AIG President and CEO Peter Zaffino urged the insurance industry to acknowledge that more frequent and severe catastrophe losses are likely here to stay, and plan accordingly.
“We’ve never seen consistent [catastrophe] losses at this level, and as an industry need to acknowledge that frequency and severity is changed dramatically as a result of climate change and other factors,” Zaffino said during American International Group’s Q3 2021 earnings call on Nov. 5.
Zaffino noted that AIG reported $625 million of net global catastrophe losses during the quarter, of which $530 million was in commercial. Hurricane Ida and massive floods made the biggest impact, he said.
The thing, is, extreme catastrophe losses have become increasingly common for some time, Zaffino argued.
“Since 2012 and excluding COVID, there have been 10 [natural catastrophe events] with losses exceeding $10 billion, and 9 of those 10 occurred in 2017, through the third quarter of this year. Average [catastrophe] losses over the last five years have been $114 billion, up 30 percent from the 10-year average, and up 40 percent from the 15-year average,” Zaffino said. “Should 2021 [industry] catastrophe losses exceed $100 billion – and we’re already at $90 billion through the third quarter – this will be the fourth year in the last five years in which natural catastrophes have exceeded this threshold.”
Observations and Action Plans
Zaffino said that catastrophe models “tended to trend acceptable” over the last 20 years, but they haven’t in the last five years. Models have had shortfalls in helping plan for the new normal in other ways, he added.
“Over the last five years on average, models have been 20 to 30 percent below the expected value at the lower return periods,” Zaffino said. “If you add in wildfire, those numbers dramatically increase.”
According to Zaffino, industry losses versus model losses at the low end of the curve have been deficient, and “need rate adjustment to reflect the significant increase in frequency” in more extreme natural catastrophe events.
AIG is addressing this in a key way, he said.
“We have invested heavily in our own [catastrophe modeling] team to develop our own view of risk in this new environment. As a result of this work, we’ve made frequency and severity adjustments for wildfire, U.S. wind, storm surge, flood as well as numerous other perils at International,” Zaffino said.
The AIG CEO promised to continue to leverage new scientific studies, new vendor model work and the insurer’s own claims data to calibrate its own views on risk over time, to make sure it is pricing catastrophe risks appropriately in the new normal.
Why Insurance CEOs Are Addressing Climate Change
Zaffino was the second major U.S. P/C insurance CEO in recent weeks to substantially address climate change during an earnings call. Chubb Chairman and CEO Evan Greenberg also did, during the insurer’s Q3 earnings call on Oct. 27. He spent significant time outlining catastrophe data, Chubb’s strategy to confront more frequent and severe weather events and what other drivers are at play.
Investors understand that insurers have exposure to climate risks, but few have a complete understanding of how carriers have addressed this over the years, according to Robert Hartwig, an economist and associate clinical professor of Finance and Insurance at the University of South Carolina’s Moore School of Business. He said with the increased focused on climate change risk, insurers must educate investors of all sizes about what they face, in order to maintain access to capital markets in the years and decades ahead.
“Insurers must educate investors not only how current and future climate risks are/will be modelled, underwritten and priced but also as to how insurers will find profitable opportunities for future growth as trillions of dollars in new energy infrastructure are brought online around the world to replace legacy carbon-based systems,” said Hartwig, a former president of the Insurance Information Institute.
Insurance CEOs must also devote some time during earnings calls to climate change issues so they can avoid confrontations with activist climate investors, Hartwig added.
“No insurance CEO wants to end up in the situation that ExxonMobil did earlier this year when activist hedge fund Engine No. 1 managed to win three seats on Exxon’s board,” Hartwig said. “The best way to avoid that and to maintain broad investor appeal is for insurance CEOs to communicate regularly with investors (and regulators) on the issue of climate as broadly defined, articulating a sound strategy for risk management and profitable growth.”