Allianz: Insuring Both Sustainability and Resilience
Allianz, the global insurer, has led the way in promoting clean energy to mitigate climate change, but now it must focus on its core competency by creatively reducing climate-related vulnerabilities.
Allianz is the world’s largest insurer, with operations in 70 countries and tens of millions of clients worldwide. The company exists to provide households and businesses with financial protection against major risks. Climate change stands to increase the frequency and intensity of high-impact events, and as such, is massively impacting Allianz and the industry. Whether Allianz can continue to weather this storm depends on its ability to leverage all its business lines toward risk reduction.
Climate change and insurers
Allianz provides property, casualty, and liability insurance. Although it is impossible to disentangle the “cause” of individual weather events[i], trends associated with climate change have likely disrupted and will likely continue to affect[ii] every segment of the business:
- life insurance costs will go up if death rates—from heat waves, infectious diseases that are more easily spread as temperatures rise, and other causes—increase among insured people;
- property losses will continue to rise, causing insurers to pay for both direct damages—ranging from flooded homes to wind-destroyed buildings to decimated agricultural land—as well as temporary housing for individuals or loss of income for businesses;
- commercial liabilities (or even just legal costs) may be incurred as shareholders and consumers file lawsuits against companies, blaming them for their environmental impacts.
Almost a decade ago, Allianz projected that climate change “stands to increase insured losses from extreme events in an average year by 37 percent within just a decade.”[iii] Some estimate that climate-related losses in a bad year in the U.S. could top $1 trillion; Allstate claimed that losses from Gulf Coast hurricanes in the last decade wiped out 75 years worth of profits.[iv] Going forward, although it is almost impossible to predict the magnitude of potential losses, it is clear that that the increased risks will be substantial.
What is Allianz doing?
Among the first companies to recognize environmental risks and lobby governments for action, insurers have also been among the first to cut back on business due to climate change, reducing coverage in high-risk areas. Others have raised prices, but doing so—to a level commensurate with actual risks—has made their products unaffordable, shifting the burden to cheaper government programs and thus distorting the market away from developing real adaptive solutions.
The Financial Stability Board and national financial regulators have forced insurers to consider climate risks. The aftermath of Hurricane Katrina led to an increase in the capital adequacy ratio insurers like Allianz must maintain, guaranteeing they can withstand losses associated with a 250-year event (rather than a 100-year event), and that they can withstand two such events in quick succession.[v] These changes have helped bring upfront some future costs, but have not forced enough action on the risk-mitigation front for end consumers.
Allianz Climate Solutions was established to consolidate climate change-related work. It insures renewable energy technologies, mitigating the risk that renewable projects will not generate expected energy. It also incubates climate-related projects across other businesses. The company has released a Climate Strategy regularly since 2005, with the 2014 version focusing on the role the company can play in reducing carbon emissions through its own operations, investments, and financial service activities.[vi] Ceres, a leading sustainability nonprofit, has recognized the company for its innovative solutions and its disclosures of climate-related risks, including elevation of climate discussions to the board room.[vii]
The opportunity for Allianz
Insurers like Allianz have the opportunity not only to promote greenhouse gas reduction, but also to promote risk-reduction measures that benefit both clients and the bottom line. Just as the industry led in addressing risks associated with fires and earthquakes decades ago, Allianz must develop new tools to address increased losses from climate-related events, including:
- financial incentives for improved building and land use practices to reduce the harms from floods and storms. This can help push for better building codes and land use policies at every level of government.
- promote risk-mitigating behavior through the underwriting process for corporate liabilities (following Swiss Re), thus aligning the incentives of corporate executives, the public, and the insurer.[viii]
- microinsurance products for the developing world that insure against climate risks but promote mitigating behavior, e.g., insurance for farmers against crop destruction that encourages farmers to grow more resilient crops.[ix]
While these programs may seem small, insurance companies have long relied on the ability to use their products to promote risk-reducing behaviors. Allianz has taken great strides to mitigate climate change by insuring potentially risky green technologies, and has strengthened its balance sheet to prevent climate-related losses from becoming a financial stability risk. Now, rather than limit exposure to risky areas and groups, it should harness its ability to promote good behaviors in order to help vulnerable populations without breaking its customer promise.
