Insurance companies are tackling climate change challenges while insurtech disruptors fill coverage gaps.

In 1973, actuaries at reinsurance giant Munich Re noticed an unusual pattern in their risk tables: flood damage was increasing. They linked their observations to scientific research on rising atmospheric carbon dioxide levels, which trigger temperature increases and disrupt weather patterns.

Decades later, as oil and coal executives continued to deny the validity of human-induced climate change, Munich Re’s experts had long agreed with scientists that something was amiss. After all, with weather patterns driving their profits and losses, the insurance industry could not afford to ignore the Earth’s changes.

As climate change has disrupted the finance industry, there have been benefits. According to Abyd Karmali, Managing Director for Climate Finance at Bank of America Merrill Lynch, “. . . the transition to a low-carbon economy is creating billions of dollars in new business opportunities for companies and investors.” The insurance industry has plenty of new business opportunities, too, for those who seize them.

The predicted 2.5 to 10 degree Fahrenheit average temperature increases in the next century will do more than just increase heat waves. Precipitation patterns will shift, with some areas facing drought and crop losses while others are inundated with devastating floods. Hurricanes and other storms will become more frequent and intense, making each natural disaster more costly. Sea levels will rise up to four feet, putting prime coastal real estate underwater.

As of 2016 — the hottest year recorded to date — the frequency of weather-related catastrophes was six times that of the 1950s. Canada was hit with its costliest year for insurance damage, at almost US$3.7 billion. 2017’s hurricanes Harvey, Irma, and Maria, the California and British Columbia wildfires, and flooding in Southeast Asia contributed to a record US$136 billion in insured losses worldwide.

Added to the risk of direct weather damage is the risk of lawsuits for greenhouse-gas producers, liability for slips in an icy parking lot, supply chain disruptions, and a host of other negative effects.

The insurance industry must prepare for the unexpected while still keeping premiums affordable, but most companies have been slow to adapt. Despite the climate change doom and gloom, there are still plenty of opportunities for insurance companies, and industry disruptors, to remain resilient and even get ahead in a changing-weather world.

1. Crop Insurance

Climate change can increase the frequency, and severity, of droughts, rainfall, and other weather events, damaging crops. For farmers, new insurance products are sprouting, filling a gap in government coverage.

Canada’s Global Ag Risk Solutions, for example, is now covering a farmer’s input costs. If the farmer decides to invest more in their crops by applying fertilizer, that additional cost will be covered if they fail to reach expected profits at end of season. This means less risk for the farmer to invest in increasing their yield.

“There’s a lot of potential for [crop insurance] to help make farmers more resilient to [climate] change by addressing risk.” —   William Hohenstein, Director, USDA Climate Change Program Office.

Offering supplemental agriculture insurance, and identifying other coverage gaps, is an opportunity for existing insurance companies to expand their business or for new disruptors to step in.

2. Flood Monitoring Devices

The potential for more rainfall with climate change can lead to an increase in basement flooding. However, monitoring and catching water problems before they cause even more damage can help reduce claims payouts. For example, although the risk of basement flooding may not be zero, offering incentives for a homeowner to install a water-detection device can find a leak while it is still isolated in a small area.

The homeowner places a water detector near their windows, hot water heater, drains, water pipes, and other leak-prone areas in their basement. When water bridges the contacts, an alarm sounds and, if the device is connected wirelessly, the homeowner receives an alert. If they are away from their home when the flood happens, homeowners can return and contain the leak before the damage spreads.

Britain’s Aviva covers the cost of installing water sensors on homeowners’ water pipes, detecting tiny leaks for proactive repairs. Roost, maker of an IoT water sensor, has partnered with various insurance companies, including Desjardins and Liberty Mutual. Their device detects not only leaks but freezing pipe conditions, alerting home owners before they encounter a much bigger problem.

U.K.’s FloodFlash has partnered with Everest RE through Lloyd’s of London, offering parametric flood insurance based on sensors, basing payment on water depth instead of damage. When the sensor detects flooding at a predetermined depth, it triggers an automatic payment to the policy holder without the need for adjustors. Prices vary by flood risk, target water depth, and payout amount, and the flexibility allows even small businesses in high-risk areas to purchase a policy.

Although providing water sensors to customers increases initial costs for the insurance company, the sensors can reduce damage through early detection, lowering future claims. Not only that, by providing value to their customers, participating insurance companies gain a competitive edge and improve customer retention.

“There is a Chinese saying that a very good doctor is someone whose patients never get sick in the first place. That’s the opportunity for the IoT. It allows us to monitor data in real time, such that we can prepare for a loss and in some cases prevent it as well.” —   Craig Beattie, Senior Analyst, Celent

3. Risk-Reduction Audits

Canada’s Intact Financial and Co-operators both offer incentives for clients to modify their homes for better weather resilience, reducing claims. Intact partnered with the University of Waterloo to offer a Home Flood Protection Assessment, identifying potential ways water can enter the home. When a homeowner acts on recommendations, such as redirecting an eavestrough spout away from the house, they reduce their risk of basement flooding and an average $26,000 repair costs.

Similarly, insurance companies may offer incentives for policyholders to fireproof their homes or install sewer backup prevention devices. Not only do insurance companies have a chance to reduce their risk, but new companies may form to offer their own risk consulting assessments.

AXA insurance took risk reduction to the next level with their 2016 flood simulation in Paris, France, mimicking the modern effects of 1910’s Great Flood. If those same winter rains overfilled the Seine River by 26 feet above the banks in modern times, it could shut down 41 metro stations, leave 3 to 5 million people without power, and cause more than $34 billion damage.

When AXA partnered with police and others for their large-scale flood simulation, they helped raise awareness of the risks and how to manage the situation, such as running damage control out of another AXA office in France. Just three months after the simulation, the Seine rose about 20 feet, triggering evacuation of 20,000 residents with economic losses of about$1.6 billion. Author Valérie November called the exercise “tremendously helpful” when real flooding hit since those involved already knew who to contact and what action to take.

By improving water storage upstream of Paris and infrastructure resilience, among other measures, the city plans to reduce damage during future floods. AXA’s data on past flooding, topography, and more helped simulate potential damage to reduce the city’s risk in the future.

Insurance Shifts from Reactive to Proactive

In spite of such efforts, much of the insurance industry hesitates on adapting to climate change. As they fret over the risk of payouts exceeding premiums, they also risk running out of time before insurtech disruptors snap up all the new opportunities. Luckily, even as climate change makes risk harder to predict, there are plenty of ways to diminish risk while expanding insurance into new ventures.