Allstate’s business viability depends on effectively modeling, pricing and managing climate-related risks, as well as meeting the needs that arise due to climate change and other strategic trends. We continue to develop products and services that address climate change and the transition to a lower-carbon future. Our senior management and the Allstate Board of Directors identify, measure, manage and monitor material risks, including those presented by climate change. Our Board of Directors regularly hears from Allstate’s chief risk officer about climate change risks.
Identifying and managing climate risks
We manage climate risks within our integrated Enterprise Risk and Return Management (ERRM) Program, which applies risk-return principles, modeling and analytics, governance, and transparent management dialogue to understand the company’s highest-priority risks.
The ERRM Program has key components that enable management and Board oversight of climate risk:
- Risk identification
- Risk assessments
- Risk mitigation
- Risk monitoring and reporting
Our ERRM framework is built on three core principles – maintaining a strong foundation and capital position, building strategic value through time, and optimizing risk and return across the enterprise.
The Enterprise Risk and Return Committee evaluates climate change risk in coordination with the Sustainability Council, which leads our broader ESG efforts. We evaluate climate risk across six key categories: strategic, insurance, financial, investment, operational and cultural risk.
We apply our risk-return principles directly to climate risks, such as emerging changes to the transportation system and property construction, increasing frequency and severity of losses due to extreme weather and catastrophes, losses on investments, and regulatory compliance.
We view risks from climate changes in three categories: insurance, investment and reputational.
- Insurance risk: We expect increased losses as climate change worsens severe weather events and precipitation. Increased severe weather has raised loss costs for homeowners insurance, requiring risk management actions such as changes in pricing, product coverages, reductions in policies in force, underwriting practices, and reinsurance utilization. We expect that the impacts from climate change will continue to be concentrated in property insurance as adjustments made to respond to climate-induced volatility lag the near-term impact of weather-related losses.
- Investment risk: We employ some of the same practices from our underwriting to model risk in our investment portfolio. We incorporate ESG considerations and climate-specific metrics in our asset management decisions. Please read more in our section on Responsible Investing.
- Reputational risk: Climate change matters deeply to internal and external stakeholders. They have high expectations for how Allstate manages its response to climate change. Through this report and other platforms for disclosure, we demonstrate our commitment to sustainability and mitigating climate change.
Allstate continuously evaluates products to ensure our prices adequately reflect risks, including climate change. We believe our management practices give us a strategic advantage in the marketplace.
To be as responsive as possible to changing conditions, we monitor state-specific risks and scientific consensus on climate change impacts, as well as competitor trends, including pricing methods. We continually evaluate our pricing methodology to identify better ways to estimate future loss.
Allstate’s executive compensation program is based on short- and long-term incentive components and does not reward excessive risk-taking. Monetary incentives for achieving corporate and performance goals incorporate risk and return management, including managing risks affected by climate.
As a member of the corporate executive team, Allstate’s chief procurement officer (CPO) incorporates sustainability initiatives into Allstate’s purchasing practices. Our CPO implemented a sustainability program as part of Sourcing & Procurement Solutions to assess the environmental risks and opportunities within Allstate’s supply chain and purchasing operations enterprisewide, including the potential to reduce greenhouse gas emissions. Additionally, in 2020, Allstate requested the disclosure of environmental data from companies’ supply chains to be reported through CDP Supply Chain. The performance of this sustainability program is one component of the incentive compensation for the CPO and program development team.
Policies and practices
Climate change modeling
Allstate’s Catastrophe Modeling and Analytics team and pricing groups assess climate change information and update product leadership. The team uses information from the Intergovernmental Panel on Climate Change (IPCC), the U.S. Global Change Research Program (USGCRP) and the Actuaries Climate Index (ACI). The IPCC and USGCRP evaluate research by climate scientists around the world and conduct robust reviews to provide balanced information to decision-makers. The ACI provides an objective measure of extreme weather and sea level rise over time through quarterly updates. We also use AIR, a hurricane modeling software that specifically considers warm sea surface temperatures. AIR looks at data from years with above average sea surface temperatures and the resulting landfalls of hurricanes, to help inform Allstate’s approach to increased insurance risk.
