The insurance industry is poised to be one of the major industries most effected by climate change. Insurance companies are paid to bear risk and many of the insurance policies that they hold are becoming increasingly risky as a result of the effects of climate change, including more powerful storms and rising sea levels. Over two decades ago, the then president of the Reinsurance Association of America was quoted to say “It is clear that global warming could bankrupt the industry.”1 Today, we are presented with meaningful examples of the financial threat to insurers with mega-storms like Hurricane Sandy and other natural disasters “generating $35 billion in privately insured property losses” in 2012.2
Allstate Insurance is the second largest property casualty insurer in the US, with $24.8 billion in net premiums written in 2013.3 In 2015, Allstate wrote 6.5 million homeowners insurance policies on privately owned property.4 Separately, Allstate estimates its agencies have “approximately $1.3 billion of non-proprietary personal insurance premiums under management, primarily related to property business in hurricane exposed areas.”5 Going forward, what are the risks and opportunities of climate change for a major insurance player, like Allstate? What is Allstate doing now and what future actions will it take to address climate change?
Climate Trends and Liability
Climate change threatens insurance companies’ fundamental business model for property insurance. The business model consists of insurance companies assessing the risk on a property, in terms of consequences and probability of particular events, and then calculating a price for the insurer to assume the risk for the customer. Embedded in that price are assumptions about how much the insurer will need to pay out to all policy holders over time.
Stated plainly, climate change affects the costs incurred by Allstate to support insurance policies. Climate change increases the consequences and probability of property damage, thus impacting the significant portion of Allstate’s business which involves writing casualty insurance policies.
As shown below, the amount of insured catastrophic losses in the US over the last 25 years reflects increasing volatility with the most extreme spike in 2005 for Hurricane Katrina with $75 billion of losses and then $30+ billion of losses in each of 2008, 2011, and 2012.6 The graph below shows increased frequency and expense of catastrophic events in the US that may not have been accounted for in prior risk assessments. These losses suggest that some meaningful portion of Allstate’s 6.5 million homeowners policies have and will be effected by changing conditions.
Allstate has adapted its policies in response to the effects of climate change in recent years. However, the insurance industry as a whole has been relatively slow to adapt to climate change, despite its serious impact and long term awareness of the issue. Allstate produced a corporate responsibility policy that states “Climate change could pose considerable challenges to the insurance industry due to increased volatility and frequency of extreme weather, and the effect it could have on pricing and availability of insurance products.”7 Allstate’s overall strategy includes short and long term items that fall into a few specific categories:
- Restricting or denying policies in vulnerable geographies: Allstate is seeking to minimize its risk by limiting exposure to areas where weather is expected to become increasingly extreme, specifically stating that Allstate is “continuing to restrict new homeowners business in certain geographic areas [. . .].”5 The effects of these practices are already manifesting themselves in the market with Allstate “canceling or failing to renew policies in many Gulf Coast states because of the risk of hurricane damage.”8
- Raising premiums and introducing new deductibles: In order to compensate for the costs associated with increased probability and severity of climate change related consequences, Allstate is taking actions like raising premiums (increase the amount it takes in annually) and “implementing tropical cyclone and/or wind/hail deductibles where appropriate,”5 (decreasing the required payout when such events damage insured property).
- Purchasing reinsurance: Allstate is “purchasing reinsurance for specific states and on a countrywide basis for personal lines of property insurance in areas most exposed to hurricanes.” Reinsurance (effectively insurance for insurance companies) is a product that insurance companies can purchase in order to provide additional risk protection on the policies they hold.
Going forward, Allstate will need to continue to build upon the actions it is already taking and expand their efforts to protect the company and customers. Specifically, Allstate will need to constantly reevaluate and update their risk assessment models to adapt to new data and information about the state of climate change and ensure adequate pricing strategies. Additionally, Allstate should consider introducing strengthened financial incentives (e.g., lower premiums and deductibles) to help change customer behavior and encourage customers to invest in fortifying their properties against the impacts of climate change. (798 words)
Footnotes / Sources
 Los Angeles Times. 2014. “How the insurance industry sees climate change – LA Times,” http://www.latimes.com/opinion/op-ed/la-oe-linden-insurance-climate-change-20140617-story.html, accessed 03 November 2016.
 Eduardo Porter. 2013. “Insurers Stray From the Conservative Line on Climate Change – The New York Times,” http://www.nytimes.com/2013/05/15/business/insurers-stray-from-the-conservative-line-on-climate-change.html, accessed 04 November 2016.
 Investopedia. 2016. “Top 10 Insurance Companies By The Metrics | Investopedia,” http://www.investopedia.com/articles/active-trading/111314/top-10-insurance-companies-metrics.asp, accessed 03 November 2016.
 The Allstate Corporation Notice of 2016 Annual Meeting, Proxy Statement and 2015 Annual Report, p. 108.
 CDP, Climate Change 2015 Information Request, Allstate Corporation
 Insurance Information Institute. “Catastrophes: U.S. | III,” http://www.iii.org/fact-statistic/catastrophes-us, accessed 03 November 2016.
 Allstate Corporate Responsibility | Climate Change. 2016. “Allstate Corporate Responsibility | Climate Change,” http://corporateresponsibility.allstate.com/environment/climate-change, accessed 03 November 2016.
 Richard Lou, et al., Municipal Climate Adaptation and the Insurance Industry, Emmett Environmental Law & Policy Clinic, Harvard Law School, Cambridge, Mass.: April 2012, p. 11.