American International Group, also known as AIG, is a multinational insurance company with more than 88 million customers in 130 different countries. Their core business lines include insurance on property casualty for both industrial and individual customers, life insurance and mortgage underwriting. Out of all the three lines of business, there has been growing concerns with the impact of global climate change on the property casualty insurance.
According to Allianz, Europe’s largest insurer, insured losses due to natural disasters have increased 37% during the past decade. Much of which can be contributed to the climate change, and the loss during an extreme condition can be as high as 1 trillion USD for the entire industry. There is increasing scientific evidence that supports the premise that extreme weather events are increasing in frequency and intensity, and will only grow more pronounced in the foreseeable future. According to AIG, property casualty insurers were exposed to over $100 billion US dollars in global disastrous losses and insurance payments related to climatic event have increased fifteen-fold from thirty years ago.
As a matter of fact, AIG’s property casualty has already undergone losses due to the higher frequency of natural disasters. The firm recognizes that climate change is the root cause of the profit declining and measures, other than financial risk hedging, need to be conducted in order to fully “weather-proof” the company. Below are a few actions that AIG has taken towards mitigating the impact from climate change:
AIG Global Investment Group, through impact investing, allocated additional private equity investment to projects, technologies and other assets that contribute to greenhouse gas emission mitigation. For example, AIG real estate arm invested in the development and acquisition of several major building complexes that are of U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) standards. AIG also co-developed building complexes from formal contaminated land.
AIG also developed Clean Development Mechanism (CDM) and Joint Implementation (JI) projects in developing countries to earn carbon credits that are recognized by the EU and other emission trading system. This can in turn serve AIG’s client who has compliance issues with carbon emission. AIG added carbon credit to Dow Jones – AIG Commodity Index. By doing so, carbon credit can be more broadly recognized and traded in open markets, which will subsequently benefit the whole society through the generation of carbon credits.
AIG provided innovative insurance products around carbon emission. For example, AIG developed products to insure against the failure of a project to generate tradable carbon reductions. This provides an incentive for companies to engage more in carbon reduction activities. Meanwhile, AIG can hedges out its risk by investing in CDM to earn carbon credits. This creates a virtuous circle of carbon reduction.
In my opinion, these are all great steps towards raising awareness of climate change and protecting the company from being impacted by the environmental change. Another thing that AIG should do is to engage with climate scientist to add more predictive power to the pricing model of insurance. Despite this is a temporary fix, by charging proper premium towards property casualty insurance; AIG will be able to lessen the impact that natural disasters have on the loss of insurance payments. Also, since climate change has a great impact on the insurance industry in general, AIG should consider joining force with the other insurance companies, such as Allianz and Aon, who already realized the important impact of climate change. Together, they can form an partnership that help work with both public and private sectors to raise awareness of the impact climate change has on people’s lives, engaging more actively in impact investing to help environmental sustainable companies such as renewable energies or clean technology. This can be proved to be both profitable and beneficial for the global climate overall.
In all, the growing threat posted by climate change needs to be property handled by the insurance company: from a financial perspective, AIG should properly charge a premium on property casualty insurance. From a long-term sustainable perspective, AIG should join force with the rest of the industry, work with public and private sectors to help reduce carbon emission and utilize innovation to create a more “weather-proof” insurance company.
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