Natural disasters are on the rise – it’s time to harness the potential of technology for insurance

In 2021, losses from natural disasters reached $280 billion worldwide. Insured losses increased to $120 billion, primarily due to weather-related events. It was the second costliest year ever for insurers. The science is clear: Severe storms, extreme rainfall, flash and riverine flooding as well as droughts, heat waves and wildfires are influenced by climate change and lead to immense human suffering and material loss.

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Dikla Wagner, technical scouting manager for Munich Re in Israel

Dikla Wagner, technical scouting manager for Munich Re in Israel

(Omer Stein)

The World Property and Casualty Insurance Report 2022, published by Capgemini and Efma, highlights the importance for insurers of developing a climate resilience strategy: 73% of policyholders rank climate change among their main concerns, 40% of insurers rank as a top priority, with insurability and profitability emerging issues. But only 8% of insurers surveyed have clear governance and a strong focus on risk prevention, provide advanced data analytics capabilities, and promote resilience through their underwriting and investment strategies. It’s time for the industry to adjust its business models and add new revenue streams.

Insurance plays an important role in a world facing increasing climate risks, as insurers are experts in understanding, measuring, managing and predicting risks. New products and services are needed that cover the two major challenges of climate change: adaptation and mitigation. This means, on the one hand, increasing customers’ resilience to climate-related disasters and, on the other hand, slowing the pace of climate change through innovative solutions and services for future climate-neutral development.

In this new world, insurers must rethink their entire value chain. Climate-related technological solutions with, for example, scientific datasets and innovative risk intelligence tools can essentially help financial institutions better anticipate the growing risks of natural disasters and protect themselves from their effects, as well as to assess new risks and adapt pricing. To only cite a few :

  • Advanced mapping: AI and available data sources can help understand the impact of events such as floods, wildfires, or hurricanes on a given area. This better prediction of climate risk allows companies to underwrite risk, mitigate the number of risks and protect the industry against losses. In addition, it offers adaptability.

  • Climate-specific stress testing: In order to capture climate impacts on portfolios, insurers can use stress testing technology with advanced analytics. By applying a combination of comprehensive climate data and macroeconomic analysis, insurers can forecast the pricing and portfolio changes that need to be made.

  • Parametric Insurance: These Insurtech-based solutions for weather hazards or agribusiness, for example, define compensation parameters and automatically apply them to those who meet the criteria. They are able to effectively re-engineer claims processes and improve customer satisfaction by speeding up claims times. The basic concept is quite simple: parametric insurance covers the probability of a predefined event occurring, paying according to a predefined pattern instead of a long claims process.

  • Advanced monitoring and reporting technologies: ESG standards have become a major topic for companies in all sectors. New Insurtech technology helps insurers measure, report and communicate ESG-relevant data.

Raising attention to the climate issue is not a privilege for financial institutions, but rather an essential step. Climate change has a huge financial impact. Insurers and banks must treat these risks as risk transfer solutions, as services to policyholders and beyond pure insurance products. Their voice is important to clearly mark the reality of climate change. Because its consequences are increasingly felt, it is imperative to develop new services and products to cover risks where people need them most. Advanced climate-focused Insurtech solutions will play an extraordinary role in addressing climate risks and supporting the transition to a low-carbon economy.

There are many important and responsible tasks ahead of us, and it is exciting to closely follow developments in weather insurance technology.

Dikla Wagner is Head of Technical Recruitment for Munich Re in Israel