{"id":26856,"date":"2017-11-15T22:57:33","date_gmt":"2017-11-16T03:57:33","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/allianz-underwriting-a-sustainable-future\/"},"modified":"2017-11-15T22:57:33","modified_gmt":"2017-11-16T03:57:33","slug":"allianz-underwriting-a-sustainable-future","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/allianz-underwriting-a-sustainable-future\/","title":{"rendered":"Allianz: Underwriting a Sustainable Future"},"content":{"rendered":"

On August 25, 2017, Hurricane Harvey made landfall, rocking southern Texas and causing catastrophic flooding.\u00a0 Less than one month later, Hurricane Irma made landfall in the Florida Keys, marking the first time that two Atlantic Category 4+ storms have made landfall in the continental U.S. within a single hurricane season.[1]\u00a0 Some sources estimated Hurricane Harvey to be the costliest weather disaster in U.S. history at $190 billion; damage from Hurricane Irma was estimated to be $100 billion.[2]\u00a0 Much of these economic costs will be absorbed by property & casualty (P&C) insurers that provide liability coverage to protect policyholders against unexpected losses.<\/p>\n

The Allianz Group is one of the world’s leading insurers, having generated \u20ac76 billion (~$90 billion) of gross written premium in 2016.[3]\u00a0 By nature of its diversified P&C business, Allianz is exposed to extreme weather events, the likes of which include Hurricanes Harvey and Irma.<\/p>\n

Climate Change Represents a Strategic Challenge<\/strong><\/p>\n

Over recent decades climate change has resulted in increased prevalence of extreme weather patterns, including hurricanes, cyclones, flooding, and droughts.[4] \u00a0The U.S. Climate Extremes Index (CEI) indicates that the number of extreme climate events in any given year has been rising over the last four decades (see Figure 1).[5] \u00a0According to research by ClimateWise, a network of 29 insurance companies convened by the University of Cambridge, the frequency of weather-related catastrophes has increased six-fold since the 1950s, with economic losses growing at a similar rate to $170 billion.[6]<\/p>\n

Insurance carriers underwrite catastrophic risks based primarily on historical data.\u00a0 Unless underwriting methods adapt to the changing nature of climate patterns, the increased prevalence of extreme weather events will result in increased losses and will hinder insurance carriers\u2019 ability to offer affordable coverage.[7]\u00a0 Allianz is exposed to climate change risks as both an insurer that writes policies covering damage caused by natural disasters and as an institutional investor with \u20ac1.9 trillion invested in companies affected by changing weather patterns.<\/p>\n

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

Aligning Operations for a Sustainable Future<\/strong><\/p>\n

Allianz has developed a comprehensive climate change strategy that integrates protection into the core business.<\/p>\n

As an insurer, Allianz designs insurance products that incentivize customers to take preventative measures and to encourage environmentally-friendly and socially-responsible business practices.[8]\u00a0 The portfolio of products include solutions related to weather, financial and regulatory risk, mobility, renewable energy, and resource protection (see Figure 2). [9]<\/p>\n

As an institutional investor, Allianz applies comprehensive environmental, social, and governance (ESG) guidelines for all investment decisions.\u00a0 These ESG considerations were developed jointly with various NGOs and are based on 37 different parameters, including carbon emissions, energy efficiency, and environmental footprint.\u00a0 In addition, Allianz proactively invests in renewable energy, with \u20ac4.6 billion invested in wind farms and solar parks located across Europe and the United States.[9]\u00a0 Allianz also avoids investments in assets that contribute to climate change.\u00a0 Inspired by the Paris climate negotiations, Chairman & CEO Oliver B\u00e4te announced in November 2015 that Allianz will no longer invest in coal-based business models.[10]<\/p>\n

Figure 2: Allianz’s Portfolio of Environmental Sustainability Solutions<\/strong><\/p>\n

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

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

Preparing for an Uncertain Future<\/strong><\/p>\n

While Allianz has done a commendable job aligning its insurance product and investment portfolios with its vision for a sustainable future, there is more work to be done.<\/p>\n

For Allianz to remain competitive in the future, the company must invest in climate expertise.\u00a0 In the short term, Allianz should look to engage with climate change experts in governmental agencies and university research departments to build more predictive climate risk pricing models. \u00a0Over the long term, Allianz might look to insource meteorology and climatology expertise.\u00a0 There is an opportunity for Allianz to enhance its underwriting of climate risk by leveraging scientific expertise and big data analytics.\u00a0 For example, Aviva Insurance individualizes pricing on flood coverage for coastal homes by leveraging topographical data, distinguishing between homes located at higher elevation from those located at sea level.[11]<\/p>\n

Allianz would also benefit from formalizing its climate risk management program.\u00a0 The company should consider the creation of a Supervisory Board committee dedicated to the oversight of climate risk, the appointment of directors with relevant expertise, and the appointment of a senior executive with dedicated responsibility for climate risk management initiatives.<\/p>\n

