The insurance industry of today is reaching a tipping point – past which two factors will force it to reshape: climate change and technology. Climate change is bringing reinvention to the way the industry invests – largely in fossil fuels – and its underwriting responsibilities. The manner in which insurance companies deal with both of these fronts is thus expected to drastically change in the coming years.

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Technological advancement is the second factor reshaping the insurance industry, though in a radically different way to that of climate change. Insurance companies’ technology and operations functions have historically worked separately, with the former merely assisting the latter in being the principal driver of corporate performance. However, this relationship is transforming, as insurers are increasingly allocating more resources to technology functions rather than operational ones.

According to Statista, the largest insurance brokers in the US by revenue are:

  • Marsh & McMellan Cos. Inc. (NASDAQ:MMC)
  • Arthur J. Gallagher & Co. (NASDAQ:AJG)
  • Hub International Inc. (NASDAQ:HBG)

Effects of Climate Change

  • Underwriting Liabilities

The most apparent way in which climate change will reshape the insurance industry is the number of property and casualty claims that insurers can expect. Climate stress tests are beginning to turn over eye-opening results for insurers, and the picture will only become clearer as stress-testing becomes more commonplace.

For example, stress tests held by the central bank of France earlier in 2021 found that natural disaster-related insurance claims could increase five times in the nation’s most affected regions; this would cause premiums to surge by as much as 200% in 30 years.

In a webinar hosted by S&P Global Sustainable1 in June 2021, Dave Jones, the former California Insurance Commissioner, stated that: “on the underwriting side, one has only to look at both regional and global losses that are driven by catastrophic weather events that in turn are being driven by climate change to understand the enormity of the exposure that insurers have”.

Insurers extend coverage to many structures and belongings that may be destroyed or otherwise damaged by climate change through its property and casualty business line. Climate change has only exacerbated extreme weather events over the last twenty years.

Moreover, the U.S. experienced 22 extreme weather and climate-intensified disasters that caused over $1B in losses each, according to the National Oceanic and Atmospheric Administration. Accumulatively, these events induced over $95B in damages insurers are liable for and killed at least 262.

The increased frequency of such natural disasters is starting to lead insurers to reshape the way they provide underwriting coverage. Put simply, this often causes decreased affordability (and thus availability) of insurance in most areas that are often affected by disasters.

When private insurance becomes too costly, individuals must seek state-backed coverage as a last resort, or forego insurance entirely and rely on the funds of the Federal Emergency Management Agency when a loss occurs. For example, residential non-renewal of insurance in California grew by 31% statewide between 2018-2019.

  • Investment Liabilities

Another liability that climate change exposes insurers to is that of investment. It was found that, out of 4,000 insurance investment portfolios across the US, the industry had nearly $582 billion invested in a combination of oil, gas, coal and other activities relating to fossil fuel in 2019, a $70 billion increase from the year prior.

Moreover, despite total assets under the management of these insurers’ portfolios growing each year, the percentage of fossil fuel-exposed assets remained at 9%, meaning investment in this area is increasing alongside that of total assets.

This represents a liability to insurers because there are concerns that fossil fuels have the potential to become stranded assets, that is, assets that can experience sudden and erratic write-downs or devaluation – in this case caused by the ongoing innovation in the renewable energy resource sector.

Dave Jones, California’s insurance commissioner during 2016, asked Californian insurers to voluntarily divest from fossil fuel. He expounded that he felt such a request was appropriate due to his responsibility to make certain that insurers address any potential financial requests.

US insurers have been criticised by regulators for being far slower to move away from fossil fuels than their international counterparts; corporations in Australia and Europe are increasingly excluding fossil fuels from their investment portfolios. Several US insurers have committed to exit coal financing (e.g. Axa wants to completely exit coal by 2040).

The number of insurers making the change is still too few. Whilst the number of insurers withdrawing coverage for the coal sector doubled in 2019, and 37% of the insurance industry assets around the globe were found to be earmarked for plans to exit the coal sector, it’s not quick enough.

It is conventional wisdom that the insurance industry has been historically slow to change the way it operates its business on multiple occasions, but when it comes to climate change this cannot be allowed to happen.

Effects of Technological Advances

  • The Insurtech Effect

Insurtech describes the use of technology in the insurance industry; it has now become so big it is an industry sector of companies within itself. Its use of technologies has accelerated the improvement of traditional insurance processes and arguably threatens them to keep up or risk being left behind.

Insurtechs, such as UPC Insurance, or Duck Creek Technologies, are entering the insurance sector and taking advantage of new technologies to provide improved coverage to a customer base that is more digitally literate. Not unlike their counterparts in banking, fintechs, the initial focus of insurtechs has been on the retail segment; 75% of their business is in serving retail clientele.

As the young, digitally-savvy segments begin to take over as the largest demographic of their customer-base, insurtechs are tailoring their services for these customers’ preferences. They value convenience and like to execute transactions by mobile (if possible without interaction with the company); it is infinitely more preferable to receive a quote or submit a claim through digital channels than in branch.

Insurtechs are also focussing on the commercial segment of their business as well. This does involve bringing innovation to products (e.g. peer-to-peer and digital brokerage), but primarily focuses on loss prevention and efficiency. This can be seen in AI becoming increasingly prevalent in “Big Data” and data analytics to inform increasingly precise and segmented underwriting decisions.

  • Skyway

A new technological innovation by UPC insurance, called Skyway Technologies, is one example of the direction insurance agencies are likely to move in going forward. allows condo owners in Florida to buy condo insurance online, in real time.

UPC’s insurance start-up Skyway Technologies has created an entirely new sales channel for UPC, selling direct to consumers through an omnichannel experience that takes a consumer through a streamlined, easy-to-use digital buying process that can take a few minutes.

The service enables condo owners to find a quote and go on to buy HO6 insurance at almost the same time. For UPC, which has been providing insurance to condo owners in the natural disaster-prone coastal cities of Florida for over twenty years, this was a logical step.

The insurance agency is being reshaped by technologies such as this because of the overarching trend across all forms of business during recent years to provide increased convenience. Thought to have stemmed from Amazon’s generational leaps forward in delivery service, and the consequently higher expectations of customers, consumers are increasingly choosing the convenience of online solutions that are quick and effective.

  • Duck Creek Technologies

Duck Creek Technologies is one of the tech companies helping fuel the insurtech trend. For example, Duck Creek designed Duck Creek OnDemand to make it easy for insurance companies to follow the path that best fits their specific circumstances.

A great example of this approach is UPC Insurance, which used Duck Creek OnDemand to launch Skyway Technologies, Duck Creek CEO Mike Jackowski told investors in the Q3 2021 Earnings Call.

Duck Creek OnDemand platform is increasingly gaining popularity in the insurance industry. Since earlier this year, the company had 20 customers successfully go live with Duck Creek products, including notable industry leaders like IAT, Auto-Owners Insurance, American National, and The Doctors Company. At the same time, GEICO, the second-largest private passenger auto insurer in the US, completed the rollout of their auto and motorcycle business on Duck Creek across all 50 states.

Final Take

The insurance industry is not alone in its quest to innovate during peak climate change: numerous industries have to contend with this factor and the rise of AI. In the case of the abovementioned companies, challenges are turned into opportunities.