Recent rises in global temperatures due to climate change has led to an increase in extreme weather events. One of the industries most impacted by these changes is the insurance sector which has had to quickly adapt to help stakeholders better manage environmental risk.
In the short term however, insurance policies which provide adequate cover have been harder to obtain often due to a lack of appropriate technology and forecasting expertise.
“Insured catastrophe losses have increased over the past five years to $96bn per annum from $44bn per annum in the prior five-year cycle,” says Mark Hubbard, managing director of property at Gallagher Speciality. This includes an increase in secondary perils severity and frequency, he says.
Currently, insurance companies focus on recent climate events and historical trends, rather than forecast where new events are more statistically likely to happen, according to Amy Barnes, head of sustainability and climate change strategy at Marsh.
This can result in policy limits being introduced or even denial of coverage where previous disasters have been, she notes.
However, a shift in approach has started to emerge with several insurance companies looking to minimise losses through better monitoring and early warning systems. Barnes explains these systems could help insurers better equip their customers to adapt to changing weather events more quickly. For example, the relocation of an oil platform to somewhere less susceptible to storms or implementing crop management to protect farms from flooding.
AXA UK has been exploring new services which warn customers of serious weather events forecast to impact them. The insurer is currently trialling a free weather alerts service with a small group of customers, according to Tom Mansfield, data and analytics director at AXA UK.
Similarly, Marsh coordinated Flood Re’s UK-wide Flood Rapid Response Programme, which forecasts and monitors the onset and triggers of flooding using drone, aerial and satellite data. The programme also produces granular flood footprints in rapid time using the data.
Flood Re is a joint initiative between the UK government and insurance industry to make flood cover more widely available and affordable to households at the highest risk of flooding.
The availability of near real-time data has proven key to enabling insurers to consistently monitor environmental events and react quickly. Satellite technology – which is now more widely available – has helped the industry make great strides in this area.
ICEYE, a Finnish micro-satellite manufacture, has miniaturised its Synthetic Aperture Radar satellites, which provide continuous natural catastrophe monitoring data insights at a much lower cost. For any flood event, ICEYE can report the extent and depth of the flood, even when visibility is poor.
Its proprietary satellite imaging is combined with third-party information sources, including river/tidal gauge data, ground sensors, watershed maps and elevation models. Using this data, insurers can better map their exposures to quickly understand the extent of a flood’s impact and highlight the locations where losses will be significant.
Climate change modelling
An increase in data from new sources, has led to the emergence of new modelling tools which can help insurers better understand climate change risk and its associated impacts. Simulating the impacts of natural and man-made perils enables the evaluation and, therefore, better management of damage and loss.
Most of the large catastrophe modelling software providers – RMS, Verisk and EigenRisk – are developing methodologies to support this. Jupiter Intelligence, a California-based predictive data and analytics provider, claims to provide the only “global-to-street resolution climate analytics offering”.
Its Climate Score Global product quantifies physical climate risk around the world at portfolio scale, for every point on the earth’s surface. In addition, Jupiter Intelligence’s Climate Score Planning offering delivers high-resolution projections of “peril-specific climate impacts” on individual assets, facilities, and communities.
“For example, a large power facility located in a flood-vulnerable area may contemplate constructing flood barriers or raising equipment to higher elevations to reduce or eliminate future flood risk,” explains Jupiter CEO Rich Sorkin.
“Our data feeds directly into capital expenditure calculations and alternative scenario modelling to enable decision-makers to understand the risk/reward of different mitigation measures,” he says.
Sorkin notes some insurers have made more progress in “confronting” climate risk than others. He says that while most remain reactive (waiting to respond to events such as mandatory climate risk disclosures), a handful are more proactive and have created internal capabilities which incorporate climate risk into their operations.
Those firms which are more advanced, he goes on to add, are making a strategic commitment to quantify (and manage) climate risk across their functions and portfolios.
“The availability of more accurate, appropriate, and transparent physical climate risk data and scenario-based, higher-resolution analyses of probable impacts to properties and portfolios is a vital catalyst in speeding this adoption,” argues Sorkin.
Demand for new solutions grows
The expanding data pool from which insurers can pull information from, and the development of new climate risk models, has led to a boom in the types of climate-related insurance produces being offered. Among them are new micro- and parametric insurance products.
