{"id":23950,"date":"2017-11-15T16:31:51","date_gmt":"2017-11-15T21:31:51","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/chubb-rethinking-the-insurance-supply-chain-in-response-to-wildfires\/"},"modified":"2017-11-15T16:31:51","modified_gmt":"2017-11-15T21:31:51","slug":"chubb-rethinking-the-insurance-supply-chain-in-response-to-wildfires","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/chubb-rethinking-the-insurance-supply-chain-in-response-to-wildfires\/","title":{"rendered":"Chubb: Rethinking the Insurance Supply Chain in Response to Wildfires"},"content":{"rendered":"

This post will analyze the response of Chubb Limited (NYSE: CB) to worsening damages caused by wildfires, a subset of the broader climate change megatrend. Chubb is a leading property casualty insurer, with products ranging from personal lines (e.g., home insurance) to commercial lines (e.g., workers\u2019 compensation), and in 2016 had gross written premiums of $35 billion[1]<\/a>.<\/p>\n

 <\/p>\n

Why worsening fires are an issue for Chubb\u2019s management team<\/strong><\/p>\n

Insurers have always had to manage risk of wildfires, but in recent decades climate change has exacerbated the issue. As the graph[2]<\/a> below shows, an increasing level of acreage has been burned by wildfires over time.<\/p>\n

\"\"<\/a><\/p>\n

Research has suggested that an area equivalent in size to the states of Massachusetts and Connecticut combined has been burned due to human driven climate change[3]<\/a>. The economic cost associated with the fires is enormous (the October 2017 California fires alone are estimated to have caused $85 billion in damages[4]<\/a>), and property insurers like Chubb are heavily exposed. For example, The Travelers Cos, Inc., a primary competitor of Chubb\u2019s, announced losses of $525 to $675 million (pre-tax) related to the California fires.[5]<\/a><\/p>\n

 <\/p>\n

What Chubb\u2019s management team is doing to address the issue<\/strong><\/p>\n

As an underwriter, Chubb \u201cassess[es], assume[s] and manage[s] risk with insight and discipline.\u201d[6]<\/a>\u00a0The individual pays a known cost (premium) in exchange for handing off an unknown, possible cost. The ensuing value chain is as such:<\/p>\n

 <\/p>\n

Individual risk –><\/strong><\/em>\u00a0insurance distributor –><\/strong><\/em>\u00a0primary insurer –><\/strong><\/em>\u00a0reinsurance distributor –><\/strong><\/em>\u00a0reinsurer<\/em><\/p>\n

 <\/p>\n

Chubb manages this side of the equation through underwriting selection (picking the right risks) and price (estimating the risk of the aggregate pool and setting insurance premiums appropriately). But insurers also serve as risk managers, particularly in commercial lines (e.g., sending risk control engineers to mitigate future losses by removing things like hazardous chemicals). The coordination of this latter function, in combination with the payment of claims to customers, forms the insurance supply chain. While largely intangible, this supply chain comprises the deployment of capital from the capital markets to an individual to indemnify<\/em> loss, and the deployment of risk management services to prevent<\/em> loss:<\/p>\n

 <\/p>\n

Capital markets –><\/strong><\/em>\u00a0primary insurer –><\/strong><\/em>\u00a0loss prevention + loss indemnification –><\/strong><\/em>\u00a0individual risk<\/em><\/p>\n

 <\/p>\n

In response to the growing threat from wildfires, Chubb and other insurers innovated by introducing loss prevention into the personal lines space. Specifically, the company contracted with private firefighting services to defend its insureds\u2019 homes. The company has engaged in this practice since 2008, and Chubb EVP Paul Krump says enrollment in the services has been \u201cgrowing leaps and bounds.\u201d[7]<\/a> Private firefighters are deployed to at-risk homes to perform preventative services such as clearing debris, applying fire retardants, and extinguishing brush fires as they occur on the property. Chubb coordinates the delivery of this service via local \u201ccommand\u201d centers that partner with the California Department of Forest and Fire Services. The service is free to wealthy clients who enroll.7 This innovation represents a step towards a \u201cvertical integration\u201d of Chubb\u2019s supply chain, in that it transforms an implicit loss control service (reliance on local public fire departments) into an explicit offering that is coordinated by the insurer itself. By rethinking its personal lines supply chain, Chubb lowers its exposure to the worsening fires.<\/p>\n

 <\/p>\n

Additional recommended actions for Chubb\u2019s management team to consider<\/strong><\/p>\n

