Managing Director & Partner
Radical weather is fast becoming an existential crisis for property owners and their insurers.
The world has suffered more than $1 trillion in damages from more than 1,000 extreme-weather events in recent years. In 2022, the global insurance industry saw claims for natural catastrophes soar by 54% compared with the most recent 10-year average and by 115% compared with the most recent 30-year average. For a combination of reasons, coverage in some locations is becoming hard—even impossible—to obtain. Multiple major insurers have stopped writing new homeowners’ policies in two of the most populous US states, California and Florida.
Conditions are only expected to get worse. By 2040, according to Swiss Re, losses from weather-related events are likely to spike by 35% to 120% in Australia, Canada, France, Germany, Japan, the UK, and the US, driven by big surges in floods, hurricanes and cyclones, and wildfires. Premiums for primary insurance coverage are rising quickly, with climate change fueling projected increases of 30% to 60% by 2040 (excluding inflation). The share of catastrophe risk in property premiums is projected to rise from 20% to around 30% over this period.
The insurance industry faces a dual dilemma: a looming crisis in profitability for insurers and in affordability for customers. As we observed in our 2023 Value Creators Report on the US property and casualty industry, there are multiple pressures on profitability. They include the inability to raise rates in the face of rising claims, which stems from a combination of gaps in underwriting capabilities, regulatory constraints, and competitive pressures. The scarcity of reinsurance capacity is putting additional pressure on primary insurers.
Affordability presents its own series of issues. As rates keep rising in high-risk areas, many customers will simply be unable to pay. Countries face the potential for economic and social disruption as traditional vehicles for spreading and managing risk stagger under growing financial pressure. Adjustments to existing insurance business models, especially with respect to high-risk areas, and new measures to spread awareness of risk are both needed. Insurers must lead the way, for their own benefit as well as that of their customers.
The need is urgent. Big changes take time, and the emerging problem will only become more severe. Individual insurers are taking their own steps, but we believe that the sheer scale of the issue requires an industry-wide and multisector game plan.
Based on our work around the world with property and casualty and multiline insurers, BCG has devised an integrated framework to align risk management with both the major steps in the risk value chain (risk assessment, policy in force, and during and after the claim) and individual companies’ state of climate readiness. (See the exhibit.)
At each stage of the value chain, companies can implement those initiatives that address where three principal sets of stakeholders need to adapt to new climate realities:
Basic to our framework is the understanding that we are all in this together and that more collaboration and information sharing are needed if the industry is to adapt to the new environment. We have discussed our framework and recommended initiatives with senior executives from more than 15 large insurance companies as well as other industry experts. All are in broad agreement with our approach and have suggested specific ways to strengthen the effort that should receive immediate attention. Here are some steps that the industry can help each set of stakeholders take.
In today's insurance landscape, strong predictive modeling for risk-based pricing is essential. Yet many insurers find themselves faced with gaps in scenario and forecasting capabilities, limited asset-vulnerability-based risk assessment, and changing correlation patterns across both assets and liabilities. Calls for innovation in catastrophe models requiring next-level industry collaborations and wider local climate management initiatives are on-target, but the ability to execute lies well beyond current modeling capabilities. As one senior executive said, “We have consistently underestimated the risks in our models.” Insurers need to up their game, starting immediately. Key solutions include:
Loss prevention goes well beyond the basic upgrading of building standards and is a pivotal lever for curbing potential risks and damages. A 2023 study by JBA Risk Management, which specializes in flood risk, on 28 million insured properties in Great Britain found that a 5% enhancement in home prevention measures (such as elevated foundations and reinforced floors) reduces losses by 40%. Several barriers impede progress, however. These include limited R&D on prevention effectiveness, difficulty ensuring successful client implementation, and a deficit of technical and building expertise within the insurance distribution network. In addition, the lack of standardization in practices across insurers limits the development of risk mitigation incentives. As one senior company executive told us, “Prevention at both the individual and corporate levels is crucial for risk mitigation. Nevertheless, we face challenges in identifying the most effective resilience measures and establishing a sustainable incentivization model.”
Key solutions include:
An executive at an Asia-Pacific insurer put it this way: “While insurer-centric and client-centric initiatives are crucial for addressing short-term adaptation, the long-term solution lies in increased public investments and more effective policies for resilient infrastructure.”
The insurance industry possesses unique capacity, insight, and potential to further understanding of climate adaptation strategies and their broader societal and economic impacts. Policy makers and regulators can gain lessons and insights from the industry into the effects of severe weather and incorporate them into legislation and regulation as well as planning and investment decisions. Public agencies and institutions can embed adaptation strategies in regulations and standards.
Key solutions include:
Consumers, businesses, and governments need a strong insurance market that can absorb risk and use its expertise to develop strategies to combat the effects of climate change. The loss trends of the last few years have elevated the priority of addressing the effects of extreme weather and made clear that all stakeholders need to participate in developing solutions. We believe that a coordinated framework, like the one presented above, can direct this effort. The insurance industry has the capacity and motivation to lead, but it needs to move now to adapt quickly to new climate realities and secure the collaboration of others to forge a more secure and resilient future.
The authors are grateful to Maryam Golnaraghi of the Geneva Association and to their BCG colleague Nicolas Bachan for their valuable contributions to this article.
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