Climate change will likely increase your home insurance – what’s the solution?

What’s happening? Analysis from Swiss Re has found that climate-related risks could cause a 22% increase in global annual property insurance premiums, equivalent to $183bn, over the next 20 years. Swiss Re anticipates climate change to increase the property risk pool by 30% to 40% by 2040, which it said will also increase demand for reinsurance as providing property insurance becomes riskier. Swiss Re also said that in some markets weather-related catastrophe losses may double by 2040 as result of climate risks. (Swiss Re)

Why does this matter? Insurers have arguably been more affected by climate change than other financial institutions. A deep winter freeze, hailstorms and wildfires resulted in global estimated insured losses from natural catastrophes of $40bn in H1 2021, according to a recent report. The figure is above the previous 10-year average of $33bn.

When insurers have high loss ratios – i.e. the amount they pay out in claims exceeds that brought in from paid premiums on policies – they need to make it up somehow. The most likely way of doing this? Hiking up rates for products such as home insurance.

Current models have many faults – Climate change has also made it harder for insurers to model risks. Common catastrophe models largely use historical data, yet the historical probabilities of natural disasters and extreme weather events are increasingly less representative of future likelihood.

As a result, today’s models may conceal the true risk to properties. Insurers must look to innovative new modelling techniques while seeking out risk-mitigation methods, the latter of which may help property insurance premiums remain affordable.

What solutions are there? Insurance companies could look at approaches where they encourage customers to take measures to reduce the risk they face and offer guidance on how to do this. Some coverage providers, for example, have started to offer discounted premiums for flood insurance when flood resilience measures, such as constructing flood walls, are taken.

Additionally, there have been a number of innovations in the insurtech space to help insurers improve the accuracy of their modelling. Munich Re for instance, has partnered with the firm Luko to provide home insurance based on AI and satellite images. Luko’s system generates information about risks relating to nearby water or trees as well as roof and ground surface data.

Elsewhere, start-up Chooch AI uses a system that analyses satellite images every 10 minutes to identify locations where wildfires may have started. This technology could help identify wildfires more quickly and thus reduce their damage to properties.

Another solution is parametric pricing – insuring policy holders against events of a set magnitude rather than the value of losses. AXA Climate has collaborated with water data provider VanderSat to provide such coverage against losses from drought to agriculture businesses. The insurer provides polices which pay out as soon as the soil moisture in a field goes above or below predetermined levels.

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