Insurers and global warming: time for a new business model

Climate change is not the only factor in this seemingly inexorable increase; urban sprawl and higher property values in countries both rich and poor are playing a part. But the fact that so-called secondary perils like floods, wildfires and hailstorms now account for 70% of all insured ‘nat cat’ losses -- rather than high impact but much rarer events such as earthquakes or hurricanes -- demonstrates the growing impact of climate change on the insurance sector. 

Furthermore, re/insurance group Swiss Re sees catastrophe losses in key markets such as China, France, Germany and the UK more than doubling over the next two decades, with flood damage – where global warming is one of the contributing factors – tripling by 2040² . In response, the re/insurance industry is revisiting the way it does business, from the pricing of risk to claims management, in order to adapt to what is, literally, an ever-changing environment. And increasingly sophisticated use of data is the key.

Taking claims first: a customer’s “moment of truth”, occurs when disaster strikes and customers require speedy resolutions to get back into business as well as clear communication and a human touch, says Andreas Berger, CEO of Corporate Solutions, Swiss Re’s corporate insurance business. Often, the warehouse or factory is inaccessible after a flood or earthquake and the prime concern, once employee safety has been assured, is to restart operations. But a lack of cash after a severe economic loss can make that difficult.

This is where modern insurance techniques can help. Clients can buy so called ‘parametric’ cover, which disburses a set sum as soon as a pre-agreed trigger, such as the height of a river, or the magnitude of an earthquake, is reached. Companies with larger asset portfolios often use parametric insurance to top up policies for individual facilities.

Alternatively, by combining images from satellites or drones with all the information about the affected facility already in its database, the insurer can nowadays assess the severity of the event effectively in real time and in the event of a valid claim pay out almost immediately – without the need to wait for a loss adjuster to undertake a physical visit, as in the past. 

The most sophisticated customers, meanwhile, seek a true risk-management partnership with their insurance company: a client’s real estate and operational information is ingested into the insurer’s ‘nat cat’ data platform, enriched with analytics, proprietary data from many years of previous claims and even third-party data sets. The output is then shared with the client, usually in the form of scenarios – for example, stress testing a supply chain for a tsunami or pandemic; or modelling what happens to a container of apples (or, indeed, Apple Macs®) if temperatures on the voyage exceed a certain range; or how to manage delays caused by port closures due to severe weather conditions. 

The benefits to the client, in the form of a better understanding of its risk profile, are self-evident – and go far beyond the actual purchase of protection. The insurer, meanwhile, enriches its own platform with each new customer interaction. And, increasingly, the likes of Swiss Re, who have invested heavily in their platforms, are selling their risk analysis services separately. These days, big customers with captive insurance operations often come to them for the risk profiling rather than to buy cover itself. 

While that implies a potential loss of business, it is more than made up for by a new fee-based and hence less volatile revenue stream. Meanwhile, the enhanced database enables better modelling, says Mr Berger, which may make previously untouchable risks insurable. This also helps to reduce the so-called ‘protection gap’. In 2020, the difference between insured and incurred ‘nat cat’ losses was a massive $113 billion² .    

In one sense, then, insurance – like many other sectors – is becoming a data, or at least data-led, business. And the platforms and tools being developed by insurers have multiple applications. Societe Generale, for instance, has been partnering with Swiss Re for over a decade. Not only does the bank buy credit insurance for portions of its loan portfolio; the two firms share intelligence on infrastructure financing, natural resources, and the energy transition more broadly, where Societe Generale understands which projects meet sustainability goals and will attract financing. 

Insuring assets against climate risk is just one side of the story, says Pierre Palmieri, Head of Global Banking and Advisory at Societe Generale. More pressing is the prevention of climate change - and supporting the transition to cleaner, greener, and more efficient assets across all sectors of business and industry is the priority: “This is our central role at Societe Generale, and leveraging data sources such as those gathered by re/insurance companies can help complement ESG advisory solutions we bring our clients.” 

Public bodies, such as city governments, are also increasingly interested in modelling environmental risks in order to set sensible policies – and, again, an insurer’s comprehensive database is a good starting point.

So, while climate change is undoubtedly causing the insurance industry to suffer growing losses, it is also opening up new opportunities for those insurers that can adapt, invest in data and offer new and potentially higher-valued services – as well as perhaps gradually reducing the number of currently uninsured risks in the world.

^1- In a world of growing risk the insurance industry has a crucial role to play | Swiss Re
^2-sigma 1/2021 - Natural catastrophes in 2020 | Swiss Re