There are only so many levers Chubb\u2019s management team can pull (reducing exposure to high-risk areas, increasing prices), and they are undoubtedly using all of them. Regarding the use of private firefighters, there are a few additional steps to consider. The first would be to \u201ccomplete\u201d the move towards vertical integration by bringing the service fully in house. Should the wildfire trend continue to worsen, it is reasonable to conclude that more insurers will attempt to use the private contractors. There is an interesting parallel here to claims service in the aftermath of a hurricane \u2013 demand for 3rd<\/sup> party claims adjusters skyrockets as insurers race to reach their clients, and the reliability of the service thereby worsens during the surge. A rival insurer, Travelers, innovated post-Katrina by bringing its catastrophe claims service fully in-house, cross-training its existing claims adjusters to respond to hurricanes.[8]<\/a> This enables faster and more reliable time-to-customer. Given that the firefighters will only ever be in demand during \u201csurge times,\u201d this could be a logical action for Chubb to take. A corollary to this step would be to continue to invest in risk modelling and geospatial analytics to better identify at risk homes in real time and to integrate that intelligence into the deployment of the firefighters.<\/p>\n

A second angle for Chubb to consider is to combat the root cause of the problem itself, climate change. Chubb is in a unique position to be an advocate here because it has a front-row seat to the costs associated with a changing climate.<\/p>\n

 <\/p>\n

Open questions for consideration<\/strong><\/p>\n

A key question raised by this article is the \u201cfairness\u201d of this service. As the economics are likely only favorable for the insurer to provide the service to high net worth clients, it effectively creates a \u201ctwo-tier\u201d system.[9]<\/a><\/p>\n

 <\/p>\n

 <\/p>\n

 <\/p>\n

Word Count: 795<\/strong><\/p>\n

[1]<\/a> Chubb Company Website. \u201cAbout Chubb.\u201d https:\/\/www2.chubb.com\/us-en\/about-chubb\/about-us.aspx<\/a>. Accessed November 2017.<\/p>\n

[2]<\/a> Environmental Protection Agency, https:\/\/www.epa.gov\/climate-indicators\/climate-change-indicators-wildfires<\/p>\n

[3]<\/a> John Abatzoglou and A. Park Williams, \u201cImpact of anthropogenic climate change on wildfire across western US forests.\u201d 2016. http:\/\/www.pnas.org\/content\/113\/42\/11770.full<\/a>. Accessed November 2017.<\/p>\n

[4]<\/a> Brian Lada, \u201cDevastating California wildfires predicted to cost US economy $85 billion; Containment may take weeks,\u201d Accuweather<\/em>, October 15, 2017, https:\/\/www.accuweather.com\/en\/weather-news\/devastating-california-wildfires-predicted-to-cost-us-economy-85-billion-containment-may-take-weeks\/70003000<\/a>. Accessed November 2017.<\/p>\n

[5]<\/a> \u201cIn Advance of Its Investor Conference, Travelers Estimates Range of Catastrophe Losses from California Wildfires,\u201d press release, on November 9, 2017, Travelers website, http:\/\/investor.travelers.com\/file\/Index?KeyFile=391021355<\/a>. Accessed November 2017.<\/p>\n

[6]<\/a> Chubb Company Website. \u201cAbout Chubb.\u201d https:\/\/www2.chubb.com\/us-en\/about-chubb\/about-us.aspx<\/a>. Accessed November 2017.<\/p>\n

[7]<\/a> Leslie Scism, \u201cAs Wildfires Raged, Insurers Sent in Private Firefighters to Protect Homes of the Wealthy,\u201d WSJ<\/em>, November 5, 2017, https:\/\/www.wsj.com\/articles\/as-wildfires-raged-insurers-sent-in-private-firefighters-to-protect-homes-of-the-wealthy-1509886801?mod=trending_now_4<\/a>. Accessed November 2017.<\/p>\n

[8]<\/a> Travelers Company Website. \u201cCatastrophe Response.\u201d https:\/\/www.travelers.com\/claims\/catastrophe-response\/index.aspx<\/a>. Accessed November 2017.<\/p>\n

[9]<\/a> Leslie Scism, \u201cAs Wildfires Raged, Insurers Sent in Private Firefighters to Protect Homes of the Wealthy,\u201d WSJ<\/em>, November 5, 2017, https:\/\/www.wsj.com\/articles\/as-wildfires-raged-insurers-sent-in-private-firefighters-to-protect-homes-of-the-wealthy-1509886801?mod=trending_now_4<\/a>. Accessed November 2017.<\/p>\n","protected":false},"excerpt":{"rendered":"

Examining an insurer’s use of private firefighters to protect client assets from worsening wildfires.<\/p>\n","protected":false},"author":10079,"featured_media":24001,"comment_status":"open","ping_status":"closed","template":"","categories":[3731,1218,730,17,1563],"class_list":["post-23950","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-chubb","category-climate-change","category-insurance","category-supply-chain","category-wildfires","hck-taxonomy-organization-chubb-limited","hck-taxonomy-industry-insurance","hck-taxonomy-country-united-states"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"\nChubb: Rethinking the Insurance Supply Chain in Response to Wildfires - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/chubb-rethinking-the-insurance-supply-chain-in-response-to-wildfires\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Chubb: Rethinking the Insurance Supply Chain in Response to Wildfires - 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