Allstate’s rate-making evaluations typically rely on a 20- to 25-year historical retrospective view and project one to three years into the future, depending on whether the product is auto- or property-based. This practice aligns with Allstate’s three-year strategic planning cycle. Our analysis focuses on predicting business continuity, resiliency and solvency through a variety of catastrophe scenarios. The Catastrophe Modeling and Analytics team also partners with our Investments group to model mortgage and real estate portfolios under consideration for purchase.
To better predict the level of risk at properties, we are using geocoding, which integrates precise geographic coordinates. This will move us away from using single ZIP codes to using granular risk-based pricing zones, with an immediate focus on coastal and wildfire states where greater precision has the most impact. It also applies machine learning techniques to increase the predictive power of weather, geographic, demographic, construction and customer segmentation data.
Through aerial imagery, we’re prioritizing and eliminating some physical inspection, cutting expenses and improving customers’ experiences. We incorporate insights from high-resolution aerial photos to enhance underwriting and pricing.
Partnerships to advance resiliency
More frequent and severe weather events have an immediate and traumatic effect on our customers, communities and economies. We have long-standing partnerships with industry leaders to sponsor research to improve resiliency to weather-related perils, so customers can prevent damage and lower insurance costs.
For example, Allstate is an active member and financial supporter of the Insurance Institute for Business & Home Safety (IBHS). IBHS delivers top-tier science and translates it into actions that prevent avoidable suffering, strengthen our homes and businesses, inform the insurance industry, and support thriving communities. To reduce future losses, IBHS analyzes existing standards and identifies ways to improve them. Allstate partners with IBHS to promote more durable homes and buildings through better building practices and stronger codes.
The work has led to improved building codes in Florida, the development of impact-resistant shingles, and the identification of fire-resistant materials and building codes that mitigate wildfire damage with no increase in overall construction costs.
The Allstate Foundation partners with agents and local and national nonprofits to prepare communities for disasters by providing emergency kits and other tools. At Allstate, we believe collaborative efforts like these increase awareness of severe weather-related risks and help people better protect themselves and loved ones.
Advocating for disaster prevention, preparedness and risk response
Allstate uses our industry expertise to formulate public policy solutions to address weather-related risks and reduce their impact. We understand that climate change will likely make natural catastrophes more frequent and severe. We partner with national and local organizations to prepare and protect communities from the adverse impacts of climate change. We have successfully advocated at the state level for addressing climate change by strengthening building codes, expanding emergency response capabilities and creating catastrophe insurance pools.
We support FEMA’s Building Resilient Infrastructure and Communities (BRIC) program, which offers grants for mitigation and related activities. We are monitoring FEMA efforts to increase funds for infrastructure mitigation by as much as $10 billion through COVID-19 programs. Given the challenges with efficiently assessing mitigation, particularly for wildfires, we are advocating for state and local programs to promote and assess mitigation and increased federal support of such programs.
Allstate is a champion for pooled solutions to protect consumers in high-risk areas, such as establishing a Florida-style catastrophe fund to help stabilize the California’s homeowners market, along with other reforms and mitigation funding.
You can learn more about our partnerships with other stakeholders, like local, state and the federal government, in our Public Policy section.
Programs and performance
In addition to managing risk from the changing environment broadly, we know we must act to reduce our contributions to the climate crisis.
We have cut energy use beyond our original targets and significantly reduced our greenhouse gas emissions. In 2021, we are committed to adopting science-based targets and continue to report our emissions through CDP. We also published our inaugural Task Force on Climate-Related Financial Disclosures-aligned index in conjunction with this report. The report will evolve with our enhanced practices.
Allstate is a member of the CDP “A List” for Climate Change.
“Our ‘A List’ celebrates those companies who are preparing themselves to excel in the economy of the future by taking action today.” – Paul Simpson, CEO, CDP
To help suppliers manage climate change, in 2020 we performed our first Supplier Sustainability Assessment. More than 120 of our most strategic suppliers disclosed their environmental data via the CDP Climate Change questionnaire.
In 2021, Allstate published a TCFD report and is committed to working toward a science-based target. We will also continue to apply emerging data science to risk assessment, including exploring partnerships with startups that specialize in forward-looking climate modeling.