“Climate change is increasingly recognized as an ongoing, significant global environmental problem with potential risks to the global economy and ecology, and to human health and wellbeing … At the same time, market-based environmental policies and potential new investments provide business opportunities for AIG to address the problem.”
On May 15, 2006, American International Group (“AIG”) became the first U.S. insurance company to publicly address climate change as a risk and formally outline its corporate policy and programs regarding the issue. As a leading provider of Property and Casualty (“P&C”) insurance in the U.S., AIG is directly exposed to the risk of insured losses resulting from severe weather. According to Allianz, one of AIG’s competitors, “climate change stands to increase insured losses from extreme events in an average year by 37 per cent within just a decade”. Given this threat, the players in this market have focused on limiting their financial exposure to high-risk areas, either by canceling or not renewing policies or by increasing deductibles, reducing limits, and adding new exclusions to policies. Insurers such as AIG are working diligently to incorporate appropriate risk levels in their forecasting analyses to align rates and reserves. However, as stated in their May 2006 press release, AIG has identified opportunities that they expect not only to enhance the revenue and profitability of their business, but also to provide potential solutions to climate change.
AIG’s specific actions to date include investing in clean energy and greenhouse gas emission mitigation projects, participating in the trading of emissions compliance securities, and creating customized insurance products for the renewable energy space, such as tailored insurance for ‘green’ buildings or ‘green replacement’ policies. ‘Green replacement’ policies may offer premium discounts if an individual or business builds to a higher standard of sustainability. In 2007, AIG created the AIG Global Alternative Energy Practice for “the insurance, risk management and loss control needs of U.S.-based alternative energy clients, including organizations engaged in biofuel, hydroelectric, geothermal, solar and wind operations”. The following Figure 1 from AIG’s 2015 Corporate Citizenship Report highlights the key statistics related to AIG’s sustainable investing focus. AIG also has invested in markets such as waste-to-energy, fuel-cell, transmission, and distributed generation.
Although these actions aim to address reducing greenhouse gas emissions in the long-term, the more imminent issue facing AIG, the insurance industry, and the government is how to mitigate the effects of climate change in the near-term. If individuals or businesses are unable to obtain private insurance, governments and taxpayers will ultimately bear the burden of losses arising from property damage in areas affected by extreme weather. To highlight the impact on just the private insurance industry, as of 2011, payments made by insurance companies for destruction from climate change events increased by 15x over the past 30 years.
Ceres, a non-profit organization advocating for sustainability leadership, has urged insurers such as AIG to mitigate the effects of climate change by supporting research on national and local forecasting of future weather patterns and developing “underwriting guidelines and rate plans that reward insureds that increase resiliency (e.g., storm-resistant buildings)”. AIG recognized this call to action in an informational brochure released after Hurricane Sandy. These recommendations highlight the importance of the insurance industry’s role in helping society better understand the drivers of (and forecast the impacts from) climate change. AIG should invest capital and resources to track trends in their data and partner with leading scientists to forecast risks. Figure 2 below, from an article by Dr. Evan Mills titled “Responding to Climate Change – The Insurance Industry Perspective”, outlines a range of activities pursued by participants in the insurance industry and shows the percent of insurance entities engaged in the activity. Disappointingly, only 11% of insurance entities are engaged in understanding the climate change problem, although this presents an interesting opportunity and point of differentiation for AIG. With their significant size, funding, ability to collect detailed weather data, and contacts in government and the research sector, AIG is poised to help the U.S. better understand and respond to climate change in parallel with their work to reduce the risks to their business.
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 Mills, Dr. Evan. Responding to Climate Change – The Insurance Industry Perspective, p. 1
 Ibid, p. 2
 Messervy, Mills (Ceres Insurance Program). Insurer Climate Risk Disclosure Survey Report & Scorecard: 2014 Findings & Recommendations, October 2014, p. 38
 Parekh, Rupal. http://www.businessinsurance.com/article/20070411/NEWS/20009963/aig-sets-up-alternative-energy-practice
 American International Group, Inc. Climate Change: A Call for Weatherproofing the Insurance Industry. http://www.aig.com/content/dam/aig/america-canada/us/documents/business/industry/ipg-real-estate-climate-change-paper-brochure.pdf, p. 3
 Ibid, p. 4