The global insurance industry is now confronted by a growing crisis: climate change. Natural disasters are becoming more frequent and severe, and inflation and supply chain shortages have increased replacement costs significantly.
As the effects of climate change continue and the total number of major storms continues to rise, insurers could face major losses. It’s a global risk: Recent research estimates that climate-related losses could reach €143 billion by 2050, double what the industry experienced between 1989 and 2019.
None of this is a surprise. Insurance executives are already aware of the challenges posed by climate change and are taking action to best mitigate risk. As part of our 2023 Industry Trends Report: Insurance Operations in a Changing Industry research report, we surveyed 400 global insurance executives to uncover their views of climate change.
The research findings show insurers are concerned about how climate change will affect their business:
80% of executives believe that climate change will have a significant impact on their operations over the next decade.
More than 20% of underwriting executives view climate change as the most significant trend confronting their organization.
11% of executives report that “the impact of climate change” is the most significant trend affecting their business.
Yet in looking at the future – specifically, which trend will have the most impact in the next two years – climate change came in second. Cybersecurity risk was the top concern.
75% plan to use new technologies in the next two to four years to improve their ability to anticipate future meteorological trends.
Clearly, they realize climate change has the potential to disrupt their business and are now devising new strategies to minimize risk.
The Impact of Climate Change on the Insurance Industry
As global temperatures rise, the occurrence of extreme weather events such as hurricanes, wildfires, floods, and droughts becomes more frequent and intense. This increase in natural disasters leads to higher insurance claims and makes it more challenging for insurers to accurately assess and price risks.
Insurance carriers are also grappling with a shifting risk landscape as climate change increases the likelihood of previously rare events, making traditional actuarial models less reliable. One implication: Climate change could cause the cost of home insurance to become exorbitant – and has already forced some insurers to leave certain markets.
The Role Technology Can Play
Insurance technology and pricing software are essential tools that can help insurance companies in their response to the challenges of climate change. More specifically, these solutions empower insurance companies to proactively respond to climate change by enhancing risk assessment, creating innovative products, and promoting sustainability within their portfolios.
These advanced technologies provide insurers with the ability to better assess, manage, and price climate-related risks. By utilizing sophisticated data analytics and modeling capabilities, insurers can more accurately predict and anticipate the impact of extreme weather events, rising sea levels, and other climate-related factors on their portfolios. This enables them to adjust premiums and coverage to reflect the evolving risk landscape, ultimately ensuring their long-term sustainability and profitability.
Insurers must also develop new models – not necessarily based on historical data – to project and mitigate new risk levels. Ideally, these models should use internal and external sources of data and other information. For example, this can include a mix of outside natural catastrophe models as well as internal weather forecasting models (all in addition to advanced pricing and decision solutions).
Additionally, insurers can harness technology to encourage sustainable practices and mitigation efforts. Usage-based insurance, telematics, and IoT devices can monitor and reward policyholders for environmentally conscious choices, like reducing energy consumption or installing climate-resilient infrastructure. All of this serves to align the insurance industry with broader efforts to combat climate change.
Transform Challenges into Opportunities
To put a positive spin on it, climate change is not just a challenge for the insurance industry. It can also be viewed as an opportunity to reimagine insurance practices and better prepare for a future where the effects of climate change play a more prominent role in risk management.
To help insurance executives understand new changes in the insurance industry, Earnix engaged the Market Strategy Group, LLC to conduct a comprehensive independent research survey. Our report, “2023 Industry Trends Report: Insurance Operations in a Changing Industry” summarizes key findings to show how other insurers are thinking about and reacting to so much change.