How insurtech can mitigate future risks

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Globally, the summer of 2023 was the hottest on record, and by a significant margin. For decades, scientists have been laying out the sobering facts about climate change. While their research has been met with varying degrees of praise and criticism, global climate models, which simulate weather patterns over time, have been consistently accurate. The impact on the insurance industry is undeniable.

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“The reality is climate change is here. It’s no longer avoidable,” says Lisa Leftwich, head of Sustainability Services for Zurich Resilience Solutions at Zurich North America, a provider of commercial property-casualty insurance solutions and services in the U.S. and Canada. “As an insurer, a big part of our job is to anticipate the next wave of risks. Climate change clearly falls into that bucket.”

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Alicia Pavelko is Zurich North America’s head of Construction Innovation and Sustainability. She adds, “Climate change has certainly brought disruption to our industry. But there is a silver lining, because disruption brings opportunity. Yes, it’s difficult. But I think across the board, more stakeholders are paying attention.”

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As colleagues in the insurance industry, Leftwich and Pavelko are actively focused on climate resiliency and sustainability. In a nutshell, climate resiliency is about coping with, managing and preventing the impact of climate change, while sustainability is about conserving natural resources and taking action to protect the planet for future generations.

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How climate change is impacting insurance

Here, Leftwich and Pavelko share insights about the impact climate change has had on their industry, and how insurtech will play a role in mitigating future risks:

• Increasing frequency and severity of natural disasters. Climate change is linked to a rise in extreme weather events such as hurricanes, floods, wildfires and droughts. This leads to significant property damage, disruption in business and loss of life. 

“The uptick in storm frequency and severity has had a significant impact on the number and size of claims we pay,” says Pavelko. “That directly translates to an increased cost of insurance, a reduction in available coverage and in some instances, a lack of availability of insurance altogether.”

• Shifting risk profiles. Areas that were once considered low-risk for certain hazards may now be at a higher risk due to changing climate patterns. For example, regions that historically had low flood risk may face increased volatility and vulnerability.

“While we’re seeing more weather-related events than ever, it’s not just the natural catastrophes we may be more familiar with, like earthquakes in California or hurricanes in Florida,” says Leftwich. “For example, we’re seeing extreme heat and flooding in the Midwest, winter storms in Texas, and recently, a tropical storm warning in California. Throughout the country, we’re experiencing secondary or indirect natural catastrophes, such as straight-line winds, mud slides or fires. It’s just a whole new set of perils.”

• Economic impact. “Commercial insurance has historically been inexpensive and easy to come by,” says Pavelko. “That’s not the case anymore. Prices are going up, and it’s also challenging to put together a comprehensive program. Our customers might have to retain a lot more risk through higher deductibles or by choosing to purchase a limit other than the full replacement cost of the asset they’re trying to insure.”
• Long-term challenges. There are no short-term fixes for climate change. The impact is ongoing. “This is a challenge for insurers in estimating long-term liabilities and the ability to price policies accordingly,” says Pavelko. “Many industries have been built on short-term incentives and rewards. But when we look at climate change, it’s a long-term challenge and we have to think about resiliency and adding a long-term perspective into the conversation.”
• Regulatory and legal pressures. Governments and regulatory bodies are driving regulation and action around climate-related risks. “While a lot of our global colleagues are in markets with stronger regulations, in the U.S., there are varying requirements and action may be optional,” says Leftwich. “Some state regulations are driving change. For example, in California, large companies will be required to report greenhouse gas emissions as part of a sweeping new law. In New York, local law 97 will require buildings over 25,000 square feet to meet new emissions and energy efficiency standards.” 

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“Overall, our role is to strike balance,” says Leftwich. “We support customers in their own journeys, at their own pace. It’s a collaboration that supports a more sustainable future for all of us, in a way that’s workable for our customers.”

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The role of insurtech

To address the challenges and mitigate the risks of climate change, insurtech plays a key role:

1. Adapting underwriting practices. The level of complexity that goes into an account analysis and underwriting assessment is significantly deeper today than it was even three to five years ago, according to Pavelko. “We look at risk and endeavor to understand how it’s going to perform long-term. So, in the past we may have asked ‘How old is the roof on the building?’ But now, we’re asking about the materials used in making the roof, how it was made, and how well it is going to withstand hail, for example.”
2. Advanced analytics and modeling. Insurtech companies are using sophisticated predictive models that incorporate climate data, allowing insurers to more accurately assess climate change risks. 

“Data is revolutionizing how we operate,” says Leftwich. “With forward-looking data, projections or climate models, we can get a sense of what future risks might look like using different scenarios. This gives us a better sense for how to plan for and mitigate them.” 

Leftwich compares it to driving a car. “You have your rearview mirror, which is your historical claims data, and you have your GPS, which shows where you need to go with forward-looking climate data. This is overly simplistic, but it gives you an idea of the different elements that we can bring together to give our customers a more complete picture so they can take action now to mitigate those future risks.”

3. Climate-related risk management products. Solutions relevant for climate-related risks include offerings like: 

• Parametric products, which automatically trigger payouts based on predefined climate-related parameters, such as wind speed or rainfall levels. Parametric offerings can expedite claims processing and provide quicker relief to policyholders. “With parametric insurance, you just have to reach a predetermined trigger,” says Pavelko. “It provides balance sheet protection for weather events that may or may not actually cause physical damage.” 
• Captive insurance is another way a company can tailor their coverage to reduce their total cost of risk and address coverage gaps for climate-related perils, hard-to-insure exposures and more.
• Some carriers offer a resiliency credit or incentive, where a portion of premium is given back or set aside to support proactive risk mitigation steps on the part of the insured. Zurich offers comprehensive Resilience Services, which include a service that brings together forward-looking climate insights and boots-on-the-ground assessments to help companies create climate resilience plans tailored for each of their locations. 

“Initiatives like these have led to many interesting and deep conversations with our customers and brokers,” says Pavelko. “Customers are shifting from a short-term mindset to a longer-term holistic view of their organization. They’re considering how resiliency plays into the value and longevity of their fixed assets, supply chain, customer base and more.” 

“Overall, we’re seeing a sea change,” adds Leftwich. “The business community, all industries and sectors, is recognizing the importance of climate change and planning for it. They are paying attention because if they don’t, they recognize there’s a real cost.”

What’s more, insurtech is playing a key role. “Insurtech is an important tool for providing access and awareness to the masses,” says Pavelko. “The main challenge for adapting to climate change is the unknown. The other challenge is that we can’t take a wait-and-see approach. We must take action today.”