AVIVA: AN INSURANCE COMPANY’S RESPONSE TO CLIMATE CHANGE
IN ASSESSING AVIVA'S RESPONSE TO CLIMATE CHANGE, I WAS SURPRISED TO LEARN THAT THE COMPANY'S (AND THE OVERALL INDUSTRY'S) RESPONSE HAS BEEN TO CONDUCT BUSINESS-AS-USUAL. MY POST ADDRESSES SOME OF THE WAYS AVIVA CAN ADDRESS INSURANCE PROFITABLY WHILE REMAINING A CHAMPION OF CLIMATE CHANGE.
For this challenge I wanted to choose an insurance company due to a genuine interest in how the industry is adapting to the rising threat of climate change and what that means for their process of risk underwriting. Aviva initially stood out to me as being the most progressive in their stance towards this issue. Aviva is a British multinational insurance company that offers savings, retirement, insurance, health and asset management products and services. While Aviva has aptly developed a strategic climate change strategy towards its asset management operations, it is also committed towards its own impact on the issue at hand. Recognizing the need to also directly combat climate change, Aviva has joined the RE100, a global initiative comprising 81 business committed to 100% renewable energy. Clearly, Aviva has already adapted to changing climate trends and recognized risks and potential upswings to their operations. To my surprise, however, Aviva has not significantly altered its insurance operations to strengthen its market position and has vast room for innovation in this space.
Climate change has myriad impacts on Aviva’s business model. The first is in Aviva’s asset management operations. In order to sustain and grow the pool of capital necessary to fund future insurance claims and benefits, Aviva makes diversified investments that integrate climate risk. Aviva maintains this commitment through continuous research and measurement –they regularly conduct carbon footprinting on sample portfolios. Additionally, Aviva uses its shareholder position to transition portfolio companies “to a lower carbon future” and “divest highly carbon-intensive fuel companies” (Aviva).
The second impact of climate change is in Aviva’s insurance business, in which the company serves 33 million customers and pays approximately £31 billion each year for claims and benefits related to life, general (auto, home, commercial, accident, and health insurance. It is well known that rising global temperatures resulting from human activity have contributed to widespread variation in global weather patterns. Notable patterns in include temperature extremes (2000-2009 had twice as many record high temperatures as record lows), increases in tropical storm activity, and increased frequency and magnitude of flooding in one area matched by droughts in other areas (EPA). Anticipated climate change effects specific to Britain include higher frequencies of droughts and flooding, which can in turn lead to decreased crop yields and higher food prices affecting nutrition of vulnerable populations (Parkinson). Extreme weather events can present a large financial risk to insurance companies, especially when using outdated or miscalculated assumptions of risk. In 2012, U.S. weather-related insurance losses surpassed $165 billion, which was well-above the 10 year average (Silverstein). According to a major European insurer, climate can increase insured losses from extreme weather events up to 37% within ten years. Some insurance companies, particularly the U.S. have accounted for the rise in catastrophic events through risk adjustment strategies. These include cancelling or failing to renew policies in Gulf Coast states, cutting homeowner policies in Florida, raising deductibles and creating new exclusion criteria. To my knowledge, Aviva surprisingly has not delineated any comprehensive strategy on adjusting its insurance business in the context of climate change. In the company’s most recent 16-page “Strategic Response to Climate Change,”Aviva’s only mention of their insurance business refers to sustainable claims settlement practices such as energy efficient white goods replacements and increased restorations rates. Aviva will also provide insurance for renewables infrastructure, such as residential solar systems and micro-hydro turbines and wind farms (Aviva).
While it was surprising to see that Aviva’s response to climate change was to simply offer high efficiency dish washers and to sell newer insurance vehicles, upon more research the answer became readily apparent: Despite increasing severity of catastrophic weather events, insurance companies cannot predictably price that risk according to current climate change models. This is due to the technical challenge of forecasting events beyond the near term and the fact the most insurance contracts are year-to-year (McCann). Despite these challenges, I believe Aviva can leverage the threat of climate change in order to generate more profit centers while maintaining a positive brand image with consumers. Aviva can collaborate with climatologists to develop accurate forecasting in order to better manage and price risk within their policies. An additional innovation in their traditional insurance business would be to extend policy lengths in order to capture and mark up the risk associated with catastrophic events. Aviva can also create new insurance products related to the eco-industry, including underwritings for green buildings and carbon sequestration projects (Mills). By taking on new business and providing incentives for its customers to reduce their carbon footprint (i.e., lower premiums for hybrid cars, solar panel installation), Aviva can solidify its commitment to climate change, create new revenue streams in the midst of higher risk, and reinforce its brand image and reputation with consumers.
LITERATURE CITED
“Climate Change Indicators: Weather and Climate. ” https://www.epa.gov/climate-indicators/weather-climate
Mills, Evan. “Responding to Climate Change: The Insurance Industry Perspective.” http://evanmills.lbl.gov/pubs/pdf/climate-action-insurance.pdf
McCann, David. “Hot Topic: Climate Change and Insurance.” 23 Mar. 2016. http://www.forbes.com/sites/kensilverstein/2014/05/18/rift-widening-between-energy-and-insurance-industries-over-climate-change/#372e3e9675ee
Parkinson, Justin. “Five Ways Climate Change Could Affect the UK.” BBC News. 9 Dec. 2015. http://www.bbc.com/news/magazine-35037983
“RE100.” http://there100.org/re100
Silverstein, Ken. “Rift Widening Between Energy and Insurance Industries Over Climate Change.” 18 May 2014. http://www.forbes.com/sites/kensilverstein/2014/05/18/rift-widening-between-energy-and-insurance-industries-over-climate-change/#372e3e9675ee
It’s interesting how Aviva has chosen to address climate change on the periphery of its business, i.e. investing in renewable energy and in lower carbon portfolio companies, when there are other significant risks that insurance companies such as Aviva need to address. I wonder how much they actually share about the evolution of their internal risk algorithms with the public. It seems like this is really an important strategic step that Aviva is hopefully taking (even if we can’t see it yet). I’m curious whether Aviva and other insurance companies have an ability to benchmark among themselves and share best practices in this foreign and evolving space of estimating climate change risk.
Sina, it was very interesting to learn about how an insurance company might be trying to take on sustainability. Great post!
I do agree with you, that they are not doing enough on incorporating sustainability into their insurance products. I imagine the market for climate change related risk mitigation would grow as Aviva expects but claims caused by natural disasters and other climate change related costs would also grow exponentially in coming years. Paying more attention to how their market would change due to climate change will serve as incentives for companies to put a price on unsustainable practices and be more incentivized to incorporate sustainability into their operations.
Really interesting choice of company and industry. In some ways, insurance is at the forefront of bearing losses from negative climate change events along with its customers. Given that insurance companies are huge investors in publicly traded companies, I wonder if it is possible to create a model wherein the government/citizens of countries buy insurance against climate change. It may create an incentive for insurance companies (as major shareholders) to pressure companies to become more sustainable through investor activism.