Climate change is scary and expensive for Travelers:
Who is there to foot the bill after catastrophic events like 9/11, Hurricane Katrina, and Hurricane Sandy? While communities, individuals, governments, and businesses are impacted by these events, insurance companies specifically are liable to cover the losses from these events related to the property that they insured. By their nature, insurance companies are directly impacted by weather patterns caused by climate change. Further, given the critical importance of insurance industries to economic development, the risks caused by climate change that insurance companies face should concern us all.
Travelers Companies (“Travelers” or the “Company”) is a property and casualty (P&C) insurance company that offers a wide range of insurance products, but has significant exposure to property insurance related to protection against losses from hurricanes, earthquakes windstorms, tornadoes, floods, etc. Specifically, the Company is exposed to risk related to catastrophic storms.
As a P&C insurance company, Travelers’ operating and financial models are affected by climate change in several ways. First, as climate and weather patterns become more unpredictable, it makes evaluating risk related to potential loss from storms and weather more difficult. For example, clients may have more claims than Travelers expected because of more frequent or more severe events such as snow, ice, hurricanes, droughts, typhoons, or extreme precipitation. Second, as Travelers has more difficulty properly assessing potential risk, the Company becomes a more risky counter-party. As a result, Travelers’ cost of reinsurance (what Travelers pays to have their losses insured) and cost of capital would both increase. In addition to claims, these are two of the largest costs to Travelers’ business. Third, regulation related to mitigating climate change increases the cost of doing business for Travelers’ clients. As a result, clients have less cash to invest in insurance protection, which decreases demand for Travelers products.
… so they are making an effort…
Travelers is making an effort to deal with the unpredictability that climate change has brought to insurance underwriting and has also started sustainability programs to help potentially deal with climate change directly.
Travelers has established an “Emerging Issues Committee” and a “Committee on Climate, Energy and Environment”. These committees advise Travelers’ underwriting functions to evaluate the risks related to climate change. If these committees didn’t exist, then the Company may face challenges effectively assessing risks related to climate change.
Additionally, Travelers responds to external climate change initiatives such as CERES (non-profit advocating for sustainability leadership) and the Carbon Disclosure Project. Further, Travelers offers a 10% discount on auto insurance for drivers of electric and hybrid cars. These environmentally responsible efforts are steps that Travelers has taken to make a positive impact on climate change. As a result of these efforts, Travelers has been named part of Dow Jones Sustainability Index, for the last ten years. The Company is one of only three property and casualty insurers in the 146 company index.
… but they can do more
Ceres proposes that insurance companies take more drastic measures to treat climate change as a corporate strategic issue. Ceres suggests that insurance companies formalize their strategies for addressing climate change and create a public corporate policy statement.
Additionally, Travelers could support funding research and development for climate related research. This research could be used to better inform Travelers catastrophe models so the Company could better predict the potential effects of catastrophic weather events. Additionally, the research could be used to inform the business community of the risks related to climate change.
Finally, Travelers could create insurance products that promote sustainable and environmentally responsible behavior. For example, Travelers could make a special effort to insure sustainable energy projects. By providing financial support for these projects, Travelers would be encouraging businesses to pursue initiatives that produce few to no emissions. This would be an innovative step, which could mitigate climate change risks, better protect their clients’ property, and benefit Travelers’ financially. (646 words)
Personal Property Damage. Google Images.
- Travelers, Inc. 2015 Form 10-K https://www.sec.gov/Archives/edgar/data/86312/000104746916010107/a2227255z10-k.htm
- Evan Mills, Science, 12 Aug 2005: 1040-1044, Introduction To Special Issue, and News. “Insurance in a Climate of Change.” Science.
- Jim Coburn, 8 November 2013: Ceres. “Chubb and Travelers Still Grappling with Climate Change Post Sandy”
- Travelers Press Release, 19 September 2016: Business Wire. “Travelers Named to 2016 Dow Jones Sustainability Index” http://www.businesswire.com/news/home/20160919005926/en/Travelers-Named-2016-Dow-Jones-Sustainability-Index
- “Ruins and Catastrophes.” Eco-Aesthetics : Art, Literature and Architecture in a Period of Climate Change (n.d.): n. pag. Web.
- Botzen, W. J. Wouter. “Climate Change Adaptation through Insurance against Flooding.” Managing Extreme Climate Change Risks through Insurance (n.d.): 137-64. Web.
- Dörries, Matthias. “Climate Catastrophes and Fear.” Wiley Interdisciplinary Reviews: Climate Change6 (2010): 885-90. Web.
- All pictures are from Google Images