How the insurance industry can take the lead in climate resilience

Here’s why — and how — insurers need to reposition themselves as climate challenges grow.

Growing risks

Weather-related disasters are impacting larger populations than ever before, far beyond the U.S. where record-breaking hurricanes rocked the southeastern coast. Europe is the fastest warming continent in the world, and climate risks are threatening energy, food security, infrastructure, water resources and more.

This year, central Europe experienced devastating floods, marking a second one-in-a-thousand-year flood in just 27 years — a stark reminder of the accelerating cycle of extreme weather and how the frequency of severe events is outpacing historical ones.

Unfortunately, more frequent and severe climate events are no longer exceptions; they’re becoming the rule. Risk assessments need to evolve to reflect these realities, taking into account shifting demographics, housing patterns, and migration trends.

Risk assessment and pricing

When assessing risk around natural catastrophes, insurers would traditionally have to account for the relative uncertainty of extreme weather events. But as these once-anomalous events grow in scale and frequency, insurers must adjust their risk assessment models to treat extreme weather as a rule, not the exception it once was, if they hope to keep pricing accurate.

The most critical factors are risk assessment and pricing — the primary tools insurers use to manage uncertainty. It gives insurers the power to mitigate risks by offering policyholders an “... if you adopt X safe practice, your premium reduces by Y%” proposition.

But balancing growth goals with sustainable pricing models can be tricky for insurers. Growth targets often lead insurers to overlook the long-term consequences of escalating risks, such as rising risks of floods and other natural catastrophes.

Indeed, traditional flood models are based on current and past data, but struggle to predict the future. Instead, they must incorporate ensemble climate models — a collection of multiple predictive climate simulations run with different initial conditions to provide a more robust and variable understanding of future climate behavior.

In more developed regions, insurers now have better tools to predict floods, sea surge, and wildfire risks, yet these tools are not universally adopted or easy to integrate. But they should nevertheless be utilized to better identify and manage risks, ultimately contributing to community resilience and economic stability.

Collaborative data sharing

One key to mitigating risk lies in sharing data — not just between insurers, but with governments, engineers, town planners, and construction professionals as well. The more players that are privy to relevant data, the better they can work together to help predict outcomes and ensure safer practices.

For instance, by factoring insurance data into building permit creation, communities can make better-informed decisions about building in high-risk areas. If insurers can predict the outcome of certain construction methods (e.g., wooden prefab homes vs. elevated concrete structures), they can incentivize safer practices.

More widely shared data also bolsters consumer education: Giving more players the ability to provide consumers with information about the true costs of insurance will help them make informed decisions about where and how to build.

By creating a transparent and comparative risk assessment system — akin to energy efficiency ratings for appliances or energy certificates for homes — consumers can make better, more informed decisions about the risks they are taking on when they purchase or develop a property.

Unlocking the power of data

Insurers have a golden opportunity to leverage their unique data to build a more sustainable and resilient economy. With insurers’ comprehensive risk information, stakeholders — from governments to construction firms — can work together to create more resilient communities.

For instance, when consumers understand the true cost of insuring a property, they can make decisions that align with their long-term goals. If insurance costs are high for a particular region due to greater risk of extreme weather or natural catastrophes, consumers might decide to move away or choose to invest in properties that are more affordable to insure. This behavior will influence regional economies, affecting real estate, construction, and tax revenues.

By unlocking insurance data, insurers can not only facilitate better building practices but also long-term sustainable growth in both urban and rural settings.

Insuring a climate-challenged world

The future of insurance will be more than merely managing risks — the most competitive players will be those who carry the torch on climate resilience and sustainability.

By adopting smarter predictive models, educating their consumers on the impacts climate change is having on risk assessment, and collaborating with governments, builders, and other insurers, the insurance industry can help create a safer world.

See also:

• Insurance leaders, lawmakers working on California wildfire relief
• More people are living in the riskiest wildfire zones
• LA wildfires: What will they mean for insurance in California?