Swiss Re estimated in its latest sigma report that in 2021, natural catastrophes resulted in total global economic losses of $270 billion. The level of insurance coverage for these climate related losses was less than half at 45%, or $125 billion, according to the report. How can insurers get a handle on this rapidly changing environment when it comes to climate risk?
“Data, data, data,” said Charlie Sidoti, executive director at Insureon, an independent marketplace for online delivery of small business insurance. “I mean, a lot of things get back to data, but also, this is one of the challenges with the rapid pace of change.”
Sidoti was speaking on a panel about navigating climate risks for Carrier Management’s 2023 InsurTech Summit. The challenge when it comes to climate risk, Sidoti added, is that as the risks change, historical data isn’t proving as useful as it has in the past.
“There isn’t necessarily the historical kind of view on it,” he said.
This means that insurers providing capital to offset these risks may need to take a risk themselves.
“I think on the startup side, the InsurTech side, you see that they’re very progressive,” he said. “We think there needs to be some progressive capital that will step in very early with the idea of we’re going to figure this out maybe in smaller bites to test and learn as opposed to waiting for the data history to be there and the market to be fully developed.”
That said, the accuracy and general availability of data is improving, added Katie Merrell, global business development manager at Blue Marble, a provider of commercially viable insurance protection for the underserved. This, in turn, can improve the accuracy and analysis of the models that InsurTechs can build, allowing for quicker assessment of predicted risks. Having access to comprehensive data can also help InsurTechs understand the full scope of a client’s risk across the value chain rather than in specific concentrated areas, she said.
“I think the nature of the work that InsurTechs are doing generally relies on access to reliable and comprehensive data sources. I think this is clearly improving,” she said. “But there is still a long way to go. And while the availability of data is improving, I think currently, it’s causing that space to be a bit messy and confusing. I think that also poses challenges to newer companies who might not have their own established data sets. They’re having to rely on publicly available data.”
That’s not the only challenge newer InsurTechs tackling climate risk are facing. Another is access to capital, she said.
“I think the speed at which the risks and companies and their needs are changing and evolving, and the speed at which new information is continuously changing and improving, means that I think the technology development within has to be really quick,” she said. “I think smaller organizations, which InsurTechs tend to be generally, are more nimble and able to move, adapt, turn more quickly than large organizations. But I think they don’t necessarily have the huge capital behind them.”
While some InsurTechs are more established with larger flows of capital, she said, smaller InsurTechs seeking to constantly innovate without a continuous revenue stream can face challenges.
“I think it can be quite a difficult balancing act in this current climate between generating that income to survive and then spending time on the capital, time and capital on the required innovation, to keep up with that evolving risk landscape,” she said.
Indeed, the risk landscape is evolving quickly, said Jason Kaminsky, CEO of kWh Analytics, a provider of solar asset data and portfolio analytics for the solar industry. This means that insurers will need to not only innovate quickly, but become resilient, he said.
“I think that’s sort of the next wave is how do we as underwriters, as carriers, sort of incentivize and underwrite to the resilience?” he said. “This is a long-term, macro trend. So I would say educating yourselves and educating your team on it is sort of step number one. I guess I would encourage [insurers] to begin to build a framework around how do you want to approach it? Do you want to underwrite it? Do you want to partner with an MGA? How are you going to model it?”
For insurers that are able to do this, Kaminsky said the opportunities can be significant. He pointed to Swiss Re data once again, with the company reporting in a press release that a climate investment gap of more than $270 trillion in the energy, transport, buildings and industry sectors exists between 2022 and 2050.
“From a market opportunity, we’re talking a billion dollar market growing double digits every year. So it’s just a massive premium opportunity,” he said. “I’d say sort of across an organization, [there are] a lot of opportunities to get a real economic return on the opportunities that are presented by the energy transition.”