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Insurance Companies’ Responses to Climate Change: Adaptation, Dynamic Capabilities and Competitive Advantage

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Abstract

Drawing on the dynamic capability view, we analyse how insurers adapt to climate change impacts and how adaptation relates to corporate financial performance. Based on a comprehensive literature review, we deduce seven categories of adaptation measures associated with three dynamic capability dimensions of climate change adaptation (i.e. climate knowledge absorption, climate-related operational flexibility and strategic climate integration). Using this framework, we conduct a content analysis of insurers’ adaptation efforts as reported to the Carbon Disclosure Project. Regression analysis reveals positive relationships between climate knowledge absorption and return on assets (ROA), climate-related operational flexibility and ROA, and between the total number of adaptation measures and ROA.

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Notes

  1. For example, Busch and Hoffmann (2009); Jeswani et al. (2008); Kolk and Pinkse (2007); Weinhofer and Hoffmann (2010).

  2. Mills (2009, p. 324).

  3. Dlugolecki (2008).

  4. Costs are calculated in relation to 2006 values.

  5. Mills (2009).

  6. The increasing number of responding companies to the Carbon Disclosure Project (2003: 235 companies; 2012: 4,100 companies) underlines the growing importance of the climate change topic for stakeholders.

  7. Ceres (2007); Mills (2009).

  8. Winn and Kirchgeorg (2005).

  9. Galbreath (2011).

  10. For example, Berkhout et al. (2006); Busch and Hoffmann (2009); Dlugolecki (2008); Hoffmann et al. (2009); Linnenluecke et al. (2012).

  11. World Economic Forum (2013).

  12. For example, Arnell and Delaney (2006); Busch (2011); Galbreath (2014).

  13. Reidsma et al. (2010); Shih et al. (2009); Surugiu et al. (2010); Tate et al. (2010).

  14. Maynard (2008).

  15. For example, Eisenhardt and Martin (2000); Teece et al. (1997); Winter (2003).

  16. Barreto (2010); Teece et al. (1997).

  17. Busch (2011).

  18. For example, Chakravarthy (1982); Dess and Beard (1984); Duncan (1972).

  19. Busch (2011); Lewin et al. (2004).

  20. Haigh and Griffiths (2009); Starik and Rands (1995).

  21. Winn et al. (2011).

  22. For example, Busch (2011); Galbreath (2011); Linnenluecke and Griffiths (2010); Winn et al. (2011).

  23. Busch (2011, p. 392).

  24. Hecht (2008, p. 1568).

  25. Adger et al. (2005); Hoffmann et al. (2009).

  26. Bleda and Shackley (2008, p. 517).

  27. For example, Busch (2011); Linnenluecke and Griffiths (2010).

  28. Teece et al. (1997).

  29. Winter (2003).

  30. Helfat et al. (2007); Li and Liu (2014); Winter (2003)

  31. Busch (2011); Li and Liu (2014).

  32. For example, Wang and Ahmed (2007).

  33. D’Aveni et al. (2010); Li and Liu (2014).

  34. For example, Barreto (2010); Helfat et al. (2007); Pandza and Thorpe (2009).

  35. Li and Liu (2014).

  36. For example, Weick et al. (2005).

  37. For example, Sharfman and Dean Jr. (1997).

  38. For example, Harreld et al. (2007).

  39. Easterby-Smith and Prieto (2008).

  40. Easterby-Smith and Prieto (2008); Li and Liu (2014); Zahra and George (2002).

  41. Li and Liu (2014); Sharfman and Dean Jr. (1997).

  42. Sher and Lee (2004).

  43. Harreld et al. (2007); Li and Liu (2014).

  44. Berkhout et al. (2006).

  45. Busch (2011); Gupta and Goyal (1989).

  46. Smithers and Smit (1997, p. 141).

  47. Winter (2003, p. 992).

  48. Boer and Gertsen (2003); Busch (2011).

  49. Hoffmann et al. (2009).

  50. Li and Liu (2014); Zahra and George (2002).

  51. Beermann (2011); Behringer et al. (2000); Hertin et al. (2003).

  52. Hertin et al. (2003, p. 281).

  53. Beermann (2011).

  54. We have searched in the following academic databases: EBSCOhost (Academic Search Complete, Business Source Complete, Econ-Lit, E-Journals, Risk Management Reference Center), Emerald Management, Science Direct, Web of Science (Article, Book chapter, Proceeding Paper, Review).

