Harnessing Climate Data to Sharpen Risk Selection and Underwriting

Data is the lifeblood of the insurance industry. Our panel addressed how the increasing volumes of climate data is reshaping the industry and climate-related events such as storms, hurricanes and heat increase in number and severity.

Bowen explained there is a variety of data already available to the insurance market from agencies such as the NOAA, Copernicus, Japan's Meteorological Agency, and NASA. However, these agencies mainly focus on weather data and can interpret past climates, which, while helpful, isn’t the same as future climate data. Insurers must invest further in global circulation models.

The panel flagged that current data modelling options do not always dovetail to really bring home the true impact of potential climate events. Venkatesh said this area of climate modelling is evolving and there is the potential for real change. He argued that modelling needs to go a step further and, on top of predicting when and where events will take place, should also account for the potential financial impact as areas and people with higher vulnerabilities are likely to lead to higher claims costs.

“The way in which we see climate data evolving is looking at correlated and coincident hazards. So the idea that a drought will affect your wildfire risk is intuitively pretty obvious. But not one that we have yet to see directly integrated into many climate models,” he detailed.

“Similarly, hurricanes resulting in coastal flooding or pluvial flooding. Again, intuitively, they will go together. These are areas where significantly more model development and analytical research are needed before we come to a place where we can confidently predict even a distributional impact from multiple events. So I think that's an evolving frontier of current use of climate data.”

Research to link data sets to provide real insight in future climate events and their impact is constantly developing and is an area the insurance industry is zoning in on as it seeks to address the increasing number of climate-related claims events happening globally.

Henderson noted that the scientific work to link the datasets is only just beginning and explained the insurance industry is well-placed to make sense of the information arising from the data: “We're really good at understanding uncertainty. We're really good at using this data. You know, today we're probably better than most other industries in understanding climate and catastrophe information.”

She suggested that different industries, such as banking, should collaborate more and commit to data transparency to ensure more accurate models and predicted more government involvement to enforce greater transparency. The panel noted that Europe is very much taking the lead on developing regulations around climate disclosures and modelling.

However, Bowen cautioned the industry not to become over-reliant on one model or one data provider pointing out there are no absolutes when it comes to climate data. “If you're doing any type of modelling, the one thing that we are very much communicating to our clients is ‘don't fall in love with a single model’. You need to have a multi model approach, you should be looking at various ensemble models,” he urged.

There are numerous areas where climate change has already impacted risk. Grimm explained that climate change is not the only factor driving increased claims costs but outlines that storms, hails, hurricanes, wildfires caused by drought etcetera are all having an impact on insurer bottom lines due to the increase in frequency, and crucially, severity.

With so much climate activity are there areas or business classes that are at risk of becoming uninsurable? The panel agreed it is a sticky problem and Henderson highlighted that it isn’t really a question of uninsurability, it’s a question of affordability for the policyholder. She also said rates were affected by a wide-range of factors such as an increased population in a vulnerable area and pointed out that building and population growth were happening in areas where climate hazards, for example wildfires, have been present for a number of years.

Reinsurance is also a factor. Bowen added: “If you go back to the SCS losses, we had $63 billion in the short thunderstorm losses last year. In the US were already $20 to $25 billion for this year alone. But the percentage of that was actually covered by reinsures was effectively zero, right? The primary carriers are eating all of this and it turns into this vicious cycle where they're paying more for reinsurance protection.”

There is an expectation that more governments will step in more regularly with pool insurance in areas of if increased risk and unaffordable rates. The state-run insurer of last resort is growing, especially across weather-damaged states such as Texas, California, Colorado and Florida. Future collaboration between public and private entities will be key. Grimm predicted: “The key factor for us is trying to really bring down the underlying technical risk and that's what we will not manage on our own. So we need to join forces…with the public side as well.”

Going forward insurers must consider all these factors and also take a longer-term view of modelling, instead of working in yearly cycles. Henderson also encouraged the industry become an enabler of the energy transition to help the world, and its own survival.

She concluded: “We're not really in the room when we're talking about the type of investment needed to achieve Net Zero. How are we as an industry protecting nature? How can we close the protection gap? How can we bring insurance coverage to parts of the world where it doesn't exist right now? How can we support regenerative agriculture, carbon capture and storage technologies, renewable technologies?

“Those are things that are so critical, in order to offset the impact that climate change will have on our own results since it's mutually beneficial for our industry to help to solve that.”