How Insurance Can Help Offset the Climate Crisis
Climate change is ranked by insurers as the biggest risk to society over the next five to 10 years.
As extreme weather events increase in frequency, insurers face a unique test as the industry aligns with the emerging challenges of climate change. A recent report released by French insurance company AXA SA polled 3,500 insurance professionals across 60 countries; less than a fifth had any confidence in public authorities to mitigate the crisis.
At the recent COP26, the United Nations (UN) climate change summit, in Glasgow, Scotland, insurers were urged to increase solutions for the poor and expand coverage to fill protection gaps and create resilience.
So, what does that look like?
Risk Transfer vs. Risk Mitigation
It’s a major shift in how the insurance industry operates. Through innovation, it can move the dialogue beyond just pricing and transferring risk, to changing outcomes or preventing things from happening. This can look like incentives for resilience implementation at the front end or, when bad things do happen, recovering quickly and seamlessly.
Helping customers to adapt to the effects of climate change means removing risk from the equation, rather than transferring it. It means increasing the resilience of customers’ systems, facilities, or supply chains. It means working with local authorities and governments to innovate how buildings should be designed, what standards are used, where they should be built or not built.
Kia Javanmardian, the senior partner for McKinsey and Company, says in the Reimagine Insurance podcast, the industry should be asking itself three questions: where are we going to thrive, how are we going to add value, and what do we have to do to shift where we deliver for our clients?
As the risks of impacts from climate change increase, the consumer and the government are going to be the two groups left holding the bag, so to speak. Being prepared with pre-funded disaster response when an extreme weather event causes significant damage is one example of how a public-private partnership can be effective.
Even on a global scale, as poorer countries are more likely to feel the effects of extreme weather and rising ocean levels, insurers can be proactive by working with partners to plan a disaster response before the need arises.
Insurance can also encourage governments to invest in climate resilience. Municipal governments plan their development in decades, while insurance companies stick to an annual timeline when assessing property risk. A successful collaboration between private sector insurance and the public sector seeks to find the intersection between how carriers work with municipalities, regulators, and policymakers to create a sustainable, proactive model.
Better Use of Data
Insurtech has the capability to precisely estimate risk by geographical land parcel. If it’s expensive to insure a house on a floodplain or the coast, there is an incentive to live elsewhere. If insurance companies offer discounts for using resilient materials or renewable energy systems, homeowners have more incentive to invest in these efforts as ways to climate-proof their homes.
Offering more individualized insurance allows companies to not just retain low-risk insurance customers, but also recognize that because their risk is lower, their premiums should be lower. That’s the power of insurtech—the same tech we use for our ConsumerCoverage Agent Marketplace, which matches agents with exclusive leads so they can spend less time searching for clients, and more time helping the clients they have.
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