The increased frequency of extreme weather events is causing some insurers to reduce the coverage they can afford to offer.
In the US, the states of Florida and California are in the headlines. But the impact of weather is broader than coastal communities and includes severe convective storms, hurricanes, floods and wildfires all over the world.
Faced with increased loss costs, insurers must balance the need to preserve capital to pay policyholders’ claims with increased demand for coverage on these perils.
The difference between total economic loss and what’s covered by insurance products is often called the protection or coverage gap.
Consider these figures from Aon’s 2023 Weather, Climate and Catastrophe Report:
“As well as increasing the vulnerability and suffering of individuals, the protection gap is also a key indicator of economic and societal resilience. Working to narrow it is essential,” says BCG Managing Director and Partner Nadine Moore, who specializes in property and casualty lines.
“The scale of losses from climate disasters means that insurers are unable to shoulder the burden alone. However, the insurance industry has huge expertise in finding innovative ways to both mitigate and transfer risk.”
According to Moore:
Advanced Risk Modelling. The insurance industry has a long history of modeling risk and working with regulators to create fair and effective products to transfer risk. As governments and regulators tackle the climate-related coverage gap, it will be important to have insurers at the table to share expertise. And with the explosion of AI, the industry can innovate to create new solutions on the topic of climate risk at an even faster pace.
Spreading the Load.
New Government-Supported Programs. There will continue to be geographies where the industry needs to find an appropriate balance of risk and return. These are the areas seeing price increases at present. Governments may need to consider new alternatives where insurance is becoming increasingly expensive. Recent disasters are a call to action for insurers to team with governments to build new programs that complement current insurance products.
Long-term Risk Reduction. Building regulators and city planners also have a role to play in ensuring new building standards limit damage. For example, roof design and construction can be an effective mechanism in reducing the extent of wind or fire damage. These techniques take time to implement and may require funding support.
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