In 2021, damages from natural disasters reached $280 billion worldwide. Insured losses rose to $120 billion – mostly driven by weather-related events. It was the second costliest year for insurers. The science is clear: hurricanes, heavy rains, floods and droughts, heatwaves and wildfires are affected by climate change and cause great human suffering and economic loss.
The World Property and Casualty Insurance Report 2022, published by Capgemini and Efma, emphasizes the need for insurers to develop a climate-resilient strategy: 73% of policyholders put climate change among their biggest concerns, 40% of insurers put more advanced, with insurability and benefits as the emerging issues. But, only 8% of the insurance respondents have a clear control and focus on risk prevention, provide advanced data analysis skills and improve resilience through their underwriting and financial processes. It’s time for companies to transform their businesses and add new revenue streams.
Insurance plays an important role in a world facing climate risks, because insurers are experts in understanding, measuring, managing and predicting risks. New products and services are needed, which address the two main challenges related to climate change: adaptation and mitigation. This means increasing the customer’s resilience to climate-related disasters on the one hand and mitigating climate change through the use of technology and services to support climate-resilient development on the other.
In this new world, insurers need to rethink their entire value proposition. Climate-related technology solutions, for example, scientific datasets and risk intelligence tools can help financial firms better anticipate the risk of natural disasters and protect against their effects as well as assess new risks and adjust pricing. Just to name a few:
Advanced modeling: AI and existing data sources can help understand how events such as floods, wildfires or hurricanes will affect a particular region. Better forecasting of climate risks allows companies to document risks, reduce risks and protect companies from losses. Also, they offer flexibility.
Weather-related stress testing: To understand the impact of weather on portfolios, insurers can use stress testing technology and advanced analytics. Using detailed weather analysis and financial analysis, insurers can predict prices and adjustments that need to be made.
Parametric Insurance: Insurtech solutions for weather-related risks or agribusiness, for example, set payment parameters and allocate these to those who meet the criteria. They are able to streamline customer processes and improve customer satisfaction by speeding up the time taken to issue compensation. The basic idea is simple: Parametric insurance deals with the probability of a predictable event occurring, paying out according to a predictable scheme instead of a long process of changing claims.
Leading technology and reporting: ESG standards have become a major topic for companies in all industries. New Insurtech technology helps insurers measure, report and communicate ESG-related data.
Paying attention to the topic of climate is not an advantage for financial institutions, but it is an important part. Climate change has a major economic impact. Insurers and banks have to deal with these risks in the form of risk management strategies, such as support for policyholders and continuity of insurance products. Their voices are important to the successful presentation of climate change. Because the consequences are increasing, it is important to create new services and products to solve the risks in the ways that people need them the most. Advanced climate-related Insurtech solutions will play a key role in addressing climate risks and supporting the transition to a low-carbon economy.
There are many promising and meaningful projects in the future and it is interesting to closely follow the technological advancements related to weather insurance.
Dikla Wagner is Head of Tech Scouting at Munich Re in Israel