  55. Dlugolecki and Keykhah (2002); Dlugolecki (2008).

  56. Phelan et al. (2011).

  57. Botzen and van den Bergh (2008); Dlugolecki (2000).

  58. In a recent report of Munich Re (2014) the following reasons for rising property damages are mentioned: economic growth in many developing and emerging countries, urbanisation of seriously exposed coastal and river regions as well as more frequent severe weather events.

  59. Mills et al. (2005)

  60. The affected stakeholders are on the one hand the customers and on the other hand the energy supplier.

  61. For example, Anderson (2003); Blazey and Govind (2007); Botzen et al. (2010); Dlugolecki (2000); Dlugolecki and Keykhah (2002); Hecht (2008); Herweijer et al. (2009); Maynard (2008).

  62. Anderson (2003); Dlugolecki (2000).

  63. Blazey and Govind (2007); Hecht (2008).

  64. Botzen et al. (2010); Sato and Seki (2010).

  65. Botzen et al. (2010).

  66. Hecht (2008); Mills (2009).

  67. Dlugolecki (2008); Hecht (2008).

  68. Botzen et al. (2010); Hecht (2008); Herweijer et al. (2009).

  69. Hawker (2007).

  70. Mills (2003).

  71. Dlugolecki (2000).

  72. This category is referred by Mills as “crafting innovative insurance products”.

  73. This category is referred by Mills as “investments in climate change solutions”.

  74. Hawker (2007); Mills (2009).

  75. Wilkins (2010).

  76. Crichton (2007); Mills (2003).

  77. Blazey and Govind (2007); Mills (2009).

  78. Mills (2003, p. 13).

  79. Dlugolecki and Keykhah (2002); Mills (2003).

  80. Botzen et al. (2010); Hawker (2007).

  81. Paterson (2001).

  82. Dlugolecki and Keykhah (2002); Mills (2009).

  83. Hawker (2007); Herweijer et al. (2009).

  84. Linnerooth-Bayer et al. (2009).

  85. Herweijer et al. (2009); Maynard (2008); Ward et al. (2008).

  86. Clemo (2008).

  87. Blazey and Govind (2007); Dlugolecki and Keykhah (2002); Hawker (2007); Herweijer et al. (2009); Mills et al. (2002).

  88. Dlugolecki and Keykhah (2002); Hawker (2007).

  89. Botzen and van den Bergh (2008); Clemo (2008).

  90. Botzen and van den Bergh (2008); Herweijer et al. (2009).

  91. Mills et al. (2002).

  92. Mills (2003); Dlugolecki (2008); Wilkins (2010).

  93. Crichton (2007); Dlugolecki and Keykhah (2002); Wilkins (2010); Ward et al. (2008).

  94. Blazey and Govind (2007).

  95. Crichton (2007).

  96. Herweijer et al. (2009); Mills (2009); Sato and Seki (2010).

  97. Botzen et al. (2010); Dlugolecki (2000); Hawker (2007).

  98. Botzen et al. (2010); Hawker (2007).

  99. Botzen et al. (2010); Mills et al. (2002); Mills (2003).

  100. Ward et al. (2008).

  101. Herweijer et al. (2009).

  102. Botzen and van den Bergh (2008); Charpentier (2008); Dlugolecki (2000); Hawker (2007); Mills et al. (2002); Mills (2003); Sato and Seki (2010).

