Written by Lindsay van Landeghem and Thy-Diep Ta
Allianz, a 127-year-old global insurance company with roughly $100 billion in sales and $1.5 trillion in assets, is finding new ways to tackle the threats and opportunities that climate change poses to its business model. Historically, the German insurer has successfully created market value by transferring and pooling risks from individual and corporate clients.
Recent years have, however, been tough. Since the 1950s, weather related catastrophes have increased sixfold, and Allianz risk has been exaserbated by increased urbanization and asset growth in vulnerable coastal areas. Uninsured losses have thus increased, leading to a rise in uninsurable assets. Recently, the costs of natural disasters globally and across the industry exceeded insured losses by $100 billion on an annual basis. [1]
Weather-related events such as floods, storms, and heat waves lead to direct property damage and to indirect damage such as supply chain disruption and resource scarcity, all of which Allianz covers. In addition, some Allianz claims are caused by companies suing Allianz clients for damages, which can be passed on to insurance firms under 3rd party liability contracts.
To cover its costs, an insurer can re-price risks. However, the traditional approach of raising insurance premiums or withdrawing cover is not sustainable in a volatile world in which necessary re-pricing speed can barely be met by insurance providers. Finally, assets invested in industries, such as those in the fossil fuel industry, are at risk of losing significant value in times of increasing climate change regulation.
Slowly addressing climate change related issues
In response to United Nations actions addressing climate change, Allianz withdrew its coal industry investments in 2015, moving over $4 billion out of companies that generate over 30% of their revenues from coal or those that generate electricity from coal. Allianz also has doubled its investments into renewable energy to more than $4.5 billion. [2]
In conjunction with NGOs, Allianz developed and implemented an environmental, social and corporate governance (ESG) scoring framework for its investment portfolio. This framework identifies sustainable companies and sovereigns, which are scored on 37 parameters including their carbon emissions, energy efficiency, and environmental footprint. [3]
Internally, the company also uses a “Green Solution” scoring tool to develop products that focus on: (1) reducing client exposure to the financial and regulatory risks associated with climate change and the environment; (2) conserving the environmental and mitigating climate change, and (3) fostering awareness regarding climate and environmental changes.
Allianz also offers protection against areas affected by climate change, namely: weather, financial & regulatory risk, mobility, renewable energy, and efficiency & resource protection. An example of an incentive that Allianz provides is that they offer lower insurance premiums to policyholders with low emission hybrid or electric cars. [4]
Capitalizing on opportunities
Allianz recently joined forces with 28 other global industry players to form ClimateWise, a research network convened by University of Cambridge that seeks to better understand the impact of climate change on the industry. There is, however, still more that the company can do. For example, Allianz could work with developing countries to improve local resilience to extreme weather, which would require not only working within existing boundaries, but also investing in new, underserved markets. In addition, the company should identify sustainable ways to protect the segments most vulnerable to climate change, such as rural farmers in emerging markets. In the mid term, this action will also help grow a new class of customers.
Finally, in its asset management function, Allianz can invest in companies that enhance the resilience of cities with high risk and financial exposure to extreme weather through, for example, green bonds and resilience impact bonds. [612 words]
Sources
[3] https://www.allianz.com/en/press/news/commitment/environment/170314_tackling-climate-change/
[4] https://www.allianz.com/v_1489482561000/media/press/document/Green-Solutions.pdf
Like the fact that they review their investment portfolio not only based on financial metrics – these measures can have huge impacts as the amount of money involved is huge. A lot of German insurers are under severe threats with large long term commitments from life insurances where yield promises don’t work anymore in the current interest-rate and yield curve environment – for weather and climate the same risk might apply. Maybe the key for insurers is to formulate more cautiously or be more careful about long-term commitments. At the same time the amount of dry-powder in investments funds all around the world is massive and severely depressing returns – medium risk infrastructure investments like wind farms only yield returns that risk-free government bonds used to yield a decade ago.
However from the article it seems that there is not only risk but also a lot of opportunity for the company in climate change and related products. Will be interesting to see how they will play the game going forward.
Nowadays, insurance companies need to be proactive, both in assessing the risk involved in their investments as well as coming up with innovative solutions to reduce the risk profile of their portfolio. I’m looking forward to see how they become the best advocates of the fight against climate change.