[i] Jay Guin, “Does Climate Change Matter to the Insurance Industry?” AIR Worldwide, 4 February 2016, <http://www.air-worldwide.com/Blog/Does-Climate-Change-Matter-to-the-Insurance-Industry-/>
[ii] Don Pittis, “As Climate Change claims heat up, insurance industry says we need to adapt,” CBC News, 12 May 2016, <http://www.cbc.ca/news/business/fort-mac-climate-insurance-1.3576918>
[iii] Allianz, “Quality Matters: Evaluating the quality of insurance carriers in the oil and gas sector,” 2013. <http://www.agcs.allianz.com/assets/PDFs/Special%20and%20stand-alone%20articles/Energy%20Whitepaper-%20%20Quality%20Matters.pdf>
[iv] Evan Mills, “Responding to Climate Change: The insurance industry perspective,” Climate Action Programme, 2009. <http://evanmills.lbl.gov/pubs/pdf/climate-action-insurance.pdf>
[v] Insurance Information Institute, “Climate Change: Insurance Issues,” September 2014, <http://www.iii.org/issue-update/climate-change-insurance-issues>
[vi] Allianz Group, “Climate Change Strategy,” 2014, <http://acs.allianz.com/files/6014/1570/1222/0314_allianzclimatechangestrategy_eng.pdf>
[vii] Max Messervy and Cynthia McHale, “Insurer Climate Risk Disclosure Survey Report & Scorecard: 2016 Findings and Recommendations,” Ceres, October 2016 <https://www.ceres.org/resources/reports/2016-insurer-climate-risk-disclosure-survey/view>
[viii] Evan Mills, “Insurance and Climate Change: Proactively and Profitably Managing the Risk,” Presentation: Lawrence Berkeley National Laboratory, 2007, <http://evanmills.lbl.gov/presentations/insurance-and-climate.pdf>
[ix] Insurance Information Institute, “Climate Change: Insurance Issues.”
Student comments on Allianz: Insuring Both Sustainability and Resilience
Very nice post Ben. I also wrote about an insurance company and was surprised to see how little the industry is doing to address this state of increased risk. The consensus seems to be that these extreme events are rare, and weather models are not predictive beyond the very short term. Thus, pricing the risk is very hard. That being said I don’t see this being a huge problem, as they can always respond with higher premiums and higher capital adequacy ratios as you mentioned. Warren Buffett himself told investors not to lose sleep over the effects of climate change on his own insurance business. Rather than passing the risk on the consumers, I imagine insurance companies can strengthen their image by providing premium incentives for households that invest in clean energy while underwriting insurance for clean energy technologies. Climate change, at least for now, is good business for the insurance industry.
I really enjoyed reading your post, Ben. Allianz is a really fascinating case of a company exposed to climate change from various different angles. As you pointed out, the P/C business lines of an insurance company are classically the first to get direct climate change exposure in the form of hurricane/flood/storm related insurance coverage with probability distributions likely to change in the future, thus making underwriting a very intricate part of the business. On the positive side, the company has a chance to benefit from climate change related risks which will necessitate new types of insurance coverage in the future. Prime examples for this would be crop insurance to protect against higher levels of volatility (and higher levels of expected losses) across harvest yields as you mentioned in your post, but also coverage for the emerging (and fast growing) renewable energy sector. Allianz’ subsidiary “Allianz Global Corporate & Specialty (AGCS)”, a specialty insurance company with HQ in Munich and a US location in Chicago, leverages Allianz’ global network and immense technical knowledge to provide insurance solutions among others for wind and solar energy providers (e.g. environmental liability coverage, insurance against mechanical failures, transport insurance, etc.). In addition to that they also provide consulting services for the latter product category, essentially diversifying their business across new business lines. All in all, I would therefore disagree that their climate change related product offerings are small.
Another aspect that should be kept in mind is that Allianz is one of the largest investors worldwide, owning asset management companies, such as PIMCO and Allianz Global Investors, as well as managing their own portfolio of currently more than EUR 600bn. Allianz has been a thought leader on ESG related investment topics and has been one of the first insurance signatories for the United Nations Principles for Responsible Investments. They are the leader among insurance companies on the Dow Jones Sustainable Index and have dedicated in-house investment teams focusing on real assets, such as renewable energy and infrastructure. This is evidence that Allianz has successfully managed to turn climate change into an opportunity while at the same time taking action to ensure that their traditional P/C insurance business will be ready for and resilient against the impact of climate change in the future.