Natural disasters are increasing - time to leverage the potential of tech for insurance

In 2021, losses from natural disasters reached $280 billion worldwide. Insured losses increased to $120 billion – mainly driven by weather-related events. It was the second-most costly year ever for insurers. Science is clear: severe storms, extreme precipitation, flash and river floods as well as droughts, heatwaves and wildfires are influenced by climate change and lead to immense human suffering and material losses.

Dikla Wagner, Head of Tech Scouting for Munich Re in Israel

The World Property and Casualty Insurance Report 2022, published by Capgemini and Efma, underlines the importance for insurers to develop a climate resilience strategy: 73% of policyholders rank climate change among their top concerns, 40% of insurers classify it as a top priority, with insurability and profitability as emerging issues. But, only 8% of the surveyed insurers have a clear governance and a strong focus on risk prevention, provide advanced data analytics capabilities and promote resilience through their underwriting and investment strategies. It’s time for the industry to adjust its business models and to add new revenue streams.

Insurance plays an important part in a world faced with increasing climate risks, because insurers are experts on understanding, measuring, managing and predicting risks. New products and services are needed, which cover the two major challenges regarding climate change: adaptation and mitigation. This means increasing clients’ resilience to weather-related disasters on the one hand and slowing the pace of climate change through innovative solutions and services for a climate-neutral further development on the other.

In this new world, insurers must rethink their entire value chain. Climate-related tech solutions with, for example, scientific datasets and innovative risk intelligence tools can essentially help financial institution companies to better anticipate the growing risks of natural disasters and to protect from their effects as well as to assess new risks and adapt pricing. To mention just a few:

• Advanced mapping: AI and available data sources can assist in understanding how events such as floods, wildfires or hurricanes will impact a given area. This improved prediction of climate risks allows companies to underwrite the risk, to mitigate risk numbers and to shield the industry from incurring losses. In addition, it provides adaptability.
• Climate-specific stress testing: In order to grasp climate impacts on portfolios, insurers can make use of stress-testing technology with advanced analytics. By applying a combination of comprehensive climate data and macroeconomic analyses, insurers can forecast pricing and portfolio changes that should be made.
• Parametric insurance: These Insurtech based solutions for climate-related hazards or agribusiness, for example, set parameters for compensation and automatically apply this to those who meet the criteria. They are able to efficiently reorganize claims processes and to improve customer satisfaction by speeding up the time taken to provide compensation. The basic concept is quite simple: Parametric insurance covers the probability of a predefined event happening, paying out according to a predefined scheme instead of a lengthy claims adjustment process.
• Advanced tracking and reporting technologies: ESG standards have become a major topic for companies across all industries. New Insurtech technology helps insurers to measure, report and communicate ESG-relevant data.

Directing attention towards the climate topic is not a privilege for financial institutions, but rather an essential step. Climate change has a tremendous financial impact. Insurers and banks need to address these risks as risk transfer solutions, as services to the insured and beyond pure insurance products. Their voice is important in clearly marking the reality of climate change. Because its consequences are being felt increasingly, it is imperative to develop new services and products to cover risks in the ways people need them most. Advanced climate-focused Insurtech solutions will play an extraordinary role in tackling climate risks and in supporting the transition to a low-carbon economy.

There are a lot of responsible and meaningful tasks ahead and and it's exciting to closely follow the further development of technology related to climate insurance.

Dikla Wagner is the Head of Tech Scouting for Munich Re in Israel