The tremors of climate change are not faint to the insurance industry anymore. The frequency and severity of natural disasters are forcing some insurers to withdraw coverage in certain geographic locations. Previously, insurers were the custodians of security to society. Today, insurers are forced to rethink their role as physical risks have multiplied, giving rise to massive gaps in coverage. Can the industry retain immunity and build resilience to the rising risks of climate change and extreme weather events?
During the seventh session of Send’s INFUSE webinar series titled ‘Climate Change in Insurance: Proactive approach to managing climate risk’, panelist Caroyln Shreeve, Chief Underwriting Officer, Global Market Division, Allied World; Mark Varley, CEO, Addresscloud and Derek Lynch, Chief Underwriting Officer, reThought Insurance Corporation suggested that the very nature of climate risk has changed. There is now an immediate need for carriers to embrace data integration and automation to assess risk accurately and sustain their ability to provide adequate coverage to their customers.
The panelists discussed how insurers are going beyond claims settlements and helping consumers install floodgates, and proactive take steps to integrate global building footprint data with flood zones for more accurate risk assessment.
The nature of climate risk has changed.
The diversity of climate perils and the many different types of of losses that come along with it has played a role in driving the insurance industry into a hard market. The massive rise in premiums, restricted coverage and low capacity to absorb risk has created uncertainty and doubt about what to do next. To accurately measure physical risks such as floods, hurricanes and wildfires, insurers are leveraging the use of climate scenarios and impact projections.
However, these methods rely on various modelling assumptions which don’t always have a high accuracy rate. Apart from physical manifestations of risk, today’s insurers are also faced with new risks arising from disruptions and shifts associated with transitioning to a low-carbon economy. These factors are motivated by policy, market, technological and other reputational influences. To add further complexity, unsatisfied claimants who have suffered losses during a natural disaster may take legal action against the insurer resulting in additional liability risks, which are very difficult to assess. Underwriting Officer Caroyln Shreeve shares how litigation cases have been steadily rising over the last few years.
“I think last time I looked at numbers, there were over 2000 live cases globally ranging from individual losses to corporate losses and class actions. It’s an area that’s causing more complexity for underwriters to price risk accurately.”
– Caroyln Shreeve, Chief Underwriting Officer, Global Market Division, Allied World
Data-driven insights for better climate risk management
The evolving nature of climate risks are complex as insurers must rely on high-quality data to assess risk. By using climate data regularly, underwriters can identify risks across the lifecycle of a policy and detect potential natural hazards and high-risk geographical locations. This data also supports the development of preventive scenarios designed to forecast climate perils that evolve continuously. These forecasts can be extended and modelled to provide additional scenarios based on best- and worst-case outcomes. Chief Underwriting Officer Derek Lynch talks about using data early in the policy lifecycle to underwrite more accurate climate-related policies.
“After hurricane Ian, a lot of insurers have taken data seriously to identify zones that could not be serviced anymore, eliminated unprofitable products, and increased premiums as well. So, using data upfront at an early stage is absolutely what we need to do to manage climate-related risks better.
-Derek Lynch, Chief Underwriting Officer, reThought Insurance Corporation
Help consumers build resilience
Since insurers are in the unique position of having data and insights across numerous jurisdictions, geographies, and industries. The ability to distill and understand that information will help indicate how certain assets are going to perform in the face of extreme weather events. Feeding that back to clients simply and clearly not only add values, but also provides an opportunity to improve their risk profiles.
The SME consumer market is the most appreciative of this type of risk management advice. Mark Varley, CEO, Addresscloud says that his company works with NHBC (The National House Building Council) in the UK, who provides a rich set of data that they provide to their customers at the beginning of new construction projects. By combining that data with climate risk indicators and detailed mapping, the combined insights can help customers build some resilience and a plan to deal with unforeseen events. Mark shares another example of re-insurer Flood-Re’s ‘Build Back Better’ scheme, which is adding value to customers with proactive strategies.
“When a homeowner has a claim, rather than just settling the claim, Floor-re is giving an additional sum of money to raise plug sockets, install non-returnable valves, replace carpet with tiles and install flood gates. This is something that every insurer should consider across the globe.
-Mark Varley, CEO, Addresscloud
As the webinar closed, the panelists shared their final thoughts on managing climate risks:
- Carolyn said that underwriting is still an art. Data gives you one part of the story, but what you do with it is what counts to better assess climate risks.
- Mark cautioned that relying on data alone is not enough. He said, “Just because Google tells you it’s a rooftop doesn’t mean it’s the right rooftop”. He encouraged insurers to run in-person spot checks to get the whole picture.
- Derek said that the insurance community needs to stay educated and aware of the tools that exist and how best to use them. He suggested, “We need to help educate the brokers and insurers we work with, especially in flood.”
With the increase in climate-related disasters, the future is not going to be an easy path. However, this also presents an opportunity for insurers to build more resilient and responsive businesses. Insurers must proactively address climate risks to achieve a stronger position to ensure financial stability, protect policyholders, and contribute to global economic resilience.
You can watch a recording of the webinar (and all our webinars) here.