AIG considers the potential impact from climate-related issues on our business, strategy and financial planning over short-, medium- and long-term time horizons. We consider both direct physical impacts and indirect effects that may emerge through transition risks, particularly those driven by new legal and regulatory requirements. We also consider evolving investor, client and broker expectations.
In the short term, acute physical risks from climate change may result in increased frequency and severity of natural catastrophes. This in turn affects operational risks associated with business activities of AIG or third parties as well as business continuity risks. We manage these physical and operational risks through our modeling work, the diversification of our business and regular reviews of our risk appetite and reinsurance strategy.
In the short- to medium-term, AIG’s underwriting and investment activities create potential legal and regulatory risks due to increased focus on ESG-related litigation and regulatory action. In the medium- to long-term, chronic physical risks such as shifting temperatures, precipitation levels, droughts and sea water levels could impact AIG’s property and casualty underwriting and operational exposures to climate change. Morbidity and mortality expectations could also be affected by dramatic changes in weather, including the potential spread of vector-borne diseases. Additionally, efforts to transition towards low or net zero carbon economies present market and credit risks. Further, AIG’s attempts to match long-duration liabilities from AIG Life and Retirement with equally long-dated assets may present technology risks.
We manage catastrophe exposure with multiple approaches such as setting risk limits based on aggregate Probable Maximum Loss (PML) modeling, monitoring overall exposures and risk accumulations, modifying our gross underwriting standards, and purchasing catastrophe reinsurance through both the traditional reinsurance and capital markets in addition to other reinsurance protections.
We use third-party catastrophe risk models and other tools to evaluate and simulate frequency and severity of catastrophic events and associated losses to our portfolios of exposures. We apply adjustments to modeled losses to account for loss adjustment expenses, model biases, data quality and non-modeled risks.
We perform post-catastrophe event studies to identify model inefficiencies, underwriting gaps, and improvement opportunities. Lessons learned from post catastrophe event studies are incorporated into the modeling and underwriting processes of risk pricing and selection. The majority of policies exposed to catastrophic risks are one-year contracts that allow us to adjust our underwriting guidelines, pricing and exposure accumulation in a relatively short period.
We recognize that climate change has implications for insurance industry exposure to natural catastrophe risk. With multiple levels of risk management processes in place, we actively analyze the latest climate science and policies to anticipate potential changes to our risk profile, pricing models and strategic planning. For example, we continually consider changes in climate and weather patterns as an integral part of the underwriting process. In addition, we provide insurance products and services to help our clients be proactive against the threat of climate change. Our internal product development, underwriting, and modeling, will continue to adapt to and evolve with the developing risk exposures attributed to climate change.
For an overview of our natural catastrophe exposures and annual aggregate modeled losses for all perils worldwide refer to our 2021 Form 10-K page 165–167.
AIG has business continuity plans in place to help ensure we can quickly respond to climate change-related incidents that may disrupt business operations, including extreme weather events. AIG regularly reviews its existing incident management, business continuity and disaster recovery practices, and our Global Head of Resiliency guides our business resiliency plans.
In 2021, AIG successfully put these incident management and business continuity plans into action in moments of crisis. For example, our Houston offices were significantly impacted by Winter Storm Uri and our New Orleans, Baton Rouge and New York offices were affected by Hurricane Ida. In both cases, we experienced power outages and had to suspend essential on-site functions. However, pursuant to our business continuity plans, our employees received emergency communications via AIG’s Alert system to allow them to confirm their safety and ability to work, and we were able to continue operating remotely. These events gave us the opportunity to assess, enhance and improve our operational resiliency.
In December 2019, AIG began tracking the emergence of COVID-19, and after it developed into a pandemic in 2020, we successfully implemented business continuity plans, including transitioning over 90% of our workforce to a remote work environment, thereby allowing us to maintain operations and continue to serve our clients and stakeholders. AIG’s COVID-19 response strategy prioritizes the health and safety of our employees, and we continue to adjust our approach as conditions evolve. You can read more about our return-to-work strategy in the Social section of this report.
Regulators are increasingly focused on ESG issues, including climate change issues. Per the UN Green Finance Platform, there are over 680 unique climate-related policy measures in place globally, and there were over 1,000 sustainable finance or ESG regulatory developments in 2021 alone. Governments and policymakers are pledging to meet carbon reduction targets and are adopting sustainable finance strategies that decarbonize their economies to drive adaptation and resiliency in the face of increasing natural catastrophes and societal pressures. As such, we anticipate that policymakers and regulators’ climate- and ESG-related expectations will continue to increase over the coming years.
