Travelers Insurance: If storms are getting worse, who pays first?
When the weather hits, it hits their wallet.
Climate change is scary and expensive for Travelers:
Who is there to foot the bill after catastrophic events like 9/11, Hurricane Katrina, and Hurricane Sandy? While communities, individuals, governments, and businesses are impacted by these events, insurance companies specifically are liable to cover the losses from these events related to the property that they insured. By their nature, insurance companies are directly impacted by weather patterns caused by climate change. Further, given the critical importance of insurance industries to economic development, the risks caused by climate change that insurance companies face should concern us all.
Travelers Companies (“Travelers” or the “Company”) is a property and casualty (P&C) insurance company that offers a wide range of insurance products, but has significant exposure to property insurance related to protection against losses from hurricanes, earthquakes windstorms, tornadoes, floods, etc. Specifically, the Company is exposed to risk related to catastrophic storms.
As a P&C insurance company, Travelers’ operating and financial models are affected by climate change in several ways. First, as climate and weather patterns become more unpredictable, it makes evaluating risk related to potential loss from storms and weather more difficult. For example, clients may have more claims than Travelers expected because of more frequent or more severe events such as snow, ice, hurricanes, droughts, typhoons, or extreme precipitation. Second, as Travelers has more difficulty properly assessing potential risk, the Company becomes a more risky counter-party. As a result, Travelers’ cost of reinsurance (what Travelers pays to have their losses insured) and cost of capital would both increase. In addition to claims, these are two of the largest costs to Travelers’ business. Third, regulation related to mitigating climate change increases the cost of doing business for Travelers’ clients. As a result, clients have less cash to invest in insurance protection, which decreases demand for Travelers products.
… so they are making an effort…
Travelers is making an effort to deal with the unpredictability that climate change has brought to insurance underwriting and has also started sustainability programs to help potentially deal with climate change directly.
Travelers has established an “Emerging Issues Committee” and a “Committee on Climate, Energy and Environment”. These committees advise Travelers’ underwriting functions to evaluate the risks related to climate change. If these committees didn’t exist, then the Company may face challenges effectively assessing risks related to climate change.
Additionally, Travelers responds to external climate change initiatives such as CERES (non-profit advocating for sustainability leadership) and the Carbon Disclosure Project. Further, Travelers offers a 10% discount on auto insurance for drivers of electric and hybrid cars. These environmentally responsible efforts are steps that Travelers has taken to make a positive impact on climate change. As a result of these efforts, Travelers has been named part of Dow Jones Sustainability Index, for the last ten years. The Company is one of only three property and casualty insurers in the 146 company index.
… but they can do more
Ceres proposes that insurance companies take more drastic measures to treat climate change as a corporate strategic issue. Ceres suggests that insurance companies formalize their strategies for addressing climate change and create a public corporate policy statement.
Additionally, Travelers could support funding research and development for climate related research. This research could be used to better inform Travelers catastrophe models so the Company could better predict the potential effects of catastrophic weather events. Additionally, the research could be used to inform the business community of the risks related to climate change.
Finally, Travelers could create insurance products that promote sustainable and environmentally responsible behavior. For example, Travelers could make a special effort to insure sustainable energy projects. By providing financial support for these projects, Travelers would be encouraging businesses to pursue initiatives that produce few to no emissions. This would be an innovative step, which could mitigate climate change risks, better protect their clients’ property, and benefit Travelers’ financially. (646 words)
Personal Property Damage. Google Images.
Sources:
- Travelers, Inc. 2015 Form 10-K https://www.sec.gov/Archives/edgar/data/86312/000104746916010107/a2227255z10-k.htm
- Evan Mills, Science, 12 Aug 2005: 1040-1044, Introduction To Special Issue, and News. “Insurance in a Climate of Change.” Science.
- Jim Coburn, 8 November 2013: Ceres. “Chubb and Travelers Still Grappling with Climate Change Post Sandy”
- Travelers Press Release, 19 September 2016: Business Wire. “Travelers Named to 2016 Dow Jones Sustainability Index” http://www.businesswire.com/news/home/20160919005926/en/Travelers-Named-2016-Dow-Jones-Sustainability-Index
- “Ruins and Catastrophes.” Eco-Aesthetics : Art, Literature and Architecture in a Period of Climate Change (n.d.): n. pag. Web.
- Botzen, W. J. Wouter. “Climate Change Adaptation through Insurance against Flooding.” Managing Extreme Climate Change Risks through Insurance (n.d.): 137-64. Web.
- Dörries, Matthias. “Climate Catastrophes and Fear.” Wiley Interdisciplinary Reviews: Climate Change6 (2010): 885-90. Web.
- All pictures are from Google Images
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Interesting post Rob! I agree that insurance companies, particularly those in the P&C space, face significant risk due to the higher frequency of catastrophic events. I really like your last point on building insurance products that incentivize people to take steps to identify and reduce the risks of climate change, in addition to investing in climate change research and sustainability as a whole (i.e. CERES). On a broader level, it seems that there are many areas that have very individualize problems (ex: property near shrinking wetlands: http://blog.nature.org/science/2016/10/24/how-much-do-wetlands-reduce-property-damage-during-storms-and-hurricanes/) that could benefit from a different set of insurance products that push them to invest or take actions to reduce the risk of the entire communities (ex: planting trees in frequent flood areas, https://www.theguardian.com/environment/2016/mar/11/planting-more-trees-can-reduce-uk-flooding-research-shows).
Riveting prose Robert! If climate change is making weather more extreme and unpredictable, why wouldn’t this be long-term good for the business? They would need to charge higher premiums (more sales), would be higher value-add due to the added difficulty of underwriting this type of insurance and greater need (more margin), and the market might grow as more consumers/businesses demand insurance (more sales). Tell me tomorrow what I’m missing!!
Great article, Robert. In response to mzirngibl questions, I think you hit the nail on the head when talking about how volatility in weather patterns is making the risk models that Travelers, and other large insurance companies, have relied on for decades undependable. Given the analytical nature of the industry having such volatile and unpredictable weather patterns as a result of climate change has meant that actual losses are starting to deviate from statistical projections. In addition, regulatory policies have meant that large insurers like Travelers have had to continue to insure those in the most volatile areas. One other interesting dynamic in the insurance industry has been the proliferation of private capital investment by private equity and hedge fund investors in catastrophe insurers (http://www.wsj.com/articles/SB10001424052702304584004576415682545924942). These investors have a higher risk tolerance than companies like Travelers, which creates an interesting dynamic in the market.