To assist smallholder farmers in developing countries, Marsh helped found micro-insurance business Blue Marble in 2018. The business has worked with the United Nation’s World Food Programme to provide weather index insurance to vulnerable populations in Southern Africa, increasing food and income security.
Africa is considered a major market for micro-financial offerings, including microinsurance. Since 2015, climate change-related events have severely impacted Zimbabwe and Mozambique: for example, events in the 2015/2016 and 2019/2020 seasons caused severe droughts that left around 10 million people food insecure.
In Latin America, Blue Marble’s Cafe Seguro program, in collaboration with Nespresso, covers coffee farmers in Colombia for excess rainfall and drought during the developmental stages in which coffee is most vulnerable to climatic shocks.
The program provides customers with a tailor-made, digitised weather index, designed to closely match pay-out performance with actual loss in each specific geographic location using satellite weather data. This helps the farmers plan and invest in sustainable agronomy while also improving the supply chain’s resilience.
Parametric insurance (also known as index-based insurance) meanwhile, provides pre-specified payments based upon a trigger event. This is in contrast to traditional insurance policies which are tied to the magnitude of losses.
Because this type of contract eliminates the claims adjustment process, insurance companies can ensure a much faster pay-out to policyholders, enabling businesses to conduct repairs and resume operations quickly.
Parametric technology solutions have helped the sector offer this type of insurance to several clients around the world. An example is parametric flood solutions which supply evidence-based information indicating whether an event has met or exceeded a set trigger.
Another example is AXA Climate’s drought index insurance which is based on soil moisture satellite data and analytics provided by VanderSat.
The ascension of insurtech
The expansion in the range of insurance products being offered by firms has led to a growing number of new entrants entering the market. Parametric insurance has become a growth opportunity for several ‘insurtech’ start-ups – BirdsEyeView key among them.
The UK-based insurtech firm, which began operation in 2021, acts as a managing general agent (MGA). Through a combination of aerial and artificially intelligence, and several machine learning techniques, the firm plans to provide farmers with cheaper, bespoke insurance options.
“Seventy-five percent of crops worldwide are uninsured and exposed to the increasing frequency and severity of natural disasters,” says BirdsEyeView CEO James Rendell.
“Traditional ‘multi-peril crop insurance’ requires manual loss-adjustment and is therefore extremely expensive and mostly unavailable. Parametric insurance is the way with which to provide cover for these previously uninsurable risks,” he says.
BirsEyeView is funded by the European Space Agency and was a Lloyd’s Lab cohort. Its proprietary algorithmic underwriting engine ‘RAPTOR’ aggregates vast quantities of meteorological data from satellites, radar, and ground stations. It then prices and structures parametric insurance products.
BirdsEyeView intends to expand coverage to earthquake, windspeed, temperature and rainfall events to fill the gap left by tightening capacity in the market, which has led to natural disasters being excluded from traditional policies.
“For instance, a chain of hotels in Greece has recently had earthquake damage excluded from their policy – so they approached us looking for parametric earthquake cover,” Rendell adds.
The company is already looking to introduce parametric earthquake cover in Italy, where only two percent of infrastructure is currently insured against earthquakes.
New insurtech entrants have forced the insurance industry to innovate more than ever before. And in some instances, new partnerships have formed: Munich Re recently partnered with FloodFlash, an insurtech form which uses cloud-software and computer models to provide flood cover. The start-up is already able to typically pay catastrophic flood claims within 48 hours.
Reducing the administrative burden
The rise in catastrophic events and demand for data have created a heavy administrative burden on many insurance companies. AI company Optalitix, another of Lloyd’s Lab cohort, has built the UK insurance giant a new catastrophe reporting portal, which speedily and accurately accumulates major catastrophe data.
The reporting portal receives data from 100 insurance syndicates and MGAs around the world via excel spreadsheets, with the data validated at point of entry. Previously, these spreadsheets would be processed within Lloyd’s internal systems manually and sent back and forth for correction.
Co-founder of Optalitix, Dani Katz, explains the portal enables insurers and Lloyd’s to identify the economic impact of climate change because the data is transformed into a “very clean data set that can be used elsewhere”.
“An enormous amount of intellectual property is built up in spreadsheets around the world and it’s a real shame if that value is lost because spreadsheets were not within a cloud environment,” he explains. “Optalitix is making sure value is retained and can be connected to this new world we live in.”