2020 brought widespread disasters, with bushfires in Australia, locusts in Africa, and the worst year on record for hurricanes.1 The year also featured five of the six-largest wildfires ever in California (including the largest)2 and the costliest thunderstorm in U.S. history.3
Climate change has put insurers in a tight spot, as they bear the economic burden from disasters. The bulk of their income comes from underwriting profit and investment returns, but profits shrink when there are so many insurable disasters in a single year.
Reconsider the business model
Insurance models are based on the idea that frequency and severity of disasters are inversely related. But with climate change, frequency and severity are increasing in tandem. Most models that create pricing structures and determine risk are not built for these new conditions.
Insurers need to develop a new organizational strategy. Some will raise premiums; others will exit geographic or coverage markets entirely. However, those options are not viable for some carriers — for these smaller insurance companies, a better option would be to improve risk management.
Limit the risks you continue to cover
Placing tighter restrictions on coverage is the first step to improved risk management. This may mean leaving certain areas, such as California with its increasing severity and number of wildfires or Florida, which has become a perpetual windstorm and beach erosion risk. For those insurers who cannot leave higher-risk areas without effectively going out of business, it’s essential to find better risk profiles and rethink customer relationships. It may also warrant offering different types of insurance.
In any case, emphasizing coverage in areas less affected by climate change is important.
Insurers also make money through investments but choosing the right investment vehicles can be tricky. Organizations that exacerbate climate change, such as non-renewable energy companies, those that build in flood plain areas or develop in the urban wildland interface space, often need insurance investments to operate.
If insurers begin to exit those markets, it may push those organizations to change their investments. Here, insurers are in a unique position to be a positive influence for change.
An insurance company that wants to mitigate climate change must demonstrate its commitment with employees. For example, allowing employees to work at home when possible reduces commuting and environmental costs.
Contact HUB to help make your insurance business more competitive and sustainable.
1 2020 Atlantic Hurricane Season takes infamous top spot for busiest on record,” November 10, 2020.
2 California Department of Forestry and Fire Protection, Top 20 Largest California Wildfires, April 28, 2020.
3 Washington Post, “Iowa derecho in August was most costly thunderstorm disaster in U.S. history,” October 17, 2020.