Insurance and Climate Change Risk Management: Rescaling to Look Beyond the Horizon
| Author | Michael O. Wood,Jason Thistlethwaite |
| DOI | http://doi.org/10.1111/1467-8551.12302 |
| Date | 01 April 2018 |
| Published date | 01 April 2018 |
British Journal of Management, Vol. 29, 279–298 (2018)
DOI: 10.1111/1467-8551.12302
Insurance and Climate Change Risk
Management: Rescaling to Look Beyond
the Horizon
Jason Thistlethwaite∗and Michael O. Wood
School of Environment, Enterprise and Development (SEED), Universityof Waterloo,
200 University Avenue West, Waterloo, Ontario N2L3G1, Canada
Corresponding author email: j2thistl@uwaterloo.ca
Climate change represents a significant financial risk to the insurance industry, but re-
search has yet to assess whether the industry is managing this risk. Through the applica-
tion of scale as a vertically nested hierarchy of relationships,this paper seeks to evaluate
whether insurers are ‘rescaling’ risk management practices to accommodate the tempo-
ral and spatial uncertainty associated with climate change. This framework is applied to
a content analysis of 178 (183) firm responses to the 2012 (2015) U.S. National Asso-
ciation of Insurance Commissioners Climate Risk Disclosure Survey to detect evidence
of rescaling through climate change risk management (CCRM). The results reveal that
the majority of companies do not integrate climate change into their risk management
practices, but reinsurers are rescalingin a greater proportion than primary insurers. This
finding confirms that a nested spatial and temporal scale in the insurance industry creates
resistance to CCRM. The use of scale contributes to emerging scholarship on organiza-
tions and climate change by oering a frameworkfor measuring organizational responses
and justifying a research agenda on rescaling strategies as a means of risk management.
Introduction
The insurance industry has been identified as the
‘canary in the coal mine’ for the financial risks as-
sociated with climate change (LeBlanc and Linkin
2010, p. 113). Growing insured losses generated
by the increasing frequency of extreme weatherin-
centivize eorts to manage this risk (Ball, 2015;
Dlugodecki, 2006; Mills, 2009; Swiss Re Sigma,
2015). These losses are consistent with Intergov-
ernmental Panel on Climate Change (IPCC) re-
search suggesting that climate change will in-
crease the intensity and frequency of extreme
weather (Cutter et al., 2012; Seneviratne et al.,
2012). Climate change is identified as both a
threat and an opportunity for the insurance
∗Equal contribution. Authors appearin alphabetic order.
We would like to thank our two graduate research assis-
tants for their help in developing this important work.
industry: a threat because losses limit the avail-
ability and aordability of coverage, and an
opportunity because risk can be priced into
premiums and investments,thereby creating incen-
tives to support mitigation and adaptation strate-
gies throughout the global economy (Botzen and
van der Bergh, 2008; Kunreuther, Michel-Kerjan
and Ranger, 2013; Mills, 2009). For these reasons,
non-governmental organizations (NGOs), policy-
makers and thought-leaders seeking to strengthen
global climate change governance have engaged
the insurance industry as a potential market-based
system for pricing the risks associated with climate
change throughout the economy (Paterson, 2001).
