Travelers Insurance: Focusing on Climate Change and Natural Disaster

Risk
Situation Analysis:
Travelers Companies Inc. was founded in 1846 by J.G. Batterson and nine Hartford
businessmen. It became the second-largest US Commercial property-casualty insurance
underwriter and the third largest US personal underwriter. The company was divided into
three reportable business segments: (1) Business Insurance, (2) Financial, Professional &
International Insurance, and (3) Personal Insurance. In 2011, the US endured its most
expensive and destructive year with severe weather and climate incidents. In 2012, this trend
continued. The trends didn’t go unnoticed by Travelers. A majority of insured losses due to
natural disaster events directly impacted Travelers' P&C business. Travelers used several
proprietary and third-party computer models to analyze the risk of catastrophic events.
Travelers’ underwriting took into account the exposure of the client risk to the risk of rate
premiums, premium collections, premium investments, claim payouts, and reinsurance
contracts. Climate change could create uncertainty about risk levels dependent on natural
disasters and extreme weather events. It may also change other facets of the corporate plan of
the firm, including underwriting, contracts, capital structure, and assessment of future
liabilities. How would Travelers manage to provide affordable, comprehensive insurance and
satisfy shareholders at the same time reducing climate change risk? Travelers needed to
defend their policyholders but still had to build a strategy that would boost market equity and
its $73.8 billion6 portfolio of investments.
The problem Evan Blue is confronting arises from a study by Ceres Sustainability Advocacy
group calling for businesses to take climate change into considerations in their risk
projections and to build mitigation plans. The fictional Vice president of Traveler’s Insurance
is responsible for updating the company’s board of management about the issue the following
day. This will determine if there is a strategic argument for taking steps in response to the
danger of climate change. What is the liability of the organization and how incorporating
climate change into its risk model would render it a stronger underwriter or a priced out of
other markets?