Rise in extreme weather-related claims fuels concern about impact of climate change on sector.

 Australia’s two biggest insurers will exceed their annual budget for natural hazards by hundreds of millions of dollars, as floods ravaging the country’s east coast add to a string of catastrophic weather events and worries about climate change.

 “Extreme weather indices have been consistently showing an increased propensity to have large rain events. Globally, you saw Hurricane Harvey, terrible floods in the UK and Europe in the last two years, Hurricane Dorian in the US — I think there has certainly been a high frequency of extreme rainfall events in various parts of the world in recent years,” he said. The Intergovernmental Panel on Climate Change released a report on Monday warning there was a “brief and rapidly closing window” to adapt to climate change.

General insurers in the UK will have their profits hit by recent consecutive storms Dudley, Eunice and Franklin, according to credit rating agency Fitch Ratings.

Storm Dudley hit parts of the north east, Cumbria, north Yorkshire and Lancashire on 16 February 2022, while Storm Eunice caused high wind speeds over 18, 19 and 20 February. Storm Franklin, meanwhile, brought strong winds and heavy rain to the UK on 21 February.

Gross insured losses following these weather events are expected to be as much as €5bn (£4.17bn) for the UK, Germany and Netherlands, Fitch Ratings predicted.

Rade Muslin, an actuary with consultancy Finity, said insurers were struggling to pick out long-term trends from relatively short-term data sets. But he said a rise in “mid-level” extreme weather events in recent years was in line with climate scientists’ predictions. “Extreme weather indices have been consistently showing an increased propensity to have large rain events. Globally, you saw Hurricane Harvey, terrible floods in the UK and Europe in the last two years, Hurricane Dorian in the US — I think there has certainly been a high frequency of extreme rainfall events in various parts of the world in recent years,” he said.

 Reinsurers could be underestimating their exposure to natural catastrophes by as much as 50 per cent, according to a report that lays bare the potential threat to these groups’ profits and capital from a worsening climate.

 "If its scenario played out, there would be “significant potential for volatility in earnings and capital”, S&P said, with the losses — and increased capital needing to be held against the risk — wiping out at least four-fifths of reinsurers’ excess capital above its required level for a double A rating. It added that the industry’s ability to raise prices to offset climate change risk “may not be sufficient or responsive enough”. But the agency said the experience was not its base case for calculating ratings. Instead, it hopes the findings will “provide us with a starting point for a dialogue . . . about [reinsurers’] modelling assumptions”, and would encourage “an even greater focus on the short-term impact of climate change”.

Ian Smith in Financial Times September 23rd 2021 

Climate risks are expected to add as much as $183bn to annual premiums for property insurance by 2040, as the growing frequency and severity of extreme weather prompts insurers to raise prices. Swiss Re Institute, the reinsurance group’s research unit, predicted on Monday that climate-related risks would account for just over a fifth of the overall rise in property premiums over the next two decades.

It is not just the dramatic property damage seen in raging Australian and Californian firestorms to  freezing Texan property blanketed in ice. 

Swiss Re said that in some important markets including China, the UK, and France, weather-related property catastrophe losses could double by 2040 because of climate risks.

Jerome Haegeli, Swiss Re’s group chief economist, believes the changing climate is the “number one” risk to the global economy. The insurance industry has the capacity and expertise to cope with the risks, he said, but highlighted that the forecasts for losses and claims assumed that the world met the target of keeping the rise in global temperatures to 1.5C above pre-industrial levels.  

When considering which technology partners can help cope with this doubling of losses insurers must plan macro and micro strategies in parallel. It's no good choosing one point solution to tackle one problem if it cannot build into an overall world-class technology that competes with new full-stack insurtechs like Lemonade that are unencumbered with legacy core systems.

Whatever choices are made data is and always will be at the heart of insurance.

Data is key to to all aspects of insurance from underwriting to settling claims. Many insurtechs tackle bite-sized parts of the insurance picture e.g. Quote & BInd plus Mid-Term Adjustments and Renewals. Others Claims from FNOL to Settlement.

Others aim to provide a complete data-driven ecosystem platform  to support all aspects of insurance from Underwriting, providing capacity and distribution to settling claims. CoreLogic and Verisk are shining examples. One core advantage they offer is a viable data infrastructure and model that powers all aspects of property insurance. 

This is key not only to innovation, customer satisfaction, effectiveness and efficiency. Carriers must not forget compliance and regulation or they have a "Lemonade Moment".

