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.”