The analytical rigor and discipline seen in the modeling and management of mortality risk in life insurance contracts is almost completely lacking in the management of climate risk in the US property and casualty insurance (P&C) industry. Is the one-year P&C policy to blame? The first of three posts compares AXA, Europe’s largest insurer, with Chubb, Liberty Mutual and Travelers, the largest US P&C companies that publish climate reports. increase. Part I is an overview of the topic. Part II examines the liability side of an insurance practice or P&C balance sheet. Part III examines the asset side of your investment practice or balance sheet.
Property & Casualty (P&C) The insurance industry is expected to be at the forefront of the fight against climate change. Hurricanes, floods and wildfires hit the insurance industry’s wallets before anyone else. Moreover, it is well known that population growth since 1990 has exceeded the US average in areas at high risk of hurricanes and wildfires. These climate disasters are also becoming more common. For example, Travelers states in his 2021 TCFD report:
Climate risk affects both assets (investments) and liabilities (obligations to cover losses) on an insurer’s balance sheet). These companies must have climate expertise because they handle the sheer number of claims related to climate-borne threats. So if there ever was an industry where doing good things equates to doing good things, it must be insurance. Furthermore, the analytical rigor that actuaries bring to the prediction and management of mortality risk for US life insurance companies is commendable. Why is her P&C climate risk management in the US lacking that formidable intellectual and managerial capacity?His SwissRe, his 2021 climate report for a prominent reinsurer, He said: Part of this gap is very likely due to the effects of trends due to climate change. ”
The U.S. property and casualty insurance industry has traditionally believed that the likelihood of wildfires in California, for example, is not correlated with the likelihood of hurricanes in Florida. What if these events began to correlate because of climate change? The simultaneous occurrence of wildfires in California and a major hurricane in Florida would put the capital positions of US P&C insurers at risk. A further concern is that a large climate-related catastrophe or a series of large losses will result in an exponential rather than a linear hit to an insurer’s capital over time. .
In my assessment, the US P&C insurance industry has been less visible and proactive when it comes to leading the climate risk debate. This is due to different social, political and economic pressures in Europe and somewhat short-sighted incentives for US policyholders.
Annual Policy Making Incentive
Is it because of the yearly policy development cycle? Insurance companies that take out life insurance for the next 15 to 30 years have an incentive to dedicate actuarial resources to predict your mortality. However, property and casualty insurance policies that cover climate change losses are typically only in force for one year, giving the industry necessarily limited incentive to look ahead.
Top 10 U.S. Property/Casualty Insurers
To understand the situation a little better, I started digging deeper into the sustainability disclosures of major French insurer AXA XL (the latest available 85-page 2022 climate report). AXA’s revenues are €99 billion, half of which comes from property and casualty insurance and around 20% from health-related insurance. I believe AXA is the gold standard for thinking about how climate risk affects both insurance coverage and investment decisions.
To benchmark AXA with insurers on the other side of the Atlantic, we found the top 10 property and casualty insurers ranked by US revenue. They are State Farm, Berkshire Hathaway, Progressive, Allstate, Liberty Mutual, Travelers, USAA, Chubb and Farmers. insurance, and nationwide. The return was somewhat disappointing.
State Farm’s 2021 sustainability report is basic and does not address any of the issues raised by AXA. My initial thought was that such silence might be excused when most of State Farm’s business relies on cars and covering life. However, it turns out that State Farm has raised $25 billion in premiums for its home insurance business in 2021. It’s not pocket change, climate issues will be relevant to your home portfolio.
Berkshire Hathaway is known for its ESG skepticism, and their discussion of sustainability for their conglomerate runs a total of one page. Progressive publishes his 51-page sustainability report, but his CEO statement in that report focuses on Progressive’s DE&I efforts, not climate. Progressive publishes a general discussion of risks he devotes one page (pages 13 and 14) and half a page of general text on climate (page 15). On the investment side, Progressive says 80% of its bonds have his MSCI ESG rating. They also say they have started tracking his LEED status for building CMBS (collateralized mortgage-backed securities) portfolios. About $35 billion of Progressive’s $47 billion in revenue in 2021 will come from auto insurance, where the climate isn’t such a big concern. But about $2 billion in premiums annually comes from insuring physical risks where climate is supposed to be a risk factor. Moreover, the asset side of all these insurers’ balance sheets is exposed to climate risk.
