Hi, this is Dan Morrell, host of Skydeck.

Liberty Mutual CEO Tim Sweeney (MBA 1991) says that 2012 was the year that climate change started really showing up on the balance sheet.

“This is a horrible analogy for a climate discussion, but we're kind of the canaries in the coal mine—in that our business is risk. Our job is to price risk and thus predict risk.”

Up until 2012, Liberty could just trend past weather data into the future and get reasonably close predictions. But the uptick in severe weather forced the company to shorten its historical data period from 20 years to six or seven; today, Liberty looks at only the most recent three years.

As climate change and the resulting rise in catastrophic weather continue to have these dramatic implications on the insurance industry, I talk to Sweeney about the mindset shift from mitigation to adaptation, how the insurance industry can be proactive about that adaptation, and what it will take to make a real difference.

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Dan Morrell: I think there's this lay understanding that insurance their job is to just show up when something goes wrong. And I wonder if you can talk about how Liberty actually can support mitigation and adaptation and what that looks like in real terms.

Tim Sweeney: We have risk engineers on staff. And so even when new construction projects are happening now, we lend our risk engineers, we often write surety bonds on those projects that ensure that we're following updated building codes. And frankly, that the building codes are being enforced, because a lot of what needs to change to adapt to what will be worse weather for some period of time are building codes and making sure that folks are building in the right places.

And so bringing risk engineers and ensuring that building codes are being followed… Look no further than the earthquake tragedy in Turkey. We were there as well because we ensure property there. Building codes just weren't enforced, you see the tragedy that can happen.

And so we view ourselves as helping to prevent those types of things with our risk management, risk advisory services. So it's not just about premium. And that loss, all those being paid when claims occur. It's about the services that we can provide. That's on the commercial side. On the consumer side, we've got a product called WeatherReady, which is literally you go onto the site and, and we help you weatherproof your home. I mean, simple things like when hail is coming, put your car in the garage. It sounds so simple, right?

Or other things you can do, to make sure that you're ready for hail or for strong winds or for tornado risk, et cetera. We provide discounts if you use resilient materials, building materials. So we try to provide incentives to folks to make the right decisions.

Those are more direct services. I would say that the indirect piece of this is if we are regulatorily allowed to price our product based upon the risk and if folks are then forced to bear the full cost of their decisions, that will help us build in the right places, right? So not just build in a safe way but decide where to build. And you know, the industry for a few years now, globally has paid over a hundred billion dollars of, of claims based upon natural catastrophes. So allowing us to charge the right risk will lead people to make the best decisions. And if you look at the multiple of billion-dollar events facing the insurance industry … and there's an insurance gap, too, whereby not everything is covered. And we're now a few years in a row where the industry globally has had losses, natural catastrophe losses, in excess of a hundred billion dollars. Some of that is climate—we mine our data and we can see the climate signal in there—but it's not all that inflation, if you will, in the number of really large insurance events from natural catastrophes.

Some of it over the past few years, for obvious reasons, has been monetary inflation. Some of it has, in fact, been more severe weather. But some of it has been this migration. If you look just at the US, migration to the southeast and the southwest, which are more risky areas from a natural catastrophe standpoint—and that's where people are moving and building. And so there's an increased concentration of property insurance exposure, in places that are more risky. And you know, if you have a home on the Outer Banks of the Carolinas and it gets destroyed by a hurricane, you probably shouldn't rebuild there.

Yet, yet we see that happen. and in part, I would argue that's because. the way that insurance premiums are regulated, whereby folks not by the coast are subsidizing folks that are by the coast, folks that are building or rebuilding in high-risk areas are not made to bear the full cost of that decision.

So that's another indirect way whereby we can use our economic influence to help businesses and individuals make proper, fully, risk-aware decisions.

DM: But it also sounds like there's a point where the risk becomes untenable. There's places in the world where they're just beyond adaptation, right? What happens there? Do we just not build there?

TS: I would argue that we don't insure there. There's a climate scientist named Michael Mann, who likes to say that the first stage of uninhabitability is uninsurability. Again, that's where our industry can be an early warning sign: I f you can't get insurance in a particular locale, it probably is a place you shouldn't build, right?

Should you build on stilts in coastal communities where we know hurricanes are going to get more intense because of the surface temperature of the Gulf or of the Atlantic Ocean? And I would argue, how do we build in those places? When markets fail, that's the role of government plain and simple in my view.

And so, if something isn't insurable, you have to think about why that is. It's because the risk exceeds the economics that can be generated by having that property. And so perhaps it shouldn't be built. And if it's somehow important from a socioeconomic [standpoint], I think that's a role for government, not for a private industry.

DM: Some of the challenges around adaptation are systemic, right? Meaning that you can't work on adaptation at just an n-of-one level, right? You know, local governments run the sewer systems. You have to have these sort of macro vision, macro solutions. You need to work with different governments. How can you affect change in adaptation at scale?

TS: It simply has to be public-private partnership in my view. We can't do adaptation house-by-house, right? We can provide incentives for folks to use the proper materials and to weatherproof their home, et cetera. But it has to be infrastructure.

