Insurance in the era of climate change faces entirely new challenges. Increasingly frequent extreme weather conditions and rising risks have made it necessary for insurance companies to find innovative solutions. In this article, we will discuss how the industry is adapting to a warming climate and what this means for business and customers.
Increased risks from climate change
Extreme weather events, such as droughts, floods and sea level rise, affect the lives and possessions of people around the world. In 2022, global losses from natural disasters totaled $275 billion, but only 45% of this amount was covered by insurance. Already more than 3 billion people worldwide are exposed to the negative consequences of climate change. Therefore, companies need to rethink their risk pricing methods.
Insurers offering property and liability benefits are feeling the intense pressure of climate change. Companies are facing the challenge of pricing premiums in areas exposed to natural disasters. Increasingly, companies are also being held liable for climate damage. In addition, climate change can cause health problems, which increases claims in health insurance.
How is the industry coping with the changes?
Insurers are investing in advanced modeling techniques based on Big Data and AI to better understand and predict the impact of climate change. These models incorporate massive amounts of data, including meteorological, environmental, infrastructure and social data from multiple local and global sources, to more accurately assess risk and apply profiled insurance premiums and disclaimers.
A growing trend is sustainable insurance policies. They not only cover climate-related risks, but also encourage risk reduction and sustainable practices. For example, this could include offering lower premiums for energy-efficient new buildings or retrofitted low- and zero-carbon buildings, as well as offering discounts for companies that adopt sustainable ESG practices.
This also includes insuring fast-growing renewable energy sources like wind and solar farms, as well as waste disposal centers. Integrating insurers’ ESG policies into their actual investment and underwriting decisions and its credible proactive communication to customers is also an important element,
One discernible solution that the industry is also betting on is micro-insurance. These are insurances aimed at local communities to protect them against specific risks, such as floods or droughts. Examples include crop insurance for farmers or insurance related to the use of sustainable transportation in cities.
The role of regulation and cooperation in the insurance industry
Governments and international organizations are increasingly recognizing the role of insurance in the fight against climate change. Evolving regulatory frameworks aim to encourage transparency in climate risk assessment. Insurers are also collaborating with various institutions to develop climate risk adaptation and mitigation strategies.
The industry is changing with the climate
The insurance industry faces challenges and opportunities related to climate change. It must adapt to new risk realities, but it also has the opportunity to play a key role in global climate resilience and sustainability efforts. As the planet warms, the insurance industry’s responses will have a significant impact on how the world copes with a changing climate.
If you’d like to learn more about other trends changing the insurance industry and how to deal with them, we invite you to order our “Insurance of Tomorrow” report. To learn more about it, click here.
