Aviva PLC is an insurance company located in the UK and is notorious for being environmentally conscious and seeking to attain a zero net carbon footprint by 2040. During its partnership with the Bank of England, the company has undergone the Climate Biennial Exploratory Scenario (CBES), which is required for companies facing risks. Some of the major risks facing households and society in general are associated with climate change.
Due to the anthropogenic nature of the crisis, cities, homes, and businesses are at a higher risk of being affected by bad weather. Floods, storms, droughts, and other adverse weather conditions are becoming more common, increasing the likelihood of catastrophic events. One of the ways to deal with them is through preparation and risk planning (Elliott, 2021). The role of private insurance is to encourage that planning by offering reasonable insurance plans to companies willing to fortify themselves against such events, as well as those wishing to reduce their impact on the environment, as a long-term policy.
The reason the Bank of England requires financial institutions to conduct the CBES exercise is that these institutions are directly involved in financing, investing, and supporting other organizations, while borrowing money from the Bank in the short- to medium-term to cover immediate expenses. CBES allows the participants to estimate financial exposures to climate risks, understand the challenges to their business models, and improve responses to these financial risks. As such, it is a useful tool for the participants, as well as the Bank of England, which can gauge the trustworthiness of its partners.
Some of the main findings of Aviva’s CBES exercise include that the company’s investment portfolio, as well as its medical, house, and life insurance products, would be affected. Everything related to long-term planning would incur a higher degree of risk. According to the NAA (No Additional Action) scenario, financial investments would fall by under 15%, while weather-related losses would increase by 50%. These daunting findings serve as a call to action and require Aviva to implement measures to mitigate these risks to remain profitable and serve its clients, stakeholders, and shareholders. The main questions to consider include the usefulness of stress tests in their current form, the commitment to Net Zero goals, and the Shareholders vs. Policyholders debate. These inform the company’s mid- to long-term policy, while other questions do not appear to be as pressing or relevant to the CBES report’s findings.
As it stands, Aviva is the leader of the Net-Zero insurance alliance. As a member of the board, I would support management in taking a leadership role in industry collaboration. The reason is that a leadership position allows the company to set goals, directions, and objectives, and to prepare for them in advance, rather than reacting to other organizations’ initiatives (Elliott, 2021).
Aviva has a long track record of being dedicated to environmental goals, thus having the reputation and qualifications for the leadership position. The natural planning horizon for the management team should be 10-20 years. Environmental changes, both positive and negative, tend to evolve over time, with gradual differences occurring each year. Aviva and other insurance companies ought to make gradual changes to their own business model, and the best way to adapt to market changes is to lead those changes.
References
Elliott, R. (2021). Underwater: Loss, flood insurance, and the moral economy of climate
change in the United States. Columbia University Press.