Is insurance working?
Insurance frequently gets a bad press for not covering what consumers want or for charging prices that force more to self-insure. Indeed, over the last 20 years, only one third of total global economic losses have been insured – so over $2.5 trillion uninsured! The coronavirus Covid-19 has again highlighted potential gaps in cover: businesses may be unable to claim on business interruption policies if there is no actual physical damage to insured premises.Insurers provide a crucial role in society though, and have already reported losses in excess of US$25bn for Covid-19. They contributed massively to rebuilding cities post-catastrophe, like New Orleans following the devastating [$50bn insured] loss from Hurricane Katrina in 2005.
Climate change is next year’s problem?
Most non-life (re)insurance policies cover risks for a period of 12 months. Some classes of business do align insurance with specific projects (such as Contractors’ All Risks Insurance), but insurers have been more reluctant than others in risk finance (such as mortgages or bonds) to offer greater durations of cover. Don’t forget that claims on some policies (e.g. liability insurance) may attach years after the expiry date of the policy, especially for claims involving occupational diseases and environmental pollution. So-called “short-tail” policies, like Property, tend to capture claims very quickly, so pricing tends to be more reactive to actual claims experience.
Insurers exposed to greater frequency and severity of “weather” losses caused by climate change can reflect this increased exposure by adjusting next year’s annual premium. But this does not incentivise any change in behaviour in the customer, other than to shop for a cheaper deal elsewhere.
What’s the incentive?
Policyholders already have some tools at their disposal to influence the price they are charged. Crude measures, including limiting cover or increasing excesses may reduce premiums, but they don’t encourage greater uptake of insurance cover itself. Building resilience, building back better [post-loss] or adaptation are all tools that can negate the impact of climate change. Unfortunately, individual adaptation may not be enough; community solutions are required to shore up flood defences, enhance infrastructure and build preparedness. All of this requires local or national government intervention and may not be reflected in individual policyholder’s insurance premiums. It may just be the difference between being insured or not.
A paradigm shift in product design is required. Rather than pricing based on the rear-view mirror, climate-ready insurance requires a systems- and outcomes-based approach. This will incentivise adoption of carbon net-zero goals. Big data, machine learning and artificial intelligence will all enable insurers to harness technology to offer new products and services in this space.
How are corporations responding?
Reputational risk is now one of the biggest risks faced by businesses. Asset owners and portfolio managers (such as through organisations like the IIGCC) are responding to investor demands to better align their holdings to meet the goals of the Paris Agreement, follow the latest science and allow them to become “net-zero investors”. Similarly, there has been an acceleration in the number of companies publicly agreeing to transition to a low-carbon economy. Organisations like Science Based Targets are encouraging companies to commit to reducing Greenhouse Gases (GHG) emissions by set percentages and target dates.
All of this leads to peer pressure on other companies to be seen to be aligning with investor demands; failure to do so could lead to increased litigation exposure for Directors and Officers.
What can insurers do?
Insurers’ biggest challenge is to remain relevant to the needs of their customers. The “Protection Gap” [being the difference between the total economic cost and insured loss covered] has been well-studied and its impacts are different for developing and mature insurance markets; the gap is not closing and “non-damage business interruption” (where business interruption cover is excluded when there is no first-party damage) is an increasing exposure. Innovative products that support carbon net zero goals could provide opportunities for insurers to do more than provide post-loss financing options to the few that can afford the limited cover available.
You can help!
Icebreaker One is working with insurers, brokers and other stakeholders to develop new climate-ready insurance financial products that support carbon net-zero goals. These could be changes to or extensions of existing policies or new policies using shared data with pre-emptive licences. What gaps exist in existing policies? What new products could be developed using new technology to make them insurable for the first time? Can the greening of infrastructure risk, perhaps supporting the circular economy, aligned with real-time sensor technology be the next big thing?
Join us here and help us deliver a net-zero future!