Of the $40 billion in premium income, $27 billion is related to automobiles, but a significant $10 billion comes from home insurance, according to Allstate’s 2021 10-K . Allstate publishes a 106-page sustainability report, but the word “climate” is only on page 65 of his. The climate discussion runs from 65 to 3 pages. Allstate says it has enough capital to withstand the stresses of climate change.
USAA, Farmers and Nationwide efforts in the climate area appear to be minimal. USAA has a web page labeled “Environmental Responsibility” that talks about recycling, reducing paper usage, and conserving water and energy usage. Farmers has a page called “Corporate Citizenship” that focuses on employees, diversity and inclusion initiatives, reducing plastic and paper use, planting trees, charitable donations, and giving to charitable NGOs (non-governmental organizations). Engagement, and the “Farmers Insurance Open”, is a golf tournament sponsored by the PGA (Professional Golf Association).
Nationwide supports communities, giving, food security, working with the American Red Cross, the United Way, investing in affordable housing, healthcare, education, clean water, children’s well-being, diversity and inclusion. We publish a 15-page corporate responsibility report that covers: Diverse Boards, Ethics and Governance. They devote a page to the environment touching on reducing their carbon footprint, reducing waste, water usage, paper usage and landfill diversion.
Liberty Mutual will publish its second TCFD report in 2021. Travelers and Chubb also published his TCFD report. Therefore, it seems worthwhile to compare AXA’s efforts to three US companies: Chubb, Liberty Mutual, and Travelers. Before we get into the details, it’s worth reiterating that seven of the top 10 US P&C insurers have not seriously discussed the impact of climate risk on their balance sheets. The default answer might be to claim that their climate risk exposure is not great enough to justify a larger argument. We must assume that lack of reporting means either a lack of internal agreement on the importance of climate within companies, or a lack of investment in understanding its risks.
The discussion will be a series of questions and various strategies followed by AXA related to three US insurers: Chubb, Liberty and Travelers. This comparison is purely for benchmarking purposes. I understand that every company is likely to follow its own strategy given the opportunities and constraints. has its own learning curve in building the infrastructure required to establish a
Below are high-level findings covering both the liability and asset sides of a company’s balance sheet.
High level findings
Have insurers articulated their climate strategy?
All four companies have articulated climate strategies. We leave the discussion of details to the next part. In summary, AXA is the only company that has tied strategic goals to his specific KPIs (Key Performance Indicators). US insurers have released high-level statements that have no clear link to numerical targets.
What is the insurance company’s view on dual materiality?
AXA strongly supports dual materiality while thinking about ESG. For starters, “dual importance” simply means thinking about climate impacts on investments, but about the externalities imposed by a company’s operations that underlie those investments on climate. To do. Other insurers don’t devote much space to doubling materiality.
Are you seeing a full dashboard of metrics?
Ideally, the company should set objective goals or standard and time-based metrics against a benchmarked portfolio so that users can track progress both over time and keeping time steady. should present a dashboard of metrics benchmarked against time series data of AXA has great dashboards along these lines. I couldn’t find detailed dashboards for other insurers.
Voluntary audit of climate data
PwC has issued a Limited Warranty Report on AXA’s processes and underlying assumptions. No other insurer discusses climate risk metrics and process assurance.
Are executive and staff compensation linked to climate targets?
AXA says the following three Key Performance Indicators (KPIs) will be included in the compensation package for executives and 5,000 AXA employees: (ii) reducing carbon emissions during operations; (iii) reduction of investment-related carbon footprint (general account assets); No such promise was found in other insurer disclosures.
In Parts II and III, we show that AXA is similarly highly distinctive compared to the three selected US competitors. I have not performed a detailed analysis of the differences in the regulatory environment of these four companies for corporate reporting.
Part II compares AXA to these three companies in terms of insurance business or balance sheet liabilities.