To better understand the scale of the political and regulatory environment in this area, AIG regularly assesses the current and pending climate and ESG-related regulatory developments that may impact AIG.
What follows are some examples of AIG’s responses to the evolving regulatory landscape.
United Kingdom
The U.K. regulators have been in the vanguard of climate stress testing. 2021 saw the second climate stress test from the Bank of England, known as CBES: Climate Biennial Exploratory Scenario, which built upon the original exercise in 2019. AIG UK was invited to participate as one of the largest insurers in the U.K. The aim of the exercise was to size potential climate change risks and assess the impact of a range of potential actions that could be taken in response to the risks. CBES included multiple scenarios covering climate as well as macro-economic variables, with a time horizon of up to 30 years. Insurers were asked to consider the physical impacts from more severe climate events, the impact on the investment portfolio and a series of hypothetical litigation scenarios. The quantitative results were supported by a detailed qualitative questionnaire.
From the different elements of CBES, the hypothetical climate litigation scenarios presented the largest financial impacts for AIG UK. This was as expected since AIG is a very significant insurer in Casualty and Financial lines.
The impact on the investment portfolio was less significant for AIG UK, given the conservative investment portfolio, although some losses were seen driven by higher credit spreads and interest rates assumed under all three scenarios. The greatest impact arose, unsurprisingly, where no additional government policy actions were taken to respond to climate related risks.
The physical impact was relatively modest for AIG UK owing to the nature of risk in its property underwriting, and again the no additional government policy action scenario delivered the largest impacts from climate-related risks.
Europe
As of 2021, climate change risk is embedded within the Risk Appetite Statement of AIG Europe SA (AESA). AESA management has also developed a climate change risk integration plan.
Singapore
AIG Singapore is testing the ESG underwriting framework and has developed the climate risk appetite and the climate variability scenario within the 2021 ORSA report, which has been approved by its Board of Directors. The responsibilities of the Board and management have also been updated to outline oversight of environmental risk. AIG Singapore continues to actively engage with and provide feedback to the Monetary Authority of Singapore, such as embedding environmental risk assessments into investment decisions and underwriting processes.
Australia
AIG Australia assigned the responsibility for the identification and management of financial risks from climate change to the ERM team, managed by the AIG Australia CRO.
In December 2021, the Board Risk Committee approved a climate risk plan that details how climate risk management will be embedded into business processes, with heavy focus on the Australia underwriting and investments portfolio.
In 2021, AIG Australia also included climate risk in its Internal Capital Adequacy Assessment Process (ICAAP), Risk Appetite Statement and Risk Management Strategy. AIG Australia also included climate-related stress testing in the 2021 ICAAP in the form of a climate stress plan, which will be executed starting in 2022. Key features of the 2021 climate stress plan include climate scenarios pertaining to physical, transition and liability climate risk elements.
AIG monitors for and tracks regulatory developments across all jurisdictions in which we operate. AIG’s International Sustainability Working Group is providing support to AIG’s international businesses to advance sustainability initiatives and address regulatory requirements on a consistent basis across the company. Additionally, AIG is actively participating in industry associations and coalitions that are focused on ESG topics to provide our point of view and shape developing standards and requirements.
AIG embeds ESG considerations in its fundamental investment analysis of the companies or projects we invest in to ensure that they have sustainable earnings over the full term of our investment, as material, relevant and available. AIG considers internal and external factors and evaluates changes in consumer behavior, industry trends related to ESG factors and the ability of the management companies to respond appropriately to these changes to maintain their competitive advantage.
AIG is a diversified company that takes on both short- and long-term liabilities from policyholders. To the fullest extent practicable, AIG seeks to duration-match its assets to its liabilities. As such, we seek out long-term investments to match our long-term liabilities with a long-term perspective about the return profile and sustainability of the investments.
Our portfolio broadly consists of fixed income, asset-backed and securitized products and alternatives, including listed and private equity. Some of these investments are either secured by, or heavily dependent on, physical assets. Although our credit and investment processes consider protections that are in place, such as property and business interruption insurance, increased physical and transition risks from climate change may affect the value of these assets in the future.
