Can insurers give sustainability a lift?

August 17, 2022 6:20 AM

With the increased severity and frequency of natural disasters, insurers face the reality of climate change. It's driving stronger, more frequent storms to occur around the world, as a heating globe exacerbates the effects of devastating natural disasters. Now, sustainability — of the business and natural environments — is a topic of conversation at the top levels of insurance.

The World Property and Casualty Report, published by Capgemini and Efma, reports that 73% of policyholders consider climate change as one of their top concerns, and around 40% of their insurers share it as a priority. According to the same report, insured losses caused by natural catastrophes have increased 3.6 times in the past 30 years. According to the report, "insured losses for secondary perils − such as wildfires and storms − have nearly doubled within the past decade. The shift is significant as secondary threats accelerate faster than primary perils, such as earthquakes and tropical cyclones. In addition, risks are moving from wind to water-related threats. In the 1980s and 1990s, Natural Catastrophes (Nat Cat) events were split between wind and water, each accounting for 30-35% of total events. Today, water-related perils cause around 45% of Nat Cat events."

Swiss Re Institute's annual report notes that natural catastrophes caused an estimated $35 billion of insured losses in the first half of 2022 – 22% above the past ten years' average of $29 billion. Findings once again show that secondary perils, among other types of natural catastrophes, are increasing on a global scale.

Climate change is a politically charged topic, encompassing a massive debate between governments, environmental groups, corporate interests and everything in between. Carriers are forging an uncharted role for their industry in how, and when, to advocate for policy changes aimed at mitigating or reversing climate change's effects sustainably, while simultaneously meeting customers' needs related to these major events.

Travelers, for example, recognizes the climate impacts on consumers, and the company is actively working on risk mitigation and climate risk education.

"Insurance companies have a role to play," says Eric Nelson, Senior Vice President of Enterprise Risk Management at Travelers said during Travelers' "Wednesdays with Woodward Webinar Series – Wildfire Mitigation: Cutting-Edge Insights, Tech and Research" panel, held on July 20, 2022. "It's also insurance companies' role to educate consumers pre- and post- event. We also provide consumer incentives for appropriate actions. And then at the end of the day, we are here to make a timely response if an event does happen – and have appropriate claim payout."

Below, we take a deeper look at the multifaceted crisis, and the ways the insurance industry — including carriers, insurtechs, and regulators — are responding.

Lori Rittel's home destroyed by Hurricane Irma stands in Marathon Key, Florida, U.S., on Monday, Sept. 16, 2019. Rittel is stuck in her Florida Keys home, living in the wreckage left by the storm two years before, unable to rebuild or repair as the insurance money is insufficient. Now, insurers are leaving states like Florida and Louisiana, driving up costs and delaying repairs further.

Jayme Gershen/Bloomberg

Storms, fraud drive coastal insurance contagion

Between increased premiums and the lack of insurance companies willing to insure in the state, Floridian homeowners are left underinsured or completely without property coverage. Frequent, destructive tropical storms and catastrophic losses have driven most national insurance companies out of the state, which has caused premiums to skyrocket – last year, insurance costs rose nearly 25% across the state. Florida's exposure to major catastrophe events has provided an opening for fraud and abuse that drives costs up further, creating a contagion that has led to some carriers going bankrupt and raising the average premium.

A sign warns of elevated fire danger in the Oakland Hill area of Oakland, California, U.S., on Thursday, Oct. 29, 2020. An increasing amount of Californians have been dropped by their regular insurers after years of devastating wildfires that cost billions of dollars and upended the market.

Philip Pacheco/Bloomberg

Drought, fires threaten insurance out west

Over the last few years, evidence shows that areas burned by wildfires have been increasing – according to the U.S. Department of Agriculture, 58,950 wildfires impacted 10.1 million acres in 2020, compared to the 18,229 wildfires that affected just 1.3 millions acres in 1983. [...] According to analysis from Verisk, the vast number of properties at risk of wildfires is cause for concern. Dr. Arindam Samanta, Director of Product Management at Verisk Underwriting Solutions, says, "One of the things that stands out in the Western U.S. is the level of the number of properties that are at risk… About four-and-a-half million properties are at high extreme risk of wildfires throughout the Western states. And about two million of those, a half of those, are in California alone."

A home destroyed following a tornado in Round Rock, Texas, U.S., on Tuesday, March 22, 2022. Aerial before-and-after views of damage is a crucial component of insurers' digital response to increased catastrophe activity due to climate change.

Jordan Vonderhaar/Bloomberg

Next-gen data powers insurance risk assessment and response in warming world

According to the World Property and Casualty Report, artificial intelligence- and machine learning-based pricing models, leveraging increased computing power in the cloud, can be used as vital tools in data analytics, weather prediction and loss assessment. Through cloud technology, insurers are able to manage, process and retrieve vast amounts of data – data that can be used in finely tuned AI and ML-based pricing models. Creating such models allows insurers to accurately predict the exact locations of potential climate-related risks and provide customers with actionable steps to take prior to, during or after a natural catastrophe.

Climate activists from Extinction Rebellion hold a banner reading 'Insure Climate Justice' outside the Lloyd's of London building in the City of London, U.K., on Tuesday, April 12, 2022. Protesters targeting the insurance underwriting for its role in enabling fossil fuel projects are one of the factors drawing the insurance industry into a wider debate over climate activism.

Chris J. Ratcliffe/Bloomberg

Insurers take on advocacy role amid warming

According to the United States Environmental Protection Agency (EPA), greenhouse gas emissions, which trap heat and warm the planet, have increased over the past 150 years – mainly due to human activities and the burning of fossil fuels. Carbon dioxide (CO2) is the primary greenhouse gas that humans emit; CO2 accounted for 79% of all the U.S. emissions from human activities in 2020, and the excess of CO2 in the atmosphere is altering the carbon-life cycle, and further warming the planet, as reported by the EPA.

Reaching a net zero emissions economy would mean removing an equal amount of CO2 from the atmosphere that is released into it, and Manulife supports the transition to a net zero economy by reducing its own emissions – the company plans to reach net zero emissions by 2050 and reduce absolute scope 1 and 2 emissions by 35% by 2035.