{"id":12425,"date":"2016-11-04T16:26:05","date_gmt":"2016-11-04T20:26:05","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/allstate-are-we-in-good-hands\/"},"modified":"2016-11-04T16:26:05","modified_gmt":"2016-11-04T20:26:05","slug":"allstate-are-we-in-good-hands","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/allstate-are-we-in-good-hands\/","title":{"rendered":"Allstate: Are we in good hands?"},"content":{"rendered":"

Can Allstate deal with climate change?<\/strong><\/p>\n

Allstate, the second largest provider of homeowners insurance in the U.S., is in the business of pricing risk.1<\/sup> Allstate\u2019s business model is simple: Allstate collects cash today (premiums) in exchange for cash tomorrow (coverage) in case of an unfavorable event to one\u2019s home. Homeowners insurance is a large, competitive market, with premiums totaling ~$85Bn in the U.S. in 2015.2<\/sup><\/p>\n

Given the timing difference between premiums collected today and future payouts for home damage, insurers must price their policies based on what they expect to pay out over the policy\u2019s life (typically a one-year period). To do this, insurers have sophisticated statistical models to price the risk they bear, but the basic approach is to estimate next year\u2019s expected losses using some weighted average of the last several years of historical data.3<\/sup> The fundamental issue with these models (and any statistical model, really) is they rely on the future looking similar to the past to produce robust results.<\/p>\n

Enter climate change, a phenomenon that is likely to lead to increased severity of weather patterns, as well as just a fundamentally different distribution of weather scenarios versus what has been observed in the past.4<\/sup> A core competency of any insurer is its statistical risk pricing models, which hinge on the relevance of past experience to be indicative of the future. As an insurer in a changing world, how do you account for not only the uncertainty of future weather patterns, but also your diminishing ability to accurately predict the future?<\/p>\n

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What is Allstate doing about it?<\/strong><\/p>\n

In light of the increased risks posed by climate change, Allstate has responded by shying away <\/em>from risk in its core homeowner\u2019s insurance business in several ways:5<\/sup><\/p>\n