AIG – In the Wake of Climate Change
AIG's property casualty insurance arm has been significantly impacted by climate change in recent years. This article will talk about how they are impacted and what are the steps they take to mitigate the risk.
American International Group, also known as AIG, is a multinational insurance company with more than 88 million customers in 130 different countries. Their core business lines include insurance on property casualty for both industrial and individual customers, life insurance and mortgage underwriting. Out of all the three lines of business, there has been growing concerns with the impact of global climate change on the property casualty insurance.
According to Allianz, Europe’s largest insurer, insured losses due to natural disasters have increased 37% during the past decade. Much of which can be contributed to the climate change, and the loss during an extreme condition can be as high as 1 trillion USD for the entire industry. There is increasing scientific evidence that supports the premise that extreme weather events are increasing in frequency and intensity, and will only grow more pronounced in the foreseeable future. According to AIG, property casualty insurers were exposed to over $100 billion US dollars in global disastrous losses and insurance payments related to climatic event have increased fifteen-fold from thirty years ago.
As a matter of fact, AIG’s property casualty has already undergone losses due to the higher frequency of natural disasters. The firm recognizes that climate change is the root cause of the profit declining and measures, other than financial risk hedging, need to be conducted in order to fully “weather-proof” the company. Below are a few actions that AIG has taken towards mitigating the impact from climate change:
AIG Global Investment Group, through impact investing, allocated additional private equity investment to projects, technologies and other assets that contribute to greenhouse gas emission mitigation. For example, AIG real estate arm invested in the development and acquisition of several major building complexes that are of U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) standards. AIG also co-developed building complexes from formal contaminated land.
AIG also developed Clean Development Mechanism (CDM) and Joint Implementation (JI) projects in developing countries to earn carbon credits that are recognized by the EU and other emission trading system. This can in turn serve AIG’s client who has compliance issues with carbon emission. AIG added carbon credit to Dow Jones – AIG Commodity Index. By doing so, carbon credit can be more broadly recognized and traded in open markets, which will subsequently benefit the whole society through the generation of carbon credits.
AIG provided innovative insurance products around carbon emission. For example, AIG developed products to insure against the failure of a project to generate tradable carbon reductions. This provides an incentive for companies to engage more in carbon reduction activities. Meanwhile, AIG can hedges out its risk by investing in CDM to earn carbon credits. This creates a virtuous circle of carbon reduction.
In my opinion, these are all great steps towards raising awareness of climate change and protecting the company from being impacted by the environmental change. Another thing that AIG should do is to engage with climate scientist to add more predictive power to the pricing model of insurance. Despite this is a temporary fix, by charging proper premium towards property casualty insurance; AIG will be able to lessen the impact that natural disasters have on the loss of insurance payments. Also, since climate change has a great impact on the insurance industry in general, AIG should consider joining force with the other insurance companies, such as Allianz and Aon, who already realized the important impact of climate change. Together, they can form an partnership that help work with both public and private sectors to raise awareness of the impact climate change has on people’s lives, engaging more actively in impact investing to help environmental sustainable companies such as renewable energies or clean technology. This can be proved to be both profitable and beneficial for the global climate overall.
In all, the growing threat posted by climate change needs to be property handled by the insurance company: from a financial perspective, AIG should properly charge a premium on property casualty insurance. From a long-term sustainable perspective, AIG should join force with the rest of the industry, work with public and private sectors to help reduce carbon emission and utilize innovation to create a more “weather-proof” insurance company.
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References
Mills, E. (2007, January). Responding to Climate Change — The Insurance Industry … Retrieved November 4, 2016, from http://evanmills.lbl.gov/pubs/pdf/climate-action-insurance.pdf
(February). AIG Policy and Programs on Environment and Climate Change. Retrieved November 4, 2016, from http://media.corporate-ir.net/media_files/irol/76/76115/aig_climate_change_updated.pdf
Climate Change: A Call for Weatherproofing the Insurance … (April). Retrieved November 4, 2016, from http://www.aig.com/content/dam/aig/america-canada/us/documents/business/industry/ipg-real-estate-climate-change-paper-brochure.pdf
AIG – Address the Impacts of Climate Change (2003 – 2004) | Trillium Asset Management. (n.d.). Retrieved November 04, 2016, from http://www.trilliuminvest.com/shareholder-proposal/address-the-impacts-of-climate-change-aig/
Great article. I believe it is now mandatory for all new developments to be LEED or BREEAM (http://www.breeam.com/) compliant. Do you think this changes your assessment of AIG’s efforts to protect itself from the risks of climate change?
Great read on how climate change can inherently change business models, even of financial services businesses that do not have a manufacturing component that causes a significant direct carbon footprint. It seems to me that AIG is compensating for losses in its P&C insurance businesses and responding to climate change primarily through the investment, CSR and knowledge dissemination arms of its business, instead of rethinking how its insurance products are underwritten. I 100% agree with your recommendation that a big focus for them needs to be on the improving the predictive risk models – however, given that historical data no longer seems like a strong predictor of extreme tail events, I wonder whether the industry as a whole needs to reduce reliance on these models.
This post is pretty eye opening – I haven’t thought that climate change could have such profound impact on insurance industry. Given climate is becoming increasingly volatile and hard to predict, I am wondering if AIG should limit its exposure in some certain industries or countries which could be easily impacted by changing climate. This approach would definitely make AIG more “weather-proof” than before, but would also limit its business and sabotage certain client relationship they have developed for years. I believe the better way to encounter climate change issue is to innovate insurance product, and provide more product to hedge climate risks.
It’s very interesting aspect of financial services that you brought up here Grace. I didn’t think about how global warming affects a seemingly far-fetched industry like insurance but the consequence is real! Coupled with global warming, it’s becoming increasingly more difficult to forecast location, magnitude and timing of natural disasters. The initiatives that AIG is promoting are great but it wouldn’t deliver meaningful and timely impact on AIG’s bottomline. I wonder whether AIG will have to change their business model and pricing model for this type of insurance?
I am not surprised that the frequency and magnitude of extreme weather insurance payouts is increasing given the rise of global warming. You mentioned ways that AIG is trying to reduce greenhouse gases through their own captive investment managers. However, one quick fix to the increased likelihood and quantum of payouts is to raise premiums. Has this happened at AIG? It seems that would be a natural response to what is happening in their business.
Very interesting post on the financial impact of climate change. I agree with your idea of charging proper premium towards property casualty. There is a supporting example in Japan, where earthquake is a growing threat. Japanese large insurance companies have collectively increased their premium for earthquake insurance; in July 2014, they increased by 15.5% on average, and are planning to increase by 5.1% on average in January 2017. Although it is not an example of climate change’s impact, it demonstrates that charging a higher premium is an appropriate way for insurance companies to deal with national disasters. However, one concern about rapidly increasing the premium is the potential risk of losing customers, which is currently discussed in Japan. Therefore, I think steps towards “educating” consumers and raising awareness of climate change, as mentioned in the article, are very important to retain its customers.