"Recently, Lemonade hit a speed bump in its journey as a visible disruptor and innovator in the insurance industry when a privacy class-action lawsuit over its alleged collection and use of biometric data was filed on August 20. I am not privy to any details or knowledge about the case or what Lemonade is or isn’t doing, but the Twitter event and public dialogue that built up to this moment brings forward some reflections and opportunities every carrier should pause to consider."

Anthony Habayeb co-founder and CEO of Monitaur, an AI governance software company.

(Further reading Make lemonade out of Lemonade: Takeaways from recent events )

So whilst there is great pressure to adopt self-service eFNOL and straight-through-processing (STP) for simple property claims this must not be at the risk of automation hiding decisioning from homo sapiens in carriers. This has been emphasised in a new study concluding that experts are too quick to rely on AI explanations and decisions.   Maybe the reason Lemonade faces a privacy class action.  

"As AI systems increasingly inform decision-making in health care, finance, law, and criminal justice, they need to provide justifications for their behavior that humans can understand. The field of “explainable AI” has gained momentum as regulators turn a critical eye toward black-box AI systems — and their creators. But how a person’s background can shape perceptions of AI explanations is a question that remains underexplored.

A new study coauthored by researchers at Cornell University, IBM, and the Georgia Institute of Technology aims to shed light on the intersection of interpretability and explainable AI. Focusing on two groups — one with an AI background and one without — they found that both tended to over-trust AI systems and misinterpret explanations for how AI systems arrived at their decisions."

See the detail in Even experts are too quick to rely on AI explanations, study finds

When choosing technology partners make sure that they are on the front foot to address these issues. Too many times pilots and trials are started driven by how the software or platform looks rather than the ability to deliver cutting edge innovation in combination with complying with privacy laws and other regulation. 

It is not just a matter of class-action lawsuits. 

In the UK the Financial Conduct Authority (FCA) has already bared its regulatory teeth over business interruption insurance and warns many insurance firms yet to meet tougher governance rules. It has proposals to toughen these considerable and it will be no use hiding behind algorithms, machine learning and AI. 

Last month, the US Treasury’s Federal Insurance Office published a request for information on climate-related risks to the sector.

The Property and Home & Contents Ecosystems Players like CoreLogic and Verisk understand this as do digital claims platform vendors like Synergy and RightIndem. Their business models are built on data integrity, secure integration and being part of viable ecosystems. No one vendor has everything a carrier needs so it is essential that they offer low-code/no-code customisation plus the ability to integrate any insurtech or other technology essential to deliver a complete answer for customers. 

The insurance industry is not an open-standards one and just because a platform offers APIs does not mean it can integrate with any other app. Most point solutions are customised to specific carrier requirements meaning that some scripting, testing and development is required. It is wise to test their resources and capacity to integrate using references. 

Verisk, CoreLogic, Synergy and RightIndem are good benchmarks against which to compare current and future technology partners. 

Back to the data and Rade Muslin's observation that insurers were struggling to pick out long-term trends from relatively short-term data sets.

In the absence of relevant data insurers need to look at proxy alternatives. Once they might have relied on the property ecosystem players like CoreLogic and Verisk whilst today new sources of market intelligence are combining various global data sets to power both underwriting and the anticipation of surge claims. Examples ( in alphabetic order) include: -

  • CoreLogic- manage property data for selling, financing, and protecting property
  • Hazard Hub- property risk data
  • ICEEYE- global flood earthquake and CAT damage data in near real-time
  • KETTLE- house-by-house risk assessment across USA
  • LexisNexis- vehicle, ADAS and home data
  • McKenzie Intelligence Services Ltd wide range of data
  • Mitchell- Auto data
  • SAFEHUB- building specific US earthquake damage
  • Synectics identity, financial and fraud data
  • Terrafirma property risk data
  • Verisk- auto and property data
  • WeatherNet- granular and near real-time weather data
  • WhenFresh- wide range UK property data

The speed with which such events batter all parts of the globe make the new micro-service, API-powered, No-Code, cloud native platforms more relevant to insurers every day. It's not that the traditional core insurance platforms cannot leverage these data sources it's just hat they take so long, so much resource and budget to adapt.

New CoreTech can more easily be deployed faster to meet urgent needs and scaled up across the enterprise. 

 Similarly, the new ClaimsTech platforms offer practical means of accessing, joining, and analysing this data as part of a complete claims journey from eNOL/FNOL to settlement and complex third-party and injury liability, subrogation not to mention supply chain triage and management. 

Data as a service companies like McKenzie offer a complete service e.g. incorporating ICEEYE and other data sets.

Given the warnings by Swiss Re, S&P above it is a priority to examine these options to better forecast and anticipate natural hazard events.