What Has The American Insurance Sector Done About Climate Change?

The modelling and management of climate risk in the U.S. property and casualty (P&C) industry lacks almost entirely the analytical rigour and discipline that we observe in the modelling and management of mortality risk in life insurance policies. One-year P&C policies: are they to blame? In this first of three posts, I’ll contrast the biggest P&C U.S. companies that release a climate report—Chubb, Liberty Mutual, and Travelers—with the biggest European insurance company, AXA. This topic is introduced in Part I. The liability section of a P&C’s balance sheet is examined in Part II along with insurance practises. The asset side of their balance sheets or investment practises are examined in Part III.

The property and casualty (P&C) insurance sector ought to be at the forefront of the conflict.

When hurricanes, floods, and forest fires occur, the insurance industry is first to feel the financial effects. In addition, it is common knowledge that the United States’ population growth since 1990 has been higher than average in areas with a high risk of hurricanes and wildfires. Additionally, these climate disasters are occurring more frequently. For instance, Travelers claims that “California wildfires…we now view events such as those of the past few years as being less remote than we thought previously” in its 2021 TCFD report.

The asset (investments) and liability (obligations to cover losses) sides of an insurer’s balance sheet are both impacted by climate risk. As they process a sizable number of claims related to threats caused by climate change, these businesses ought to be knowledgeable about climate. As a result, the insurance sector must be one where doing good and getting rich go hand in hand. Furthermore, it is admirable that actuaries in U.S. life insurance companies apply such analytical rigour to the prediction and management of mortality risk. Why does US P&Cs’ management of climate risk lack this impressive managerial and intellectual talent? According to the 2021 climate report from renowned reinsurer SwissRe, “from 2010 to 2020, realised losses have exceeded expectations in almost every year. Part of this gap can most likely be attributed to trend effects brought on by climate change.

The conventional wisdom in the U.S. P&C industry has been that the likelihood of a wildfire, let’s say in California, is not related to the likelihood of a hurricane, let’s say, in Florida. What if these occurrences started to correlate as a result of climate change? Would the capital position of a U.S. P&C insurer be in danger if a wildfire broke out in California and a significant hurricane hit Florida at the same time? More concerningly, a significant climate-related catastrophe or a string of significant losses will cause the hit to the insurer’s capital to grow exponentially over time rather than linearly.

According to my assessment, the P&C sector in the US has not been as visible or active in guiding the conversation about climate risk as it could have been.

This is due in part to the different social, political, and economic pressures in Europe, as well as the slightly more narrow-minded incentives for American policyholders.

Annual rewards for writing policies

Is the cycle of yearly policy writing to blame? An insurance provider has an incentive to use actuarial resources to predict your mortality if they are writing a life insurance policy that will last for the next 15 to 30 years. P&C insurance contracts, which cover losses from climate events, are typically only written for one year, so there aren’t many incentives for the industry to plan for the long term.

The top ten P&C insurers in the US

I started looking more closely at AXA XL’s sustainability disclosures to gain a better understanding of the market (latest available 85 page 2022 climate report). AXA’s revenues totaled 99 billion euros, of which 50% came from the property and casualty industry and 20% from health insurance. I view AXA as the industry leader in terms of how they consider how climate risk impacts their coverage and investment choices.

I looked up the top ten P&C insurers in the U.S., ranked by revenues, to compare AXA with an insurer from the other side of the Atlantic. State Farm, Berkshire Hathaway, Progressive, Allstate, Liberty Mutual, Travelers, USAA, Chubb, Farmers Insurance, and Nationwide are some of them. The results were a little underwhelming.

The 2021 sustainability report from State Farm is elementary and doesn’t address any of the points made by AXA. My first thought was that since the majority of State Farm’s business is providing life and auto insurance, such silence might be understandable. However, it turns out that State Farm’s home insurance business brought in $25 billion in premiums in 2021. Climate issues would be relevant for the home portfolio because that is not small change.

Since Berkshire Hathaway is a well-known opponent of ESG, their discussion of the conglomerate’s sustainability takes up just one page. Although Progressive publishes a 51-page sustainability report, the CEO statement in that report places a strong emphasis on the company’s DE&I initiatives rather than climate change. Progressive devotes one page (pages 13 and 14) to a general discussion of risks and publishes a half-page of general text on climate change (page 15). 80% of Progressive’s bonds, according to the investment division, have an MSCI ESG rating. They add that they have begun monitoring the LEED certification status of the structures in their portfolio of CMBS (collateralized mortgage-backed securities). A little over $35 billion of Progressive’s $47 billion in revenue in 2021 comes from auto insurance, a market where climate is less of a factor. However, the insurance of physical risks, where climate should be a risk factor, accounts for about $2 billion in annual premiums.

According to Allstate’s 2021 10-K, $42 billion of their $44 billion in premium revenue comes from their P&C business. The 106-page sustainability report from Allstate begins with a six-page section on “climate strategy and disaster resiliency” on page 65. According to Allstate, it has sufficient capital to withstand climate stress. Allstate releases a 8 page TCFD report and promises more information and quantifiable estimates soon.

USAA, Farmers, and Nationwide appear to be making minimal efforts in the climate area. On a page titled “environmental responsibility,” USAA discusses recycling, cutting back on paper use, and saving money on water and energy.

Farmers publishes a page titled “corporate citizenship” where they place a heavy emphasis on their staff, diversity and inclusion initiatives, reducing the use of plastic and paper, planting trees, charitable contributions, involvement with charitable NGOs (non-governmental organizations), and the “Farmers Insurance Open,” a golf tournament they organise in conjunction with the PGA.

A 15-page corporate responsibility report from Nationwide covers topics like communities, giving, food security, work with the American Red Cross and United Way, investments in affordable housing, health care, education, clean water, and children’s wellbeing, as well as diversity and inclusion initiatives, diverse boards of directors, ethics, and governance.

They dedicate one page to the environment, covering topics like reducing waste, water use, paper use, and landfill diversion as well as lowering their own carbon footprint.

In 2021, Liberty Mutual released its second TCFD report. A report on the TCFD has also been released by Travelers and Chubb. Therefore, a comparison of AXA’s efforts with those of these three American companies—Chubb, Liberty Mutual, and Travelers—seems worthwhile. Prior to delving further, it is important to note that seven of the top 10 U.S. P&C insurers do not disclose a serious examination of the effects of climate risk on their balance sheets. The default response might be to claim that their exposure to climate risk is too small to call for a larger discussion.

I don’t entirely accept that theory. I must assume that the lack of reporting indicates either a lack of internal agreement regarding the significance of climate within their organisations or a lack of investment in comprehending that risk.

Following a series of queries and different approaches taken by AXA in relation to the three American insurers, Chubb, Liberty, and Travelers, the discussion follows. Simply serving as a benchmarking exercise, the comparison.

I recognise that given its opportunities and constraints, each company would probably pursue its own strategy. Additionally, every business has a unique learning curve when it comes to establishing the infrastructure needed to support such thinking and implement organizational-wide buy-in and processes.


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