Despite this potential, recent research by the
UK’s Prudential Regulatory Authority suggests
that climate change represents a ‘tragedy of the
horizons’ (Carney, 2015, p. 4) for the finance and
insurance sector, as the economic risk associated
with its eects (e.g. extreme weather) is beyond
C2018 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
280 J. Thistlethwaite and M. O. Wood
the time and spatial horizon of most organizations
(PRA, 2015). This characterization invokes scale
as a means of explaining the challenge presented by
climate change for the insurance industry, specif-
ically the need to adjust existing practices to ac-
commodate a wider range of spatial and tempo-
ral uncertainty.Indeed, scholars have described the
spatial and temporal scale of climate change as an
alteration in the natural variation of environmen-
tal change, such as increases in the frequency and
geographical exposure of extreme weather (Clark,
1987; Wilbanks and Kates, 1999). Shifts in scale
can motivatet ransformationalchange in organiza-
tional logics that support ‘rescaling’, whereby ex-
isting practices adjust to new environments(Spicer,
2006). Insurers, regulators and NGOs have rec-
ognized this need for transformation in the in-
surance industry by championing practices that
support CCRM (Kunreuther et al., 2009; Mills,
2009; PRA, 2015). The conceptualization of cli-
mate change as a shift in scale justifying organiza-
tional change in the insurance industry raises two
important research questions, which responds to
both researchers’ (see Aerts and Botzen 2011; Hall,
2011; Websterand Clarke, 2017) and practitioners’
(see ClimateWise, 2015b) recent calls for greater
clarity as to the insurance industry’s exposure and
response to climate change.The research questions
guiding this project are: Does the insurance indus-
try exhibit evidence of organizational logic rescaling
to address climatechange-related risks? Which firms
exhibit a higher proclivity, if any, toward organiza-
tional logic rescaling?
Despite some evidence that insurers are chang-
ing practices in response to climate change, re-
search measuring this shift remains scarce (see
ClimateWise, 2015a; Thistlethwaite, 2012). This
paper employs scale as a framework to assess
whether the insurance industry is integrating
CCRM across the scope of corporate governance,
underwriting, and investment practices. Survey
data from the U.S. National Association of Insur-
ance Commissioners (NAIC) Climate Risk Disclo-
sure Survey were analyzed to detect whether there
is evidence of insurers’ adopting risk-management
practices consistent with organizational logicsnec-
essary to capture the scale of risk associated with
the eects of climate change on the insurance in-
dustry. Based on this analysis, the paper argues
that the majority of US insurers have yet to rescale
practices consistent with an organizational logic
necessary for managing the industry’s exposure to
climate change risk, supporting the notion that the
industry is currently exposed to a ‘tragedy of the
horizons’ (Carney,2015, p. 4). Instead, insurers are
defending the existing organizational logics em-
bedded within a nested spatial and temporal scale
that treats increasing loss-events as anomalous
rather than correlated to climate change. There
is, however, evidence of early-adopters of CCRM
specifically among reinsurers and insurers priori-
tizing climate change risk in corporate governance,
and assessing underwriting and investment logics
for evidence that climate change is correlating in-
stead of diversifying risk across time and space.
This finding contributes to research on climate
change and insurance and, more broadly, organi-
zations and the environment,by demonstrating the
value of scale in measuring organizational change
and justifying research on rescaling as a means of
risk management.
The paper is organized as follows. The first sec-
tion leverages researchon scale and organizational
change to demonstrate the nested hierarchy that
defines the insurance industry’sspatial and tempo-
ral organizational logics and how climate change
represents a change in external scale that supports
a rescaling of these logics. The second section in-
troduces content analysis as a method of using this
framework to assess survey data from the NAIC
Climate Risk Disclosure Survey. The third section
provides the results of this analysis. The fourth
section discusses the coded responses to demon-
strate how nested and rescalingorganizational log-
ics influence the adoption of CCRM. The fifth sec-
tion concludes the paper and justifies a research
agenda identifying strategies to overcome resis-
tance to rescaling.
Literature review
Scale and the structure of the insurance industry
Scale is a widely applied concept for understand-
ing phenomena, but with divergent conceptualiza-
tions and assumptions (Sheppard and McMaster,
2004). Some assume that processesare spatially de-
pendent and conceive of scale as a vertically nested
hierarchy ranging fromlocal, regional, national to
global (e.g. Adger, Arnell and Tompkins, 2005).
Others view processes as networked connections
of flows between human and non-human actors,
and thus best understood through a horizontal
conceptualization of scale (e.g. Leitner, 2004).
C2018 British Academy of Management.
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