The extreme temperatures that hit the UK in 2022 – the heatwaves of the summer followed by cold snaps in winter – were a reminder that the climate is becoming increasingly volatile.
Globally, the weather conditions were even more challenging, with droughts, famines, wildfires, flooding, and hurricanes reported worldwide.
All this means high costs for insurers – and an urgent need to become more resilient to the threat of climate change. The industry’s economic losses, where the weather has been a factor, have risen worldwide since 1980, and evidence suggests that the risk will only grow in the coming years.
The challenges of climate change for insurers
Of course, mitigating against these losses isn’t easy when seemingly unpredictable weather events catch consumers and insurance companies off-guard. The Prudential Regulation Authority (PRA) points out:
“Historical data sets are not likely to be a good predictor of how climate risks may affect firms’ future losses [and]climate risks are simultaneously uncertain in where, when, and by how much they will impact firms and yet the fact that there will be impacts is foreseeable.”
The last point is important. We know climate change will affect people in ways that would have been difficult to imagine even five years ago. This is why, as the Prudential Regulation Authority (PRA) reminds CEOs, their financial reporting-related priorities should include: “enhancing their climate-related data and modelling capabilities, governance, and controls.”
Alongside the physical risks of climate change, insurers must also factor in the transition risks associated with a rapid swing towards a greener economy. Again, as the regulatory, commercial, and social landscapes become more complex, insurers must bolster their analytics processes to gain a more accurate picture of future risk.
But it’s not just climate change
Climate change isn’t the only challenge facing insurers. Economic and societal pressures – notably the recent cost of living crisis – are also threatening the profitability of insurance companies. It may even be eclipsing sustainability concerns in the eyes of the public (though not for insurers and investors, of course).
As one senior leader at Allianz pointed out last year, the impact of inflation is being felt by insurers in the rising cost of repairs to vehicles, courtesy cars and building materials. These costs are, he says, ‘inevitably’ passed onto customers in the form of rising premiums, although they don’t always understand why.
Supporting people through the cost-of-living crisis is expensive for insurers. From experience, we know that vulnerable customers are likely to need extra assistance, there could be more claims relating to insolvency and redundancy, and a heightened risk of fraud. People might fall into arrears too, or cancel or downgrade their policies, leaving them underinsured and unable to cover losses.
Being resilient in your digital transformation
Nobody can predict the future, but we are getting smarter at stress-testing an ever-growing number of scenarios linked to new and emerging over the coming years.
As insurers transform into data-led organisations, next-gen predictive analytics, which use AI and machine learning, can significantly improve risk management – enabling companies to become more agile and resilient.
SAS advanced analytics are based on real-time and historical data, monitored continuously to optimise risk decisioning and scenario analysis. It means new risk areas – like climate change and the cost-of-living crisis – can be evaluated and incorporated into models and risk functions within a secure and compliant data environment.
With these insights, insurers are better prepared for new regulations and policy changes and can respond quickly to unexpected social, economic, or weather-related events. While nobody can fully predict, let alone prevent, major global events, firms can ensure they channel their resources into the right areas of the business.
Our latest ebook – Reimagine Insurance: Insurance Transformation – explores how predictive analytics can improve four areas of insurance businesses: compliance, fraud detection, customer experience (CX) and pricing.