Causing unfathomable life and property losses, extreme weather events and natural disasters like hurricanes, floods, wildfires and drought have made the global consequences of climate change impossible to ignore. At the same time, climate change-related disasters have created a different kind of crisis for insurers – escalating costs, driving them out of risky markets and generally unsettling the industry.
Though most insurers and reinsurers agree that climate damages and losses are among the industry’s most pressing concerns, their methods for adapting to this growing catastrophe risk are variable.
In the U.S., one of the country’s biggest insurers, citing the ongoing threat of wildfire risk and the high cost of rebuilding, recently announced they would no longer accept applications for home or business insurance for new clients in California.
Some reinsurers, on tap to help pay out insurers’ catastrophic losses, have likewise re-evaluated their presence in high-risk areas – raising premiums or leaving markets entirely.
And while proposals for climate risk insurance, which seek to insure communities in the face of climate-related economic losses, have been gaining traction (Germany developed the Global Shield initiative), some developing countries have expressed skepticism, worried industrialized nations with huge carbon footprints and profit-driven insurance companies are somehow making them pay twice – asking them to insure themselves against a problem they didn’t cause.
Though pricing and insuring climate-related risk remains an ongoing issue for insurers everywhere, some are taking a different approach, looking at action and mitigation strategies that can minimize climate change-related losses now and in the future.
In Europe, only about 25% of weather-related economic losses are currently covered, leaving the industry with a serious and widening insurance protection gap to reckon with. To help address this, the European Insurance and Occupational Pensions Authority (EIOPA), has created an insurance protection gap dashboard to support what they term “evidence-based decision-making,” helping create actionable measures to reduce societal losses after a catastrophic weather event.
This includes impact underwriting, which fosters the creation of insurance products that use climate-related adaptation measures – like anti-flood windows and doors, fire-resistant construction materials and methods, weather alert systems, and more. Adaptation measures like these which focus on prediction and prevention over repair can help reduce risks and losses by playing a pivotal role in how insurers cover natural catastrophes.
Elsewhere, startups are finding innovative, creative and technology-driven solutions to deal with the climate risk question. EarthCare boasts the world’s largest environmental database, allowing insurance teams to save time hunting and cleaning environmental data, instead exporting data for in‑house analysis, or linking directly to their machine learning models for forecasting. Reinsurance startup, Kettle, has built a novel reinsurance model that uses proprietary ML algorithms to precision-price products.
There’s no arguing the critical role insurance coverage plays in protecting households, businesses and governments in the face of global warming and climate change. More and more, models that favor adaptation and prevention over historical data will prove to be beneficial, as never before seen weather dangers demand we look forward, not back. Insurers willing to make proactive changes are likely to see areas of significant opportunity emerge – finding crucial cost-savings strategies, guaranteeing the longevity of their insurance products, and protecting their policyholders against an uncertain climate future.