  103. Blazey and Govind (2007); Botzen et al. (2010); Charpentier (2008); Dlugolecki and Keykhah (2002); Paterson (2001).

  104. Sato and Seki (2010).

  105. Charpentier (2008).

  106. Charpentier (2008); Herweijer et al. (2009).

  107. Botzen and van den Bergh (2008); Herweijer et al. (2009).

  108. Botzen et al. (2010); Hawker (2007); Maynard (2008); Sato and Seki (2010).

  109. Anderson (2003).

  110. Botzen et al. (2010); Mills et al. (2002); Mills (2003).

  111. The original name is crafting innovative insurance products (Mills, 2009).

  112. Botzen et al. (2010); Dlugolecki (2008); Mills (2009); Sato and Seki (2010).

  113. Herweijer et al. (2009); Sato and Seki (2010).

  114. The original name is investment in climate change solutions (Mills, 2009).

  115. Benniefield and Matula (2009); Mills et al. (2002); Mills (2009); Paterson (2001).

  116. Herweijer et al. (2009); Mills (2009).

  117. While Busch (2011) focused on electric utilities, we are confident that the main finding holds for other industries such as the insurance industry and that the identified three capabilities are also relevant for meaningful and sustained adaptation to climate change by insurance companies.

  118. For example, Maynard (2008).

  119. Arnell and Delaney (2006); Bleda and Shackley (2008).

  120. Botzen and van den Bergh (2008).

  121. Berkhout et al. (2006); Busch (2011).

  122. The CDP questionnaire 2010 includes data from the year 2009.

  123. CDP (2014).

  124. Kim and Lyon (2011); Luo et al. (2012); Weinhofer and Hoffmann (2010).

  125. Krippendorf (2004, p. 18).

  126. Früh (2007); Krippendorf (2004).

  127. Früh (2007).

  128. Kvale (1995).

  129. www.maxqda.com.

  130. Dlugolecki and Keykhah (2002).

  131. For example, Clemo (2008); Herweijer et al. (2009); Ward et al. (2008).

  132. For example, Dlugolecki (2008); Maynard (2008).

  133. For example, Anderson (2003); Blazey and Govind (2007); Botzen et al. (2010); Dlugolecki (2000); Dlugolecki and Keykhah (2002); Hecht (2008); Herweijer et al. (2009); Maynard (2008).

  134. For example, Helfat et al. (2007); Li and Liu (2014); Teece et al. (1997).

  135. For example, Eisenhardt and Martin (2000); Lin and Wu (2014).

  136. For example, Ambrosini and Bowman (2009); Eisenhardt and Martin (2000); Wang and Ahmed (2007).

  137. Eisenhardt and Martin (2000, p.1117).

  138. It is worth mentioning that we do not claim that every single adaptation measure of a company requires dynamic capabilities or that adaptation to climate change automatically entails the development of dynamic capabilities. However, we argue that companies that can draw on dynamic capabilities are more likely to proactively adapt to climate change. That is, adaptation to climate change can be considered as a signal or proxy variable for the existence of dynamic capabilities that may entail competitive advantages.

  139. We included this variable to control for a firm’s general proactivity towards business risk and uncertainty, which might coincide with climate change adaptation.

  140. Porter (1985).

  141. Stone et al. (1997).

  142. van Rossum (2002).

  143. Van Rossum (2002) divides the value chain into distribution, underwriting administration and asset management. According to Stone et al. (1997), customer acquisition, underwriting, customer relationship management, and claims management and service are the main elements of the value chain.

  144. De Castries (2002) mentions recycling among research and development, product manufacturing, distribution and utilisation. Therefore, we add disposal.

  145. Berkhout et al. (2006); Winn et al. (2011).

  146. Arnell and Delaney (2006); Hoffmann et al. (2009); Winn et al. (2011).

  147. Botzen et al. (2010); Dlugolecki (2000); Dlugolecki and Keykhah (2002); Hecht (2008); Mills (2009).

  148. For example, Matisoff et al. (2013); Stanny (2013).

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Acknowledgements

We would like to thank the German Federal Ministry of Education and Research for funding the project “Development and Testing of an Integrated Regional Climate Change Adaptation Programme for the Model Region Dresden” (www.business-climatechange.com). Kristin Stechemesser thanks the Leibniz Institute of Ecological Urban and Regional Development, Dresden, Germany, for having had the opportunity of being an associated member of the Dresden Leibniz Graduate School.

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Stechemesser, K., Endrikat, J., Grasshoff, N. et al. Insurance Companies’ Responses to Climate Change: Adaptation, Dynamic Capabilities and Competitive Advantage. Geneva Pap Risk Insur Issues Pract 40, 557–584 (2015). https://doi.org/10.1057/gpp.2015.1

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