{"id":9210,"date":"2016-11-03T20:23:59","date_gmt":"2016-11-04T00:23:59","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/predicting-the-weather-insurers-are-as-good-as-your-local-weatherman\/"},"modified":"2016-11-03T20:23:59","modified_gmt":"2016-11-04T00:23:59","slug":"predicting-the-weather-insurers-are-as-good-as-your-local-weatherman","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/predicting-the-weather-insurers-are-as-good-as-your-local-weatherman\/","title":{"rendered":"Predicting the Weather: Insurers are as good as your local weatherman"},"content":{"rendered":"

AIG (American International Group, Inc.) is one of the largest global insurance businesses that focuses on providing casualty insurance, life insurance and mortgage insurance.\u00a0 Climate change has the ability to completely upend AIG and the insurance industry, more specifically the property and casualty segment.\u00a0 This business and AIG\u2019s ability to effectively underwrite insurance is based on their ability to use historical data and predictive models to price their insurance products accordingly [1].\u00a0 Climate change will cause there to be higher weather variability and instability [2].\u00a0 This will in turn create issues for AIG and their ability to predict accurately and price appropriately. \u00a0At the same time this variability will also create opportunities for AIG to create innovative insurance products to serve this new environment.<\/p>\n

As temperatures rise, extreme weather events are expected to increase which will lead to higher property and casualty damage than what insurers had originally underwritten [3].<\/p>\n

\"graph-1\"<\/a><\/p>\n

These elevated losses will directly hit AIG\u2019s performance.\u00a0 This increased variability will also make it harder for AIG to price these products in the future.\u00a0 If they price new products too low and actual future losses are higher than expected then they will end up losing money but if they price it too high to protect themselves from this scenario they may not be able to actually sell that policy and they will lose volume. \u00a0In response, AIG and other insurers have actually come to the conclusion that they are unable to write policies in some high risk areas like South Florida and have retreated from those markets, leaving the government as the only person left to pick up the bill.<\/p>\n

\"graph-2\"<\/a><\/p>\n

They also have reduced limits and increased deductibles which makes the product safer for AIG but less attractive for the insured thereby sacrificing some volume [1].\u00a0 Finally the last risk AIG will need to overcome is that even if they can get past these prior issues and sell enough product at the appropriate price, there are concerns about the reinsurance and catastrophe bond markets which are vital for AIGs business and allows them to underwrite more policies than they hold.\u00a0 If these markets find this new climate environment and underwriting model to be too risky it will freeze up and prevent AIG from writing more policies since they can only hold so much on their own balance sheet [6].<\/p>\n

AIG has had to adjust to these conditions and institute a complementary strategy.\u00a0 First of all, they continue to invest and tweak their risk management and underwriting models and analyze the latest climate science moving away from historical models and towards catastrophe models [3].\u00a0 This is believed to be a better predictor and if that does prove true the business will be in an advantageous position in the industry since the model is proprietary and different from competitors.<\/p>\n

Given the effects climate change can have on the business, the insurance industry has become some of the most vocal corporate advocates in the fight against climate change and are taking actions to help slow it down and prepare the world to best deal with its effects [4][6].\u00a0 They are also pushing for additional building regulations and planning regulations that will require buildings to be built to better withstand climate change related weather events and prevent construction in some high risk areas.\u00a0 In fact, some insurers have even gone as far as suing municipalities claiming that they had not taken adequate precautions to prevent losses due to weather events to push others to take action [5].<\/p>\n

Although AIG is having some issues in certain areas with its traditional property and casualty insurance, climate change has spurred investment and growth in the clean energy industry and AIG has seized on that opportunity and provides insurance to the industry.\u00a0 Another emerging service AIG and other insurers have moved into that was spurred by climate change is carbon risk management and carbon reduction services [1].<\/p>\n

It is too early to tell what will happen at AIG and their property and casualty insurance business but the business understood the risks early on, has made efforts to remedy the issues and has also taken advantage of the new opportunities that have arisen.\u00a0 It will be interesting to see how the policies they write today bear out in the future.<\/p>\n

(712 words)<\/p>\n

References<\/p>\n

[1] Mills, Evan. \u201cResponding to Climate Change \u2013 The Insurance Industry Perspective\u201d. http:\/\/evanmills.lbl.gov\/pubs\/pdf\/climate-action-insurance.pdf<\/a><\/p>\n

[2] Atkin, Emily. ThinkProgress. \u201cBig Insurance Companies Are Warning The U.S. To Prepare For Climate Change\u201d(2015). https:\/\/thinkprogress.org\/big-insurance-companies-are-warning-the-u-s-to-prepare-for-climate-change-eb3fdf22d674#.j2kcbr9xb<\/a><\/p>\n

[3] AIG. \u201cClimate Change: A Call for Weatherproofing the Insurance Industry\u201d (2012). http:\/\/www.aig.com\/content\/dam\/aig\/america-canada\/us\/documents\/business\/industry\/ipg-real-estate-climate-change-paper-brochure.pdf<\/a><\/p>\n

[4] AIG. \u201cAIG\u2019s Policy and Programs on Environment and Climate Change\u201d. http:\/\/media.corporate-ir.net\/media_files\/irol\/76\/76115\/aig_climate_change_updated.pdf<\/a><\/p>\n

[5] Linden, Eugene. \u201cHow the Insurance Industry Sees Climate Change\u201d (2014). http:\/\/www.latimes.com\/opinion\/op-ed\/la-oe-linden-insurance-climate-change-20140617-story.html<\/a><\/p>\n

[6] AIG. \u201c2015 10-K\u201d. http:\/\/www.aig.com\/content\/dam\/aig\/america-canada\/us\/documents\/investor-relations\/december-31-2015-10k-final.pdf<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The insurance industry is meant to spread out risk and minimize it for their clients but what happens when the risk in the world changes dramatically?<\/p>\n","protected":false},"author":1774,"featured_media":9211,"comment_status":"open","ping_status":"closed","template":"","categories":[1424,730],"class_list":["post-9210","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-aig","category-insurance"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/climate-change-challenge-2016\/","yoast_head":"\nPredicting the Weather: Insurers are as good as your local weatherman - 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\/predicting-the-weather-insurers-are-as-good-as-your-local-weatherman\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Predicting the Weather: Insurers are as good as your local weatherman - 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