Mitigating Climate Risk in Our Underwriting Decisions

Understanding climate-related effects on weather perils is central to our underwriting process. At Travelers, we combine cutting-edge technology with more than a century of expertise in catastrophe underwriting to inform a thoughtful approach to evolving climate threats.

 

Our teams of data scientists, meteorologists, geophysicists and environmental engineers give us industry-leading insights into severe weather events and the longer-term effects of a changing climate. In addition, we use proprietary, industry-specific questionnaires and sophisticated climate models to help us identify and incorporate environmental risks into our underwriting, pricing and reinsurance decisions.

 

While we take a long-term view when it comes to climate, we’re also able to mitigate our exposure to climate trends through short-term tactical adjustments to our underwriting strategy, product pricing, and policy terms and conditions. Importantly, because we generally write one-year insurance policies, we are able to make such adjustments on a regular basis.

 

Our approach to managing changing climate conditions has proven effective; over the past five years, our share of property casualty losses relative to total domestic P&C industry losses has declined significantly compared with the five years prior to that and has been meaningfully lower than our corresponding market share.

 

We continue to invest in technology and climate research, constantly improving our understanding and developing additional climate-related evaluation tools. Looking to the future, our efforts leave us well positioned to continue delivering industry-leading returns in the face of changing climate conditions.

 

Incorporating Climate Considerations into Our Investment Processes

The primary purpose of our investment portfolio is to enable us to fulfill our promise to our customers and fund the payment of future claims; accordingly, we employ a thoughtful investment philosophy that is focused on appropriate risk-adjusted returns and credit quality. We approach the impact of climate on our portfolio with the same critical eye and long-term focus that we bring to all investment risks.

 

At Travelers, as of December 31, 2021, 93% of our investment portfolio is in highly rated, fixed income securities, with a weighted average effective duration of 4.2. The credit ratings and price of those investments reflect the risk associated with climate trends, which manifest over many decades. Further, the relatively short average maturity and liquidity of our fixed income investment portfolio allow the portfolio to be adjusted as trends evolve over time.

 

In addition, our Investment Policy requires that Travelers consider environmental, social and governance (ESG) factors in our investment process to the extent relevant. We have assigned internally developed ESG scores to all issuers in our fixed income portfolio, and, based on our analysis of these scores and other factors, we exclude potential investments that we believe would not appropriately compensate us for the risks we would be assuming.

 

Our responsible investing strategy enables us to do well while also doing good, supporting financially sound projects with environmental and societal benefits. As of December 31, 2021, over 45% of our fixed income portfolio is invested in municipal bonds, which enables us to provide significant funding for projects that mitigate pollution, provide safe drinking water, promote conservation, respond to changing climate conditions and more. Additionally, at December 31, 2021, we owned almost $2.4 billion of “green bonds” and an additional $0.2 billion of “sustainability bonds” and “sustainability-linked bonds” (as classified by Bloomberg).

 

Our New Coal/Tar Sands Policy

We have recently published a policy pursuant to which we will not provide insurance for the construction and operation of any new coal-fired plants. Neither will we underwrite new risks for companies that:

• Generate more than 30% of their revenues from thermal coal mining;

•  Generate more than 30% of their energy production from coal; or

•  Hold more than 30% of their reserves in tar sands.

 

To the extent that we have existing underwriting relationships that exceed these thresholds, we have committed to phasing them out by 2030.

 

Similarly, we will not make new investments in:

• Companies that receive more than 30% of their revenues from thermal coal mining;

• Electric utilities that generate more than 30% of their electricity from coal; or

• Companies holding more than 30% of their reserves in tar sands.

 

We will also phase out publicly traded investments that exceed these thresholds as such investments mature.

 

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Through careful underwriting and conscientious investing, we will continue to anticipate the challenges posed by a changing climate, to help our customers and communities build resilience, and to do our part as the economy transitions toward a lower carbon future.