Climate change has shone a regulatory spotlight on climate-related risks for insurers

Exacerbated by climate change, the world is facing stronger, more intense, and more frequent irreversible impacts of extreme weather events with increasing biodiversity loss, extreme heat, and natural disasters turning the heat up for insurance companies.

While we are aiming to globally mitigate climate change, it is imperative that we must prepare to adapt to the worsening crisis. This includes insurers that need to be prepared to pay out more for increasing extreme weather-related claims. Data from the ABI shows that domestic property claims in the UK for weather-related incidents had more than doubled in 2020 compared to 2019, totalling £459m in claims and accounting for 20.7% of the gross claims total.^[2]

Insurers with more than US$13 trillion^[3] of global assets under management and premiums of US$6.3 trillion,^[4] are facing mounting pressure from increasing climate-related losses. Although insurers utilise the most advanced tools for risk assessment and modelling, insurer climate-related risk management remains limited with a reliance on historical data and having to meet increasingly sophisticated needs of customers and regulators. As climate change poses a systemic risk to the insurance sector and its customers, more frequent extreme weather events and climate-related threaten to shake the foundation of the entire global insurance industry if existing limited practices continue without concerted action.

The costs of climate-related risks

With the impact of climate change expected to rise across all types of climate-related risks, physical risks are the most apparent risk for insurers referring to risks from more frequent extreme weather events such as flooding and the rise in sea levels. For the UK, the major drivers of climate and weather-related losses are windstorms, floods, and other related events both to domestic and commercial properties.^[5] In 2015/16, flooding damages are estimated to have cost the UK economy £1.6 billion,^[6] with over 5.2 million homes and businesses exposed to risk from flooding in the UK.^[7] By 2045, the cost of climate change could be at least 1% of the UK’s GDP.^[8]

As natural catastrophes trend upwards, there is potential for extreme weather events to widen the insurance gap and overwhelm insurer capacities to absorb climate-related losses. It is more than likely that there will be an increase in claims in the future due to companies failing to adequately manage the risk of climate change on their business and to disclose these risks to investors.^[9] This pressure has stimulated regulators to become increasingly concerned about the exacerbation of insurer solvency risk and sensitive to the possibility that spiralling insurance premiums could lead to an availability and affordability crisis for consumers. Ultimately, climate change presents meaningful challenges to insurance business models, changing claims patterns and the impact on their assets.

A lack of insurer preparedness

Not only facing the challenge of forecasting uncertain climate-related risks, but these risks also have a direct impact on underwriting, pricing, reserving, coverage, and investment decisions ultimately rising insurance premiums and reducing coverage to risk company turnover. Regulators are increasing pressure on climate risk for insurance firms with an opportunity for insurers to improve their current practices with some regulators either remaining unaware, or unconfident of how well-prepared insurers are for dealing with climate-related risks.^[10]

Whether insurer risk models are up to the challenge of testing climate-related risks and disclosure of the efficacy of any activities and actions to assess and mitigate climate-related risks. Hence, it is fundamental for insurers to act now and find a balance between ensuring affordability and managing financial stability as extreme weather conditions continue to escalate.

Unleashing the value of advanced analytics

More data, greater insights. To assess climate readiness, insurers must focus on improving in-depth knowledge of climate risk and the factors that affect those risks. To do so, advanced analytics is the key to improving predictability and services for insurers. However, for insurers, deploying advanced analytics within industry decision processes that align with growing unpredictable extreme weather events and climate-related hazards demands extensive and complex approaches for the insurance industry.

With Climate X’s Spectra platform, it can empower insurers by providing advanced climate risk analytics around the globe with understandable risk data and ratings to meet regulatory expectations and deliver precision metrics to the asset level. Having a 95% model performance accuracy, Climate X allows insurers to incorporate climate-change risks to make well-informed decisions and develop appropriate products for customers to curb underwriting risks. Ultimately, insurers can improve business outcomes and ensure stability when assessing risks of increasingly unpredictable climate change events across the world by unleashing the value of advanced analytics.

Learn more about the work our team of climate scientists have done or arrange a demo of Spectra to see it in action.