Insurance regulators and insurtechs are working together to build climate resiliency through innovations in climate analytics and insurance coverage. (Photo: metamorworks/Shutterstock)
Climate risk is created by the shifting weather patterns. The character of extreme weather events — including heatwaves, cold surges, blizzards, flooding rainfall and droughts — is changing as they are more impactful now than at any time in recent generations.
In 2021, more than 40% of people in the United States lived in a county affected by extreme weather. What's more, 20 different climate disasters in 2021 each cost over one billion dollars and accounted for roughly $145 billion in economic losses.
In response, insurance regulators and insurtechs are working together to build climate resiliency through innovations in climate analytics and insurance coverage.
In April, the National Association of Insurance Commissioners (NAIC) Climate and Resiliency Task Force Innovation Workstream met to discuss fresh insurance solutions for climate-related risk and resiliency. The task force coordinates discussion and promotes dialogue between state insurance regulators, people in the industry and other relevant stakeholders.
The Workstream is chaired by Hawaii Insurance Commissioner Colin Hayashida and includes commissioners from Colorado, Florida and Washington. In their April meeting, Commissioner Hayashida noted the workstream's biggest priority in climate resilience is to "continue to explore innovative products that address coverage gaps created by natural catastrophes."
Catastrophe reinsurance
A coverage gap with regards to climate-related insurance refers to the losses and damages caused by weather events not currently considered, modeled or protected.
Of the climate disasters recorded by NOAA in 2021, the largest was Hurricane Ida, which cost the insurance industry nearly $40 billion. The enormous losses stemming from major catastrophic events such as this are typically managed through catastrophe reinsurance.
The majority of weather disasters, however, are categorized as "secondary peril" events. Of the 20 billion-dollar disasters in 2021, 15 of them cost under $2 billion each.
Secondary perils occur every year and have become more common in recent decades. In 2021, for example, Texas residents made headlines as they struggled through a historic cold snap, facing power outages and frozen infrastructure.
Secondary perils often don't trigger reinsurance. As these events recur through the year, losses accumulate and can become problematic for insurers. Aon estimated $343 billion in economic losses from natural catastrophes in 2021, but only $130 billion was covered by insurance and reinsurance. This 62% spread clearly highlights the protection gap during 2021.
Regulatory response
The NAIC is driving discussion that addresses the protection gap and looking to insurtechs for advanced and scalable innovations to deliver climate resilience. Such insurance-industry innovators are building new, analytically sophisticated, data-driven processes for modeling, assessing and managing climate risk at the hyper-local level.
Exact weather impacts are first modeled leveraging comprehensive climate data and assessed using business intelligence that is exclusive to each business and each location.
Customer portfolios are then appraised for asset value and operating margins. This process demonstrates the baseline value at risk from extreme weather and then shifts the baseline to reflect changing climate risks. The final appraisal demonstrates the changing value of impactful weather over time.
Parametric insurance
The financial impact of climate risk scenarios become the foundation for management strategies. Insurers are a major component for managing risk. To that end, new and innovative climate coverage is leveraging parametric insurance. Parametric insurance covers specific parameters, like temperature, snowfall, or rainfall. Claims are triggered at predefined measurements such as extreme cold in winter or high rainfall in summer.
Parametric insurance protects policyholders from losses that typically fall below levels protected by reinsurance or outside of traditional property lines and covered perils. Parametric coverage complements existing policies.
Advances in machine learning, big data and blockchain have led to quick pricing and total transparency throughout the underwriting and claims process. Any location on the globe can be appraised and underwritten. Parametric climate products aim to bridge the insurance gap by automatically covering secondary perils.
The NAIC serves as the standard-setting organization for the United States insurance industry by coordinating between chief insurance regulators from all states and territories. Recent discussions have focused on climate risks and resiliency, continuing an ongoing dialogue between regulators and insurance industry professionals.
Innovative methods of insurance, including parametric insurance coverage for extreme weather, will position the U.S. insurance industry to lead the process of bridging insurance gaps linked to climate risk and deliver climate resilience.
Carlos Oliveras (carlos.oliveras@demexsolutions.com) is the Head of Insurance at The Demex Group. He brings over 25-years of global leadership experience from within the insurance, brokerage, and reinsurance marketplace.
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