Takeaways:
- The insurance industry supports climate risk mitigation measures
- Forward-looking measures and conditional insurance will increase
- Climate resilience measures need more financing
Insurers, among others, are looking for ways to improve resilience against climate risks. These include building methods, zoning and creating insurance products to cover the new types of risks that climate change causes. Veronika Torarp, partner at Strategy&, a part of global consultancy PwC's network, looks at how insurers can get returns on climate resiliency efforts, especially supporting resilient infrastructure. Digital Insurance spoke with Torarp about the functioning of insurance markets and mitigation efforts.
This article is from a longer interview and edited for clarity.
Are resilience measures that are already in place enough?
To have a viable insurance market, the first step is to have a really good handle on what the underlying risk exposure is, and to effectively measure that from an insurance perspective. You need to be able to price for what that exposure is. In some states, California is one example, it's been difficult for insurers to get rates approved that they believe are commensurate with the risk exposures they see as they do that assessment.
Having the ability to effectively price for the exposure that you believe you have is a pretty fundamental requirement for insurance. There's multiple things that need to happen to ensure that you have a viable insurance market. Do we have insurers that are able to run a profitable business, at least break even on the underwriting side, and earn investment returns? Over the last several years, insurers have fared relatively well because they have pulled back from markets where they don't believe that they can at least break even on the underwriting.
Are mitigation efforts catching on?
The industry in general is pushing towards more mitigation. To the extent that you can reduce the underlying loss exposure, that allows you to underwrite more risk. There's a straight, strong push in the industry to move from pure risk transfer to more risk mitigation, because it matters and it has an impact. Alabama has significantly reduced losses using IBHS's Fortified Roof program.
Will insurers shift away from historical data, towards looking forward on risk data?
When it comes to looking at historical versus forward looking, I think we're going to need to do both. Carriers routinely look at historical data so that they can better understand correlations between the risk exposure and their actual experience. So historical loss data is really important to inform pricing, and is a key component.
When it comes to climate and climate risk exposure, obviously, history doesn't necessarily predict the future, and so it's really important to look at forward-looking models. It's pretty standard to look at hazard projections into the future, having climate condition cat models, scenarios and portfolio stress testing.
It's not always taken into consideration in pricing for a variety of reasons, but of course, you can look to the future. Generally, when carriers decide whether to offer a discount on insurance, they generally look at historical loss patterns to see whether they can afford a discount, given the profile of those exposures.
It'll be interesting to see if we see more discounts where you don't necessarily have historical data to back it up, but you have enough conviction around an intervention that you believe it merits a discount. We're probably going to see more of that going forward. We're also going to see more conditional insurance, where you can only get insurance, or certain terms for insurance, if you take preventative actions to fortify your home.
How should climate resilience efforts proceed?
Resiliency is really at the forefront of public discourse, for a variety of reasons. One is concern about insurance availability and affordability. State-based insurance plans and federal disaster support are underfunded or in question. How can we accelerate climate resilience efforts? It starts with a better understanding of the risks you need to mitigate and having access to the right data about what that exposure is and how that may change over time.
Think about this from a multi-peril perspective. In California, for example, there's been a lot of focus on wildfire for obvious reasons, but they have other critical exposures – earthquakes, mudslides and extreme heat. You need to understand the multiple exposures that impact your property, with good data, then understand how to best mitigate those risks. What interventions will have the greatest impact to reduce your exposure? There's a lot of different options available at both the property and community level. There's probably been insufficient focus on nature-based solutions that in the long run will likely be the most cost effective mitigation path. The other mitigation is land use and zoning. Where we live actually matters for reducing risk exposure.
What's the awareness of resilience measures, and are they getting financing?
There actually are a lot of solutions that are known, well-researched and science-backed. There's still a relative lack, relatively low awareness of what different actors can do and what the efficacy of those interventions are. We need better awareness of the financial benefits for consumers, insurance agents, communities, municipalities, corporates, investors, real estate developers, vendors and more.
We also need to look at incentives and financing for resiliency to really scale this. Unlocking that financing is going to be really important. There's some promising efforts underway in California. Maine is setting up a revolving loan fund. Texas, also. At the end of the day, insurance is not going to pay for all of this, and so you need multiple actors to contribute to the investments that are going to be needed.
Is there ROI that can be quantified on climate resiliency measures?
Yes. Most of it is going to come from loss avoidance. Studies show anything from three times, 10 times to 20 times the return on that. Allstate and the Chamber of Commerce had a
