Will Climate Change Deliver The Disruption That Insurtech Didn't?

The insurance sector has experienced a gradual transformation through the adoption of insurtech, which, surprisingly, has not led to significant disruption. Accelerated by the pandemic, the industry has embraced modernization and increased investments in technology. It is noteworthy, however, that established companies have successfully competed against tech startups, an achievement not observed in other industries facing technology driven innovation such as record publishing or taxi services.

Climate change, however, is prompting insurers to leave states due to financial concerns, driving new state and federal regulatory proposals and causing widespread anxiety from stakeholders as diverse as local community leaders to Jerome Powell, the chairman of the federal reserve. The industry is only beginning to feel the impacts of climate change.

Climate change may turn out to be the disruptive force that insurtech has not yet been. 

Why This Matters: 

The impacts of climate change require the industry to rapidly innovate solutions...  

• that include new products and services (micro-insurance, parametric, greatly expanded performance guarantees, etc.). 
• that address new and rapidly evolving hazards (extreme heat, convective storms, floods, complex and cascading risks, etc.). 
• that insure new types of assets (new energy technologies, carbon credits, natural assets, green buildings connected to decarbonized grids, etc.).
• that are delivered through new business models and/or distribution channels  (group distribution of catastrophe insurance, embedded insurance, etc.)
• with loss reserves that are comprised of innovative capital stacks (government, mission driven reinsurance, philanthropy, blended public~private, etc.).
• that rely on claims services that restore damaged assets with more resilient and low emissions assets after a loss.   

That's a significant amount of innovation required. The industry needs this innovation rapidly more than ever, not just for their own benefit. The industry's reliance on annual policies and the tendency to manage risk by limiting coverage, pulling out of markets, and increasing rates instead of helping clients mitigate risks could lead to profitability through insuring less at higher costs. This approach is not ideal for a world that urgently requires a more robust innovation agenda.

Climate change may drive large loss costs which disrupt insurance company balance sheets. The more likely scenario is that insurers response to climate change (raising rates and existing markets) contributes an escalating affordability and accessibility crisis that makes their offered solutions irrelevant to customers. 

An uninsurable world is a world without much insurance.  That is disruptive. 

It's promising to see companies and industry trade groups advocating for prediction and prevention of losses. These proactive strategies will eventually bend the loss cost curve. Predict and prevent strategies alone are not enough. They take too long to be the sole strategy.  Leaving policyholders un or underinsured in the interim is perilous for the insurance sector.  

In order to drive innovation across all the aforementioned areas, the industry must innovate faster and much more aggressively. This will necessitate significantly higher R&D budgets. According to an AM Best's January report, the P&C insurance sector managed to reduce their expense ratio by 2.6 points over the past decade.  A portion of this achievement can be attributed to operational efficiencies stemming from technological advancements. There is, however, anecdotal evidence suggesting that the expense improvements reduced core capabilities necessary to deliver non-incremental innovations. The industry need deep engineering expertise, innovation professionals and senior leaders who can and will experiment boldly.   

The danger of losing relevance with both consumers and regulators is just as crucial as experiencing subpar underwriting outcomes.