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In the year By 2021, losses from natural disasters will reach $280 billion worldwide. Insured losses rose to $120 billion – mainly due to weather-related events. It was the second costliest year on record for insurers. The science is clear: severe storms, heavy rains, flash floods and river floods as well as droughts, heat waves and wildfires will be affected by climate change, leading to greater human suffering and material loss.
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Decla Wagner, Munich Re’s head of tech scouting in Israel
(Omar Stein)
The Global Property and Casualty Insurance Report 2022, published by Capgemini and IFMA, highlighted the need for insurers to develop a climate resilience strategy: 73% of policyholders place climate change among their top threats, with 40% of insurers making it a top priority. Adaptability and profitability as emerging issues. But only 8% of insurers surveyed have transparent governance and a strong focus on risk prevention, provide advanced data analytics capabilities, and promote resilience in their underwriting and investment strategies. It is time for the industry to adapt its business models and add new revenue streams.
In a world where climate risks are increasing, insurance plays a critical role because insurers are experts in understanding, measuring, managing and predicting risks. New products and services are needed that address the two main challenges of climate change: adaptation and mitigation. This means, on the one hand, increasing customers’ resilience to climate-related risks and slowing the pace of climate change with new solutions and services for climate-neutral further development.
In this new world, insurers must rethink the entire value chain. Climate-related technology solutions, such as scientific databases and new risk intelligence tools, can help financial institutions better predict and protect against the effects of growing natural disasters, as well as assess emerging risks and adjust pricing. To name a few:
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Advanced Mapping: AI and available data sources can help understand how events such as floods, wildfires or hurricanes will affect a specific area. This improved forecasting of climate risk allows companies to underwrite the risk, reduce the number of accidents and protect the industry from losses. In addition, it offers convenience.
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Climate-specific stress testing: Insurers can use stress testing technology with advanced analytics to understand the impact of climate on portfolios. By applying comprehensive climate data and macroeconomic analysis, insurers can predict price and portfolio changes that need to be made.
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Parametric Insurance: These insurtech-based solutions for climate-related risks or agribusiness, for example, set compensation parameters and apply immediately to those who meet the criteria. You can reorganize claims processes more efficiently and compensate by speeding up the time it takes to improve customer satisfaction. The basic concept is very simple: parametric insurance covers the probability of a predetermined event that pays out according to a pre-defined plan rather than a lengthy claims adjustment process.
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Advanced monitoring and reporting technologies: ESG standards have become a hot topic for companies in all industries. New insurance technology helps insurers measure, report and communicate ESG-related information.
Leading the focus on the topic of climate is not an opportunity for financial institutions, but a necessary step. Climate change has a significant financial impact. Insurers and banks should offer these risks as risk transfer solutions, to the insured and outside of pure insurance products. Their voices are important to clearly indicate the reality of climate change. As the consequences are increasing over time, it is necessary to develop new services and products to cover risks in the ways that people need them the most. Advanced climate-focused insurtech solutions play a unique role in combating climate risks and supporting the transition to a low-carbon economy.
There are many responsible and meaningful tasks ahead and it is interesting to closely monitor the technological development related to climate insurance.
Dikla Wagner is Munich Re’s Head of Tech Scouting in Israel.
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