New Research Illustrates The Market For Climate Risk Solutions In The Insurance Industry

New Research Illustrates The Market For Climate Risk Solutions In The Insurance Industry

Losses from physical climate risks are on the rise. Already, 2024 has seen deadly heat in India and catastrophic flooding in Brazil and Germany, and scientists are predicting an “extremely active” Atlantic hurricane season. In addition to the physical impacts of weather-related events, many people and businesses are also concerned about their insurance policies. As risks have risen, premiums have skyrocketed. Some large insurers have stopped issuing policies in high-risk areas. With fewer insurance options, large parts of the economy are left at greater risk to climate impacts, and there is growing concern that more assets will be uninsurable in the future.

Risk transfer is critical for individuals and businesses as climate change worsens – for example, parametric insurance and weather derivatives offer rapid payouts after qualifying events. Insurance also helps to de-risk investments in low carbon technologies. Recognizing the need for innovative risk transfer, a variety of Insurtech firms offer climate risk products based on machine learning, AI and other advanced analytics. The insurance industry is highly exposed to climate risks and plays an important role in managing these risks throughout the economy. In a market overview report of solutions for the sector, Verdantix identifies three types of digital solutions that support climate risk management in the insurance industry:

1. CAT models.
   Catastrophe (CAT) models predict losses from low frequency, high impact events, typically on a one-year time horizon. By simulating damage from events such as floods, wildfires and hurricanes, these models inform underwriting decisions. Insurers use them to set rates, decide which risks to take on and how much reinsurance to purchase. Although these models are based on historical data, modellers are developing ways to integrate climate change.
   
   
2. Forward-looking climate models.

   Many vendors offer downscaled climate projections, simulating climate risks under multiple scenarios at the local level. These models support risk assessments over timeframes of several years to multiple decades. For insurers, this information feeds into investment decisions, climate risk disclosures and longer-term business strategy. Some insurers also build on their expertise or partner with other providers to offer climate risk analytics services and software.

3. Real-time hazard monitoring.
   Real-time data from satellites, news reports, social media, in-situ observations and weather forecasts help insurance firms prepare for and respond to extreme events. By monitoring conditions, they can more accurately predict where damage will occur and more efficiently assess losses and identify fraudulent claims. Many insurers also issue alerts to their customers before and during events to help minimize damage.
   
   

To learn more about climate risk solutions for the insurance industry, check out Market Overview: Climate Risk Solutions For The Insurance Industry.