4 tangible ways for insurers to tackle climate risks

In September 2024, Hurricane Helene struck Florida’s coast as an enormous Category 4 storm. While record-breaking in Florida, Helene also ravaged other states hundreds of miles away.

Surprisingly, one of the worst-hit areas was far inland in western North Carolina. There, the storm caused devastating flooding, mudslides, road and property damage, and loss of life. Estimates of repair costs were $53 billion – the worst in the state’s history.

Shortly after, the next natural disaster hit the headlines. This time it happened in the south of Spain, in the Valencia region. It was the country’s deadliest natural disaster in decades. Even though the full extent of the damage was far from clear immediately after the disaster, more than 227 people are thought to have died in this event alone. Weeks later, many people were still considered missing.

Extreme disasters are on the rise

Reports of increasingly severe natural disasters (some considered 1,000-year events) seem endless. It looks like we will somehow have to get used to this. But we will also have to learn how to deal with these extreme weather events.

In the Global Risks Report 2024, published by the World Economic Forum in collaboration with Marsh McLennan, extreme weather was cited as the top risk. In fact, 66% of respondents listed it as the most likely material crisis on a global scale in 2024.

Climate risks threaten profitability and stability

As extreme weather events increase in both frequency and severity, the global insurance industry is grappling with significant, increasing costs due to climate change. Insurers are facing mounting claims from extreme weather events, such as hurricanes, wildfires, floods and heatwaves.

According to Aon’s Climate and Catastrophe Insight Report, “damage from global natural disasters in 2023 totaled $380 billion in economic losses, driven by significant earthquakes and severe convective storm activity in the United States and Europe.” This rise in claims has pressured insurers to reevaluate their business models, coverage offerings and premium rates, particularly in high-risk regions.

Climate-driven risks lead to a higher number of claims and significantly higher payouts, threatening insurers' profitability and financial stability. In addition to increased claims and losses along with higher reinsurance costs, insurers will also have to deal with changing risk profiles.

Risky business: Traditional versus AI models

Traditional models based on historical data are not very reliable in a wildly evolving world. Insurers will have to adopt advanced predictive modeling tools, including artificial intelligence (AI), to better evaluate evolving risks and adjust premiums accordingly.

In cases where insurers no longer see any viable alternatives – and where they find it financially unfeasible to continue offering coverage – they could opt to leave high-risk markets entirely. This would undoubtedly lead to a protection gap where residents cannot access or afford insurance. In the long run, insurance companies and governments will probably need to work together to address this issue jointly.

How to limit exposure

Insurers that remain active in these markets must invest in climate resilience measures, seeking ways to limit their exposure to escalating climate risks. These include using AI for better risk assessment, promoting adaptive infrastructure among policyholders, and collaborating on climate resilience projects to mitigate the effects of climate-related events. By using AI for tasks like predictive analytics, real-time monitoring and automated claims processing, insurers can better manage the challenges posed especially by climate events.

Let’s look at four ways insurance companies can adjust to new climate risk challenges.

1. Use predictive modeling and risk assessment

AI-driven models, supported by machine learning, can forecast climate-related risks by analyzing historical data, satellite imagery, and weather trends. Insurers can use these models to anticipate the impact of storms, floods, or wildfires on specific regions and properties. This allows them to set premiums more accurately, encourage preventive measures and optimize coverage limits to minimize losses.

2. Develop new types of insurance products

If traditional insurance products are no longer profitable for the insurer or affordable for the customer, new types of insurance products could be considered. Parametric insurance is a new approach in which payouts are based on predefined parameters or triggers rather than actual losses. In this case, a predetermined amount is paid out when a specific event occurs (for example, a natural disaster or extreme weather event). With the help of AI, insurers can further refine the accuracy of parametric insurance triggers and rates through advanced data processing and analytics.

3. Turn to early warning systems and real-time monitoring

AI-powered platforms can support early warning systems, helping insurers and communities prepare for impending disasters. Advanced algorithms can analyze satellite data and atmospheric conditions to track events like hurricanes or floods with high accuracy. This allows insurers to notify policyholders in real time, giving them a chance to protect assets or evacuate, if necessary.

4. Improve the efficiency of claims processing

In the wake of a disaster, insurers can use AI for rapid assessment and claims processing. AI models can assess damage using aerial imagery and computer vision, reducing manual inspections. This speeds up the claims process significantly, getting policyholders back on their feet more quickly.

The best bet for addressing climate risk proactively? Yes, it’s AI.

AI's role in addressing climate risk enables insurers to be proactive, so they can better protect their clients, improve operational efficiencies, and handle increasing financial pressures from climate change-related disasters. This shift toward a data-driven, AI-powered approach is essential for the industry to manage rising climate risks effectively.

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