Despite its best efforts, Allianz may never be fully prepared for future climate-related risks.\u00a0 Questions remain as to the extent to which Allianz should advocate for public policy changes supporting climate sustainability.\u00a0 Should Allianz pursue catastrophe risk securitizations that would transfer risk from insurance markets into the capital markets?\u00a0 Given the uncertainty and magnitude of potential climate-related claims, is appropriately underwriting climate risks even possible?\u00a0 If so, can it be done at a price that maintains the insurance product\u2019s affordability?<\/p>\n

Fortunately for Allianz and its stakeholders, managing uncertainty is the company\u2019s core competency.<\/p>\n

(782 words)<\/p>\n

References<\/strong><\/p>\n

[1] The Weather Channel. (2017).\u00a0Hurricanes Irma and Harvey Mark the First Time Two Atlantic Category 4 U.S. Landfalls Have Occurred in the Same Year<\/em>. [online] Available at: https:\/\/weather.com\/storms\/hurricane\/news\/hurricane-irma-harvey-landfall-category-4-united-states-history [Accessed 13 Nov. 2017].<\/p>\n

[2] Accuweather.com. (2017).\u00a0AccuWeather predicts economic cost of Harvey, Irma to be $290 billion<\/em>. [online] Available at: https:\/\/www.accuweather.com\/en\/weather-news\/accuweather-predicts-economic-cost-of-harvey-irma-to-be-290-billion\/70002686 [Accessed 13 Nov. 2017].<\/p>\n

[3] Allianz SE (2017).\u00a0Allianz Group Annual Report 2016<\/em>.<\/p>\n

[4]\u00a0United States Environmental Protection Agency (2016).\u00a0Climate Change Indicators in the United States<\/em>. Fourth Edition. pp.7-8.<\/p>\n

[5] United States National Oceanic and Atmospheric Administration. (2016).\u00a0Global Climate Change Indicators | Monitoring References | National Centers for Environmental Information (NCEI)<\/em>. [online] Available at: https:\/\/www.ncdc.noaa.gov\/monitoring-references\/faq\/indicators.php [Accessed 10 Nov. 2017].<\/p>\n

[6] University of Cambridge Institute for Sustainability Leadership (2016).\u00a0ClimateWise launches two reports that warn of growing protection gap due to rising impact of climate risks<\/em>. [online] Available at: http:\/\/ClimateWise launches two reports that warn of growing protection gap due to rising impact of climate risks [Accessed 10 Nov. 2017].<\/p>\n

[7]\u00a0United Nations Environment Programme (2013).\u00a0GEO-5 for Business<\/em>. Impacts of a Changing Environment on the Corporate Sector. UNON\/Publishing Services.<\/p>\n

[8]\u00a0Allianz SE (2017).\u00a0Climate Change Strategy of Allianz Group<\/em>. [online] Available at: https:\/\/www.allianz.com\/v_1504716410000\/en\/sustainability\/media-2017\/Allianz_Climate_Strategy_09_2017_final.pdf [Accessed 10 Nov. 2017].<\/p>\n

[9] Allianz SE (2017).\u00a0Tackling Climate Change<\/em>. [online] Available at: https:\/\/www.allianz.com\/en\/press\/news\/commitment\/environment\/170314_tackling-climate-change\/ [Accessed 10 Nov. 2017].<\/p>\n

[10] ClimateWise (2016).\u00a0Closing the Protection Gap<\/em>. ClimateWise Principles Independent Review. [online] University of Cambridge Institute for Sustainable Leadership. Available at: https:\/\/www.cisl.cam.ac.uk\/publications\/publication-pdfs\/Closing-the-protection-gap-ClimateWise-Principles-Independent-Review-2016.pdf [Accessed 10 Nov. 2017].<\/p>\n

[11] Kahn, M., Casey, B. and Jones, N. (2017). How the Insurance Industry Can Push Us to Prepare for Climate Change.\u00a0性视界 Business Review<\/em>. [online] Available at: https:\/\/hbr.org\/2017\/08\/how-the-insurance-industry-can-push-us-to-prepare-for-climate-change [Accessed 10 Nov. 2017].<\/p>\n","protected":false},"excerpt":{"rendered":"

Aligning Allianz’s operational strategy with its vision for a sustainable future<\/p>\n","protected":false},"author":9776,"featured_media":26857,"comment_status":"open","ping_status":"closed","template":"","categories":[1794,1218,730,1653,1084,4202,1966,14],"class_list":["post-26856","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-climate-action-plan","category-climate-change","category-insurance","category-insurance-companies","category-investing","category-pc","category-property-casualty","category-sustainability","hck-taxonomy-organization-allianz","hck-taxonomy-industry-insurance"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"\nAllianz: Underwriting a Sustainable Future - 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\/allianz-underwriting-a-sustainable-future\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Allianz: Underwriting a Sustainable Future - 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