Tech may help during natural disasters, Ceres report

Natural disasters disproportionately affect underserved communities, according to a newly released report, Inclusive Insurance for Climate-Related Disasters: A Roadmap for the United States from Ceres in collaboration with ESG Initiative and Wharton Climate Center at the Wharton School.

The report emphasizes the increasing severity and frequency of climate-related disasters and analyzes the role that insurance plays in protecting those most affected by climate change – low- or middle-income households and communities of color. When disasters strike more vulnerable communities, the costs and lack of resources completely shock and overwhelm households.

The insurance process can also be either directly or indirectly discriminatory, according to the report, in pricing, underwriting and throughout the claims process. 

Steven Rothstein, founding managing director of the Ceres Accelerator for Sustainable Capital Markets, explains that this is a result of institutionalized racism, and factors such as lack of financial education, language barriers on forms and other difficulties for people with disabilities also contribute to the issue.

"It's the system," says Rothstein. "In the insurance industry, for example, the claims process sometimes can take a while. It can take days, weeks, sometimes months. In the process, if your house has had a fire or been flooded, what do you do in the meantime?... If my house had something unfortunate happen, I could stay in a hotel for a bunch of days. I have the resources to do that. But there are about a third of the people in our country that don't have an extra $400."

The Ceres report suggests that digital tools and innovations may help promote more inclusive insurance. According to the report, " While some new tech-centered approaches, such as AI pricing algorithms, open up risks that insurance would become less available or more expensive for vulnerable groups, others are being harnessed for broader inclusivity."

Mobile insurance and platforms, for example, can manage claims and insurance purchases and offer better access for the unbanked, which is about 5% of the U.S. population according to the report brief. Another approach is parametric insurance, where a set amount of coverage is rapidly distributed to individuals in an area hit by a natural disaster. The report explains, "...three key features make it a useful tool for other aspects of building financial resilience to disasters: speed, flexibility, and neutrality. With a parametric policy, the payout can be made immediately when the designated trigger is reached, without a lengthy process of loss adjustment."

AI is another tool that may help broaden inclusivity in insurance, though some may be concerned that the tech could also become less accessible to underserved populations. The report suggests that research should first be conducted to ensure that AI technologies are optimized to fair underwriting and pricing and that vulnerable communities aren't further discriminated against by machine learning algorithms.

Rothstein states, "[AI] can help to process things faster. It can also help to eliminate some of the institutional racism that exists among the process, so I think we have to look at all the tools that we have, including technology, to first understand we have an enormous issue. Look at lots of great examples and then take those examples and scale them up using human, financial, [and] technology capacities."

The Ceres report provides actionable steps for the insurance industry, policymakers and regulators to create a more inclusive insurance system in the U.S., including simplifying the claims process for all policyholders, sharing insurance coverage and claims data publicly, creating regulations to prevent further discrimination and subsidizing insurance for vulnerable groups.

"We think, to address it, there's a role for the federal government, there's a role for the state government and there's a role for the insurance industry," says Rothstein. "...The number of climate disasters is growing from fires and floods and droughts and tornadoes and other situations, and [low-income families] don't have the resources, both financial or sometimes informational, to be prepared and addressed."