Climate Change Impact on the Insurance Industry and Allianz
The insurance industry is one of the largest global industries (EUR 3.5 trillion as of 2015) and accounts for 5.7% of global economic output.  Allianz Life Insurance (“Allianz”) is one of the oldest and most reputable global providers of insurance products and has over 85 million customers in 70 countries.  In its essence, insurance is a risk management tool used to hedge against the risk of an uncertain loss in the future and as such it is very susceptible to any developments that fundamentally increase the risk profile of the underlying assets that are being insured. Therefore, as one of the largest players in the space Allianz is particularly exposed to the impact of environmental trends in a couple of different ways.
On the one hand, global warming is affecting Allianz’ life insurance business because increases in global temperatures are leading to an uptick in death rates and life insurance claims.  On the property insurance side, rising sea levels are likely to contribute to increased property losses  and commercial liabilities are also expected to increase as consumers start to hold businesses accountable for climate changes. As losses increase, weather-related claims on previously purchased insurance instruments will increase as well over time , as evidenced by the trends in the last couple of decades (see Exhibit 1).
Exhibit 1. Trends in (A) global numbers of weather-related events and (B) insured share from 1980 to 2004. 
This trend of increasing number of weather-related claims will make current levels of insurance and disaster risk management inadequate if droughts, floods, heatwaves and rising sea levels continue to increase at this rate or at an accelerated rate because of greenhouse gas emissions, which is a major threat for the industry.  At an operational level Allianz uses historical data and risk analysis to assess, price and underwrite new insurance policies.  However, climate change is forcing Allianz and other insurance players to re-evaluate that approach. Some of the main challenges that need to be addressed include how to forecast and price the increased amount of risk caused by climate change, how to hedge against new liability exposures, such as increasing number of health claims due to expanded disease ranges, and how to maintain profitability while adjusting product offerings to meet the increased risk profiles of the underlying assets.
The future of Allianz and the insurance industry in a ‘warmer’ world
While climate change is posing significant challenges to Allianz and other insurance companies, it also offers insurance providers like Allianz the opportunity to play a leadership role in the efforts to reduce the impact of climate change by using their risk management expertise to refine their assessment techniques, develop innovative products to cope with this emerging risk and share knowledge and expertise with other organizations and the public to create more awareness.  In the last three decades, Allianz has been working to better understand potential losses from single catastrophes and has created a limit framework for natural catastrophe risk that is reported bi-annually.  Additionally, the company has continued to invest in refining its flood scenario risk models by using simulations and by acquiring global data sets of flood maps. Allianz has also used its expertise in risk modeling to create new products, such as the NatCat bonds, which serve as an alternative to traditional catastrophe reinsurance. Allianz also provides rapid flood maps after instances of natural disasters to immediately assess the impact on the underlying insured assets, which also helps mitigate the impact of the flood in real time. Finally, Allianz has implemented companywide green strategies and has partnered with the World Wide Fund for Nature on a research project to quantify the direct and indirect effects of climate change.
As climate change effects continue to impact individuals and industries using insurance products in the future, Allianz should continue to improve and leverage its rich databases and modeling and simulation expertise to innovate and create better predictive models and insurance risk pricing strategies to account for higher risks. The company can also consider partnering with research institutions to ensure that its forecasting methodology is not only based on historical data but also expected future metrics (storms, floods, etc.), which will more accurately reflect the expected variability in underlying risks relative to Allianz’ current portfolio.
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