I spoke to the mayor of Boston about porous sidewalk materials so that water doesn't collect and it can mitigate rising water. And so, a fair amount of this is the aging infrastructure that we have, too, which creates even more risk. And so, as the US with the infrastructure bill that was passed, et cetera, has this more and more modernization and building of the infrastructure … and so we want to be there, as some of the infrastructure updates are happening so that we can provide the support and the risk management and the code enforcement, if you will, that is needed for the infrastructure piece. And so I think to climate-proof at scale, to me, it has to be a public private partnership. The government has to be looking at funding infrastructure. The government has to be as they did with IRA providing incentives for capital to come in, to work on some of these projects and the banking and asset management and insurance industries have to be there, ready to partner, share their data, share their expertise, ensure the projects.

But I think, I think if private industry and government don't work together, and the incentives aren’t there, we're going to have a problem because there were externalities here and the government really has to step in and, and provide the incentives that are needed and then the rest of us have to be willing to step in.

DM: Tim, I understand you guys had a convening just yesterday at Liberty about climate change. And I wonder when you meet with your peers or you participate in these summits and you have these conversations, what are the critical conversations you are having in the industry about climate change? What does that tell us? And what does that tell us about where the industry is headed?

TS: Yeah, collaboration, collaboration, and more collaboration. So we had the Geneva Association Annual Climate Summit here at Liberty Mutual yesterday, as you said. And I had my competitors in the room. I had reinsurers in the room. We had brokers in the room. We had academics from university in the room—someone from Harvard was there. We had someone from the US Department of Energy. We had someone from the US Department of Commerce. So it's really about data sharing. And we have formed at Liberty Mutual the Climate Transition Center, which is our research that we are exposing to whoever wants to avail themselves of it. And you know we've had some conversations with the Department of Energy in Washington, and I think it had been an afterthought of many policy makers, for instance, that insurance should have a big seat at this table. And a lot of the early days of climate and ESG and all the rest, focused more on banking and the asset management side of the house. I think folks are coming around to the notion that insurance—we have the data, we have the incentive, we have the will to solve this problem. If we don't solve the problem, if we don't build better models, we will have a challenged economic model as an insurance industry. So I think number one is collaboration. I think there's been a bit of a problem with demonization with some folks pointing fingers and saying, you know, this entity or this industry or whatever caused this problem and they're not doing enough to solve it. And I think the reality is even traditional sources of energy, those businesses need to play a role in the solution. Just practically speaking.

I like to say that the light bulb wasn't invented by candlelight. It turns out we're going to need carbon to build green energy plants, right? And so we have to have a just transition that is rational and not emotional and where everyone has a role to play. So I think collaboration, not demonizing, sharing of data and information is a big one.

You know, was in May last year, probably signaled to you how important this issue is to me and to my company. I went to a climate conference in Rome and it was mostly mayors and governors from around the world and academics and NGOs. And you really get a sense that it's the mayors that are on the front line of this. And so we heard from the mayor of Venice of all places.

Talking about the engineering work that's going on just for the survival of that city as we have rising water levels. Or the mayor of Sao Paulo, Brazil talking about the electrification of 18,000 city buses. Or the mayor of London talking about—and this was politically charged but talking about expanding the city center kind of charges for consumption and usage of the roads in the city center. So every mayor in different ways is trying to address this and the more that we can get government and industry and insurance and asset managers and banking to collaborate on the issue that gives us the best chances. Because this is going to be a this is not a linear path, this is going to be a very bumpy road to solving this kind of generational problem. And there are going to be big winners and there are going to be big losers. And I think it's just going to take collaboration across the board that is starting to come.

DM: You were just talking about what it's going to take to sort of meet this challenge. It's a lot of collaboration. But the scope and size of this challenge can be depressing, right? Both personally and professionally, right? So I wonder, where do you see opportunity and what gives you hope?

TS: Yeah. What gives me hope is my great confidence in human ingenuity and innovation and capitalist incentive that will reward people that come up with these solutions because it is going to be trillions of dollars. What also gives me hope is what seems to be a bit of a sea change—and again, I will state out of politics—but the IRA, which gave incentives to drive innovations for client to address climate change as opposed to in Europe where it was more of a mandate driven thing now that's there's some cultural and other reasons that that's the case but I’m much more of a believer in incentives which I think is what we're doing pretty well in the US and now others I believe is starting to replicate that mandates and chasing metrics and you know you get into scope one scope two and scope three of carbon emissions where regulators are trying to get insurance companies to police scope three which would be the emissions from the millions and millions of cars that Liberty Mutual insurers for instance that somehow I'm going to be held accountable for the emissions of cars that I insure—it's just not feasible, right? And so I think governments have to be careful not to try to offload their burden onto private industry. And so I think the emergence of incentives in the US as compared to mandates in Europe, for instance, I think is very promising to me. But it's going to be a long road.

People talked about net zero by 2050. When you talk to people behind the scenes that actually know they think net zero by 2075 is more reasonable. I think folks are getting more realistic about the complexity of it. And I think once we stop demonizing and pointing fingers about who caused it and that they're not doing enough, I think that will open the door for more collaboration. And I think the insurance industry has a big role to play in that. And we're ready, willing and able—I talk to and share with CEOs all the time. Every CEO round table I go to, climate is on the agenda, as you might expect. And every single one of us—to a person—wants to be part of the solution, not just to drive growth and profitability for our own company, but because we view ourselves as having a unique role, unique capabilities, unique data, unique incentives to actually help wrestle with one of society's biggest challenges.

Skydeck is the Harvard Business School alumni podcast featuring interviews and insights from across the world of business. It’s produced by the External Relations Department at HBS. Our audio engineer is Craig McDonald.

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