How AIG can and should Play a Major Role in the Global Climate Change Debate

AIG is one of the largest publicly traded insurance companies in the US and recognizes the significant threats and opportunities that climate change brings to its business model going forward. While it was one of the first in its industry to realize the potential impacts, there are still several opportunities that the Company can pursue to both protect its own business model and become part of the solution in the ongoing climate change debate.

AIG, one of the leading global insurance companies in the world with a total enterprise value of more than $85 billion, faces significant risks due to climate change. In fact, some individuals in the insurance industry believe that climate change is the number one headwind the industry faces and that climate change may increase insured losses from extreme events in an average year by nearly 40% within the next 10 years. The Company itself was one of the first US insurance businesses to publicly acknowledge the potential impact (back in 2007) that climate change can have on its business model primarily in the product category of catastrophe risk where it provides insurance products to a significant number of companies.

AIG acknowledges that this risk has increased over the years due to the higher concentrations of greenhouse gases, a warming atmosphere and ocean, diminished snow and ice, and rising sea levels. AIG’s primary exposure comes in areas where it provides insurance products in catastrophe risk perception and the pricing and modeling assumptions that it employs to try to predict the potential impact that a given change in climate can have on a business. More specifically the Company has its largest natural catastrophe exposure in the US and Japan. In the US it has significant hurricane exposure in the Northeast and mid-Atlantic. It also has significant earthquake exposure in California and the Pacific Northwest. In fact, in 2015, the Company quantified this exposure to as much as $12.8 billion in the US and nearly $2.0 billion in Japan.

As part of its acknowledgement of the issues the Company had already and would continue to face back in 2007, AIG released stated several ways it was going to become part of the solution (or at least mitigate the problem) to climate change. At first these policies were abstract in nature such as statements like “AIG will continue to dedicate resources to the development of market-based solutions that address climate change…” but over time its statements have been converted into action plans and in some cases these action plans have resulted in new and significant revenue streams for AIG itself. For example, in its insurance business, the Company has introduced new insurance practices dedicated to providing climate change solutions such as AIG ecoPractice where it provides general insurance products and services to the Alternative Energy Industry. Other examples in its insurance business don’t so much incentivize companies to improve the environment as they do its own bottom line such as its Pollution Legal Liability Insurance and Contractors Pollution Liability which address property damage, environmental clean-up costs, and third-party bodily injury liability arising from pollution conditions. Outside of insurance, AIG has invested in reducing its own Carbon footprint in many ways: as of 2015, AIG has invested $430 million over two years to upgrade worldwide offices using high-efficiency lighting, sustainably manufactured products, and energy-efficient mechanical infrastructure. These investments have resulted in a 15% energy reduction in its NYC and UK offices and lowered its CO2 emissions by 2,500 tons annually. AIG has also diverted more than 320 tons of electronics waste from landfills for recycling and reuse over 2 years and states that 95% of claims and underwriting processes are now done paperless in 57 countries. At the same time, AIG has invested more than $2 billion in wind, solar, geothermal, and hydroelectric projects globally.

While AIG has started to address the issue of climate change through the products it has introduced and the investments it has made, I think that there are many additional steps the Company could take that could both add new revenue streams and at the same time encourage companies and individuals around the world to stop business practices that are making our planet more vulnerable to climate change. These steps could include introducing products that some of its peers have adopted such as providing premium discounts to drivers of hybrid cars and or financing climate protection improvement programs. In fact, according to some news articles, insurers are in a position to finance customer-side projects that can improve resilience to the impacts of climate change and those that contribute to reducing emissions. The Company could also become a more vocal supporter of public policies that reduce and make risks more predictable. It has already joined 38 other insurers to call on the US to establish mandatory targets to reduce greenhouse gas emissions by 60-80% over several decades. This is a great first step, but the Company can always do more in terms of lending a credible voice to an important discussion. (760 words)


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Dave Grossman, “GE-5 for Business- Impacts of a Changing Environment on the Corporate Sector”

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Student comments on How AIG can and should Play a Major Role in the Global Climate Change Debate

  1. Great article. Completely agree that AIG could and should do much more. According to this ( only 4% of the insurance companies are being on the proactive side and invest in financing customer improvements.

  2. Nice work. Any sense what AIG is doing on the individual/residential homes to be proactive about averting or mitigating the threat of climate change? For instance, do you think punitive measures like rising insurance premiums or rewarding measures like giving credits or reducing premiums to homes that are more energy efficient would also help to alter customer behavior. Also out of curiosity the $12.8bn of exposure in the US, what is the split between companies versus households.

  3. Jake — This is a great post. I like how you highlighted the exposure that the Company has to the various types of catastrophic risk related to weather severity. I am impressed by the innovative and environmentally conscious insurance products that AIG offered in order to address climate change. Additionally, I like how you highlighted some the discounts that AIG offered to hybrid drivers. I wonder if AIG found evidence that showed that hybrid drivers were less likely to get in an accident, and therefore, less likely to file an insurance claim. I think another risk that AIG faces related to climate change is the increased unpredictability in weather patterns. Global warming may cause storms and natural disasters to be more severe and occur more frequently. AIG may have trouble predicting these types of events. There is a risk that they would not price their premiums for these events and would be in financial trouble if the storms were worst and more frequent than expected.

  4. Great read!

    I think your suggestion of investing more in customer-side projects such as giving discounts for sustainable practices (like health insurers giving discounts to gym members) is a great one. Incentivizing customers will certainly be key to AIG’s success in dealing with climate change.

    You also mention the existence of weather related insurance items like catastrophe insurance. I think one of the biggest challenges will be how to accurately price these items. While AIG certainly knows that there could be an increase in major weather phenomena that will increase claims, if they are able to price this risk correctly, it is a great opportunity for them. The problem though is if like the housing crisis they misprice risk of climate change, they could need another bailout or go insolvent. I wonder if the lessons of 2008 will hold and it will affect their calculations accordingly.

  5. Trenchant analysis of AIG’s climate change woes. It is interesting that climate change actually affects AIG’s business. One might think that the additional risk of extreme weather events could just be priced in, as I assume climate change is slow moving relative to the duration of AIG’s contracts. We should chat tomorrow.

  6. I enjoyed learning about the role AIG can/should play in helping mitigate climate change. I loved that in your post you are making it clear that AIG has the scale and power to set the tone for the whole industry around climate change responsibility. I agree with you that they absolutely should become more vocal in public policy conversations. It is clear that there is a great alignment between potential revenue, mitigating insurance risk and mitigating climate change risk. Let’s hope they accelerate efforts in that direction.

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