How insurers are, and aren't, meeting climate change challenges

September 6, 2022 9:06 AM

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With a rise in natural disasters, including storms, tornadoes and wildfires, due to climate change, insurance companies must evolve rapidly to manage the new business environment. Companies are adapting claims processes for their policyholders' digital ease and implementing new technology and automation to help with prevention and protection.

Read our roundup to learn more about how insurers are stepping up to address climate change as well as some areas where more work needs to be done.

America's Great Climate Retreat Is Starting In the Florida Keys

Jayme Gershen/Bloomberg

Can insurers give sustainability a lift?

Natural disasters have caused an estimated $35 billion of insured losses in the first half of 2022, according to Swiss Re Institute's annual report, so it's no surprise that climate change is one of the main concerns of 73% of policyholders and 40% of insurers.

As the severity and frequency of catastrophic weather events continues to grow, insurers are in the challenging position of recognizing how climate change is impacting the insurance industry and determining what they can do to address the situation.

Sustainability is a key aspect in the debate about how the industry should move forward, with carriers, insurtechs and regulators already taking proactive steps at a critical juncture for all interested parties.

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Can insurers give sustainability a lift?

Insurance meltdown leaves homeowners without policies, at risk

Insurance companies looking to protect themselves from drastic losses, if not outright bankruptcy, are exiting the market in states that are highly susceptible to hurricanes and storms, such as Louisiana and Florida.

With losses due to severe seasonal storms in Louisiana in the tens of billions of dollars in the last two years, anxious insurers in the state have recently dropped more than 80,000 policies. For residents, the options for new coverage are limited and costly. A similar story has been playing out in Florida.

Insurers and homeowners need to adjust to a world impacted by climate change. "The way to solve this problem is to reduce the underlying risk," said Carolyn Kousky, executive director of UPenn's Wharton Risk Center. "We haven't done that nearly enough in any place that's prone to these disasters right now."

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Insurance meltdown leaves homeowners without policies, at risk

Why insurers should encourage consumers to review coverage gaps

Tornadoes, cyclones, hurricanes and other severe weather conditions have become commonplace and are on the rise as the climate continues to change. The damage to property across the country runs into billions each year.

Homeowners in areas particularly prone to such weather events rely on their insurance to cover them from loss, but with the number of tornadoes and hurricanes growing with every season, residents are well advised to carefully read the fine print in their policies.

By identifying gaps in their coverage, calculating if they are underinsured and understanding policy terms and conditions, such as having to wait for 30 days typically before receiving money from a claim, homeowners can be better prepared to weather the storm in more ways than one.

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Why insurers should encourage consumers to review coverage gaps

Only 8% of insurers are sustainability leaders, Capgemini

Becoming a leader in "climate change resiliency" has been put firmly on the table for insurers in a report that shows that while 80% of small commercial companies are making some effort toward helping the industry become more resilient to climate change, only 8% make the grade as "resilience champions."

As one of these leaders in climate awareness, [you understand] "the actual real climate risk that your book of business represents," said Seth Rachlin of Capgemini, the report's publisher. " You're also pricing that book of business in a way that's consistent and aligned with the level of underlying risk that's there."

The report encourages insurance firms to develop a strategy that balances risk management and risk prevention, referred to as a climate resiliency framework, which is fundamentally about reducing risk, making it beneficial for both the insurer and the customer.

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Only 8% of insurers are sustainability leaders, Capgemini

Insurers use digital to mark National Hurricane Preparedness Week

Insurers have taken early positive steps to help policyholders become more aware of how they can prepare for this year's Atlantic hurricane season using the firms' digital tools and other resources.

"The U.S. has incurred a significant loss of life and property damage over the past two hurricane seasons and early forecasts indicate 2022 is going to be a very active one," said Sean Kevelighan, CEO of Triple-I.

As part of National Hurricane Preparedness Week, Farmers Insurance, CNA and The Hartford offered tips and suggestions on what homeowners can and should do.

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Insurers use digital to mark National Hurricane Preparedness Week

What impact climate change may have on the digital claims process

Insurers paid out $31 billion per year on average in the ten-year period through to 2020 to settle claims for damages caused by natural disasters, including storms, polar vortexes and wildfires. In the previous decade, the amount was $19 billion.

The trend is clear: climate change is driving a major increase in claims. As a rapidly evolving situation which will probably get worse before it gets better, insurers need to similarly evolve by adjusting to the reality of climate change-driven risk.

Key elements in this will include utilizing digital tools to make claims processing more efficient, automating internal processes to balance increased value with higher premiums, and investing in advanced analytics for more dependable, accurate risk forecasting.

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What impact climate change may have on the digital claims process

How AI could be used in disaster preparedness, recovery

Artificial intelligence has come a long way since the term was first coined in 1956 by American computer scientist John McCarthy, so much so that AI as a term stands on its own and needs little explanation.

From virtual assistants like Alexa to algorithms on Netflix, AI is transforming everyday life in numerous ways. Now, AI is set to transform the insurance industry too, for both claims processing and disaster prevention/protection, with its ability to perform certain tasks as well as, if not better than, humans.

Already, rather than wait for an assessor to visit, a homeowner can take pictures of property damage on a smartphone on the day of a storm, upload them to their insurer, and receive funds in their bank account the very same day. And that's just the beginning.

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How AI could be used in disaster preparedness, recovery