![\"How](\"https:\/\/www.epa.gov\/sites\/production\/files\/styles\/medium\/public\/2016-09\/bell-graph_0.gif\")
Surely AIG has thought of this!<\/h1>\n
AIG has taken a number of steps to mitigate the risks climate change poses to its insurance business. In general, they fall into two distinct categories. In the first category, the company has taken steps to better price climate change into its risk premiums. AIG is working with climate scientists to develop forward-looking projections of the ways in which climate change may affect weather patterns in the future [6]. Using these models, AIG hopes to more accurately account for its insurance risks than if it continued to use models based on historical weather patterns. Similarly, AIG is beginning to change its underwriting policies to incentivize critically exposed markets to build resiliency against severe weather events, such as storm-proofing buildings in coastal areas [7]. And finally, and perhaps most inefficiently, AIG has simply had to raise premiums in high-risk areas and hold larger capital reserves against those policies [8].<\/p>\n
The second category of mitigation steps AIG has taken generally take a longer-term perspective in reducing or mitigating the rate of climate change itself, rather than attempting to minimize its impact on AIG\u2019s primary businesses. For example, AIG has subsidized insurance premiums to companies that promote clean and efficient energy practices in an attempt to reduce the burden these business place on the environment. AIG has also supported research on climate change and weather patterns, both to better understand the mechanisms of climate change and to better anticipate the continued effects it will have. Finally, AIG and its many subsidiaries have taken steps to reduce its own contributions to global climate change. Both AIG\u2019s Hong Kong and Zurich office complexes were redesigned to be more \u201cgreen\u201d by establishing a reduced carbon footprint, and AIG has invested in numerous climate-related projects such as forestry assets, renewable energy sources, greenhouse gas mitigation technologies, and energy-efficient real estate practices [9].<\/p>\n
On the other hand\u2026<\/h1>\n
Thus far, AIG has done its homework to come to terms with the likely impacts of climate change. It has even begun taking some preliminary steps to isolate itself from the new risks that climate change may one day pose to its business model. But to truly prepare itself for the future, AIG needs to go further. For one thing, it needs to further diverse its business geographically. As mentioned, 76% of AIG\u2019s revenues are derived from the United States. One of AIG\u2019s key advantages is that it is the largest US property and casualty insurer in both Europe and Asia [10]. The company needs to leverage that advantage and focus its growth on those continents in the coming years. Because countries in these regions are less susceptible to severe weather events, and because of the geographical separation, expanding into these areas will provide diversification to AIG\u2019s policy assets. Equally important, AIG needs to diversify geographically within the United States itself. In 2015, 11.4% of AIG\u2019s property insurance premiums came from businesses located in the states of California and New York \u2013 both coastal and susceptible to extreme weather events [11]. Though this concentration of premiums in those two states is likely dictated by the sheer number of businesses operating in those states, AIG needs to take steps to either diversify that risk by expanding into other states or hedging its exposure to those particular states through financial derivatives. By diversifying the geographic risks AIG faces, it will help insulate itself from the damages of climate change \u2013 perhaps this time without the need for capital injections from the US Treasury.<\/p>\n
(796 words)<\/p>\n
<\/p>\n
References:<\/p>\n
[1] Scism, Leslie. \u201cFormer AIG Chief Hank Greenberg Wins Moral Victory in Bailout Trail.\u201d June 15, 2015 http:\/\/www.wsj.com\/articles\/judge-rules-in-former-aig-chief-greenbergs-favor-in-bailout-trial-1434384756<\/a>. Accessed November 1, 2016.<\/p>\n [2] American International Group. \u00a0http:\/\/www.aig.com\/content\/dam\/aig\/america-canada\/us\/documents\/business\/industry\/ipg-real-estate-climate-change-paper-brochure.pdf<\/a>. Accessed November 1, 2016.<\/p>\n [3] Environmental Protection Agency. \u201cUnderstanding the Link Between Climate Change and Extreme Weather.\u201d https:\/\/www.epa.gov\/climate-change-science\/understanding-link-between-climate-change-and-extreme-weather<\/a> Accessed November 1, 2016.<\/p>\n [4] AIG 10-K p8 http:\/\/www.aig.com\/content\/dam\/aig\/america-canada\/us\/documents\/investor-relations\/december-31-2015-10k-final.pdf<\/a><\/p>\n [5] Hedde, Carl. \u201cUS Natural Catastrophe Update.\u201d January 4, 2012. https:\/\/www.munichre.com\/site\/mram\/get\/documents_E1746699606\/mram\/assetpool.mr_america\/PDFs\/4_Events\/munichre_iii_2011natcatreview.pdf<\/a>. Accessed November 1, 2016.<\/p>\n [6] American International Group. \u00a0http:\/\/www.aig.com\/content\/dam\/aig\/america-canada\/us\/documents\/business\/industry\/ipg-real-estate-climate-change-paper-brochure.pdf<\/a>. Accessed November 1, 2016.<\/p>\n [7] American International Group. \u00a0http:\/\/www.aig.com\/content\/dam\/aig\/america-canada\/us\/documents\/business\/industry\/ipg-real-estate-climate-change-paper-brochure.pdf<\/a>. Accessed November 1, 2016.<\/p>\n [8] American International Group. \u00a0http:\/\/www.aig.com\/content\/dam\/aig\/america-canada\/us\/documents\/business\/industry\/ipg-real-estate-climate-change-paper-brochure.pdf<\/a>. Accessed November 1, 2016.<\/p>\n [9] American International Group. \u00a0http:\/\/www.aig.com\/content\/dam\/aig\/america-canada\/us\/documents\/business\/industry\/ipg-real-estate-climate-change-paper-brochure.pdf<\/a>. Accessed November 1, 2016.<\/p>\n [10] Securities and Exchange Commission. \u201cForm 10-K, American International Group, Inc. for the Year Ended December 31, 2015\u201d http:\/\/www.aig.com\/content\/dam\/aig\/america-canada\/us\/documents\/investor-relations\/december-31-2015-10k-final.pdf<\/a>. Accessed November 1, 2016.<\/p>\n