As efforts to move away from a carbon-intensive economy gather pace, financial market participants may fundamentally reassess the value of carbon-intensive assets and the businesses that rely on them. Shifts in consumer behavior may affect the long-term viability of these businesses and, in turn, the value of the liabilities that they issue. This revaluation may lead to asset impairments. Accordingly, we attempt to consider the relevant and material factors, including climate and ESG, as part of our initial investment underwriting process.
As part of a group-wide effort to prioritize and engage subject-matter experts on climate-related risks, AIG’s Credit Risk Team held several special topic discussions throughout 2021 about how different transition scenarios could impact the asset performance of AIG’s metals and mining, energy, automotive and real estate sector exposures. Moreover, Credit Risk regularly engages the first line on climate-related risk considerations during reviews of above-threshold obligors and annual portfolio reviews with AIG’s Investments and Credit Lines business units.
Litigation related to climate change has increased in recent years. Many lawsuits center on enforcement or interpretation of environmental laws and regulations, often seeking to use litigation as a tool to influence government and corporate climate policies. Other cases seek damages for alleged contributions to climate change, insufficient disclosure around material financial risks or “greenwashing” false advertising claims. Additionally, even where climate change is not the subject of a lawsuit, it can still create circumstances that give rise to or substantially impact the magnitude of litigation.
Some of this recent litigation includes lawsuits brought by municipalities throughout the U.S. against fossil fuel companies that seek to hold the companies accountable for past, present and future costs allegedly arising from climate change. While such cases have been unsuccessful thus far, AIG tracks the underlying cases and factors that can change their risk profile. These factors include scientific developments that claim to tie climate-related harms to individual companies and legal developments such as giving personhood and legal rights to natural objects or ecosystems.
Securities actions are another form of direct litigation over climate change. These include shareholder securities suits against companies, directors and officers, as well as derivative actions brought against directors for alleged disclosure or climate risk management failures. While these kinds of actions have not resulted in material losses, AIG continues to assess the evolving norms for disclosure and expectations for corporate action around climate change, which create the potential for more climate-related litigation.
AIG also considers and monitors the indirect effects of climate risk on litigation, which have already resulted in losses. Severe weather and other effects of climate change result in more frequent and more severe damages, leading to lawsuits. For example, wildfires in the western U.S. created significant litigation liability for utility companies whose actions allegedly affected the fires. Litigation about injury or damage from flooding, mudslides and other severe weather as well as litigation about construction defects, chemical release and workers compensation are all indirectly affected by climate change. AIG regularly assesses how climate change indirectly affects claim frequency and severity and engages in discussions among business units to ensure we are understanding and addressing these trends.
Investors, customers, regulators and other stakeholders are placing greater scrutiny on climate-related topics, and expectations about how businesses should respond to climate issues are evolving. Companies that are unable to meet stakeholders’ expectations could suffer from negative publicity, reputational harm or loss of customer or investor confidence, which could adversely affect operations.
AIG is committed to addressing reputational risk. For example, AIG Trade Finance has been requiring all clients and counterparties from the diamond industry to meet the highest sustainability standards and avoid so-called “blood diamonds,” and we insist that diamantaires be active members of the Responsible Jewellery Council.
Technological advancements that support the transition to a lower-carbon, energy-efficient economic system may have a significant impact on a wide range of companies and other organizations. This may affect the nature and financial impact of the risks our customers seek to insure. This economic transition may also materially affect the demand for insurance in specific sectors, most obviously in energy and transport. Although this may not necessarily reduce the overall demand for insurance products and services, it may alter demand patterns and the nature of insurance cover required.
AIG is currently addressing technology risks as part of our Energy Transition efforts. We have created cross-functional working groups that focus on specific technical topics, like hydrogen as well as carbon capture and storage, which serve as think tanks. These working groups convene experts from engineering, underwriting, claims and other business lines to share lessons learned, discuss leading practices, raise questions and develop guidance for the business.
Additionally, our ERM team has established a Community of Practice (CoP) to assess the potential impact of different types of energy transition risks, including technological advancements. The Energy Transition CoP brings together expertise and resources across business lines and functions where these risks are most likely to manifest and acts as the central location to review, evaluate and disseminate data and information to inform decision-making and goal setting. Through regular interactions and roundtable discussions with internal and external stakeholders, the Energy Transition CoP is developing a top-of-the-house view to guide AIG’s underwriting, investment and risk management processes. Importantly, this view will form a baseline for dedicated emerging risk professionals conducting materiality and impact assessments across all affected lines of business.
