single event.

The lesson for reinsurers: an exclusion on a treaty beneath you can increase your loss. Per risk and cat underwriters should ask which ESG exclusions apply in the inuring treaties, not only in their own wording.

When Should a Cedent Accept, Negotiate or Work Around an Exclusion?

The right response depends on how much excluded business the cedent writes and how central it is to its strategy. The table maps common situations to the usual response.

The aim is to make the net exposure a deliberate choice. The worst outcome is an unmanaged gap that nobody chose.

Which Mistakes Turn an ESG Exclusion Into a Net Loss?

Six mistakes turn ESG exclusions into unexpected net losses. Most are process failures rather than drafting failures.

How Should Cedents Operationalise ESG Exclusions?

Cedents should turn each exclusion into data fields and rules that run at quote, bind and renewal. The table lists the data needed.

Implementation Steps

1. Extract every ESG exclusion from all treaties into structured fields, including thresholds and dates.
2. Compare the exclusions with underwriting guidelines and publish the gap to underwriters.
3. Add screening questions and data fields at quote for exposed sectors.
4. Route flagged risks to a referral workflow that offers facultative, special acceptance or decline.
5. Tag excluded risks in the policy system so ceded premium and claims are calculated correctly.
6. Reconcile excluded risks and net exposure each quarter and report to the CUO and CRO.

Tagging also prevents ceded premium leakage, where premium for excluded risks is wrongly ceded or wrongly retained. For energy-specific context, see our guide to onshore energy reinsurance and transition risk.

How Do Regulators View ESG Exclusions and Climate Risk?

Regulators generally do not mandate ESG exclusions. They do expect insurers to understand and manage climate-related risks, including how their reinsurance changes net exposure.

In the UK, the PRA published SS5/25 in December 2025, replacing its 2019 supervisory statement on climate-related financial risks. It sets expectations for governance, risk management, scenario analysis and data, with a chapter specific to insurers.

The IAIS has also published supervisory material on climate risk for insurance supervisors. For cedents, the practical point is that an unmanaged underwriting gap is a risk management weakness, whatever view the firm takes on fossil fuels.

Capital models should reflect the net position. If excluded risks are retained, the catastrophe and large-loss scenarios that feed capital and the ORSA should include them on a net basis.

What Is the Market Context in 2026?

The market has moved from broad alignment towards divergence. Some reinsurers maintain or tighten fossil fuel exclusions, while others have relaxed them or never adopted them.

Political pressure in the United States has pushed some firms to step back from collective climate commitments. In Europe and the UK, supervisory expectations on climate risk management continue to develop.

For cedents, this divergence creates both risk and opportunity: panels can be built that cover more of the book, but only if wordings are tracked precisely.

Capacity for fossil energy risks is discussed further in our guide to oil and gas reinsurance and fossil capacity.

Checklist for CUOs and Heads of Outwards Reinsurance

Use this checklist before renewing any treaty with ESG exclusions.

• Every ESG exclusion across the programme is captured with its definitions, thresholds and dates
• Underwriting guidelines are aligned to the exclusions, or the gap is documented and approved
• Threshold data is captured at quote for every exposed sector
• Group and entity-level wording is tested, not just the named insured
• Excluded risks route to facultative, special acceptance or decline through a referral workflow
• Inuring calculations reflect exclusions consistently across quota share, per risk and cat treaties
• Net exposure from excluded risks is reported to the CRO and included in capital scenarios
• Renewal and phase-out dates are diarised against affected policies

Key Terms

ESG exclusion: A treaty clause removing policies covering defined environmental, social or governance-sensitive activities from reinsurance cover.

Underwriting gap: The set of risks a cedent's guidelines allow but its treaties exclude, which are retained net unless separately reinsured.

Revenue threshold: A test that applies an exclusion when a client earns more than a set share of revenue from an excluded activity.

Grandfathering: Continued cover for existing clients or policies for a period after an exclusion takes effect.

Carve-back: Wording that restores cover for a defined activity within an exclusion, such as renewable or transition projects.

Special acceptance: Agreement by treaty reinsurers to cover a specific risk that would otherwise fall outside the treaty.

Inuring reinsurance: Reinsurance whose recoveries are deducted before another treaty responds, such as a quota share inuring to a per risk XoL.

Net retention: The part of a risk or loss the cedent keeps after all reinsurance recoveries.

Sources

• SS5/25 Enhancing banks' and insurers' approaches to managing climate-related risks, Bank of England (PRA)
• Forum for Insurance Transition to Net Zero, UNEP Finance Initiative
• Climate risk, International Association of Insurance Supervisors