Climate change challenges insurers to think beyond risk transfer
Extreme climate exposures have captured the attention of insurance clients and global business leaders.
Insurers aren’t the only companies worried about mounting environmental risks. Extreme climate exposures have captured the attention of the insurance industry’s clientele as well, accounting for the top five long-term concerns in a survey of global business leaders presented to the recent World Economic Forum.
Topping the list among those surveyed was the possibility of extreme weather events, such as floods or storms, along with the lack of proper planning to account for climate-related exposures. As a result, companies around the world — including insurers — are facing “mounting pressure… from investors, regulators, customers, and employees to demonstrate their resilience to rising climate volatility,” according to the survey recap.
So it was no surprise that the impact of climate-related events was a prime topic covered at the recent Property & Casualty Joint Industry Forum, where leaders from many of the major insurance carriers and associations gather for their annual family reunion. A major part of the program focused on the need to take a more active role in limiting damage from worsening flood, wind, and wildfire events.
Industry-led research into construction and retrofitting of properties to make them more resistant to such exposures was cited, as were ongoing campaigns to upgrade building codes and rethink zoning regulations to limit development in catastrophe-prone areas.
Spotlight on the ‘protection gap’
However, forum participants emphasized the need to take these efforts even further to help society close the growing “protection gap” — the difference between total economic losses sustained during weather-related events and how much is insured. A report by Aon noted that between 58% and 81% of global weather-related damages since 2005 have been uninsured (see graphic above). While the gap is a bit narrower for US-only results, it remains quite wide—from a low of 37% in 2018 to a high of 59% the year before that.
While catastrophe bonds have picked up some of the slack by having investors securitize weather risks, with Artemis reporting deals totaling $11.13 billion last year, that alternative risk transfer option still accounts for a relatively small portion of insured losses (totaling $88 billion in 2018), let alone overall economic losses ($215 billion in 2018). Traditional insurers and reinsurers, therefore, still appear to be the best-positioned candidates to close the protection gap.
Insurers look to enhance risk management
Still, before insurers can confidently dive even deeper into the problematic property-catastrophe market, those at the forum emphasized the importance of promoting and facilitating even more proactive risk management efforts. Educational initiatives to increase awareness of rising natural disaster risks and emerging mitigation options among policyholders and public policymakers was presented as a logical first step.
Many insurers have already moved in this direction, looking to engage policyholders on an ongoing basis rather than only when a policy is purchased or renewed, or a claim is filed. Loss control advice, products, and services are increasingly being pitched as an added-value and competitive differentiator.
For example, some carriers use data analytics and artificial intelligence to identify and monitor high-risk areas for wildfires, alerting policyholders if their property is threatened. If a wildfire is approaching, private fire-fighting services can be dispatched to bolster the insured property’s defenses, from clearing debris to applying a fire-retardant gel or foam.
Other carriers go a step further, offering on-site consultation well before an event occurs on how homeowners might reduce risk on existing properties, or take mitigation into account when building or renovating a home — such as by installing ember-resistant venting. Insurers could provide additional motivation to upgrade the resilience of properties and communities by offering premium reductions as incentives for mitigation investments.
Innovation initiatives launched
Spurring greater innovation to contain natural disaster losses was a second step highlighted. The Insurance Information Institute, which hosts the annual forum, is a hub for the industry’s Resilience Project, through which insurers work together to better understand climate-related risks, promote mitigation, and close the protection gap. As part of this campaign, the Institute last year launched a “Resiliency Insurance Innovation Challenge” in conjunction with the InsurTech Connect conference. Open to startups less than five years old and with fewer than 100 employees, the contest was designed to spotlight “innovative approaches to the long-standing problems of disaster preparedness and responsiveness.”
A trio of finalists were showcased in a shark tank exercise at InsurTech Connect. The winner was WeatherCheck, a monitoring service that warns homeowners at specific street addresses about incoming weather systems, while helping determine if damage is indeed weather related— confirming that a leaky roof is due to a recent hailstorm, for example, rather than long-term, uninsured wear and tear.
Others are innovating in terms of product design. Take Zurich Insurance, which launched a parametric policy as part of its “underwriting nature” initiative, teaming up with The Nature Conservancy and regional governments to help protect the Mesoamerican coral reef off the coast of Mexico’s Yucatan Peninsula. If a hurricane hits, the policy would automatically provide funds to repair reef damage and head off beach erosion that might threaten the local tourism industry.
Such proactive mitigation initiatives could enable carriers to expand individual and community risk management capabilities, making specific properties and entire regions more insurable and thus narrowing the protection gap. A recent Deloitte research report, “How insurance companies can prepare for risk from climate change,” based on a survey of state insurance commissioners and interviews with industry leaders, found that proactive mitigation programs could also help meet new regulatory demands for greater disclosure about how insurers assess, account for, and intend to limit climate-related risks.
The elephant in the room
However, while there was much talk at the forum about the need to promote greater education, loss control, resiliency, and a narrowing of the protection gap, what didn’t get attention was what more the insurance industry might do beyond helping society adapt to and recover from the terrible consequences of weather-related events.
Will more insurers follow the lead of those who have hired chief sustainability officers to develop new environmental, social and governance initiatives, or the growing number that are changing their energy-related investment and/or underwriting strategies to alleviate climate risk concerns.
Panelists at the forum noted that while insurers often complain about being seen by the public as the ‘black hat’ industry — in part because of property-catastrophe availability and affordability issues in highly exposed areas — here is a chance for them to wear the ‘white hats.’ Many are already doing more to help communities and individual customers prevent loss of life and property, while enabling recovery from weather-related disasters more quickly and cost-effectively. But others are going even further.
Former National Underwriter Editor-in-Chief Sam J. Friedman (samfriedman@deloitte.com) is insurance research leader at Deloitte’s Center for Financial Services in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn.
These opinions are the author’s own. This piece is published with permission from Deloitte. See www.deloitte.com/about to learn more about Deloitte’s global network of member firms.
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