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How Data and Technology Are Helping U.S. Companies Take a Holistic Approach to Climate Risk
From the mid-2000s through the early 2010s, the U.S. experienced something of a lull in hurricane activity. Few major storms made landfall.
“There were no major hurricane landfalls in the United States. Hurricane Irene and Hurricane Sandy impacted the Northeast, but technically, they were not major hurricanes at the time of landfall. Florida had gone relatively unscathed,” explains Megan Linkin, senior parametric Nat CAT structurer with Swiss Re Corporate Solutions.
Then, in 2017, the U.S. was hit with three major hurricanes: Harvey, Irma and Maria. These storms caused about $265 billion in damages and led many companies to reconsider their natural catastrophe risk.
Traditional insurance carriers, too, reconsidered their appetite for natural catastrophe risks. Property markets hardened as many insurers adjusted their rates annually in order to keep pace with the increased exposures they’re facing.
“Over the last five to seven years or so, there’s just been this realization that the U.S. faces significant natural catastrophe exposure, and that has led to a hardening of the market and rates overall for catastrophe insurance,” Linkin said.
One thing is clear: Companies need to have a plan for managing climate risk. New data tools can help model exposures, allowing companies to purchase appropriate insurance coverage. These tools can also aid claims adjusters in their assessments of physical damage, and they can use data to help create new insurance products.
A combination of mitigation, smart data analysis and planning, and innovative financial risk management will be necessary to help companies protect their properties and their bottom lines.
Better Data, Better Insurance Policies, Better Claims Adjustment
Megan Linkin, Senior Parametric Nat CAT Structurer, Swiss Re Corporate Solutions
As climate risks continue to shift, risk managers need to carefully evaluate their exposures, take action to mitigate them and purchase the appropriate insurance coverage.
One way they’re doing that: better data. Improved catastrophe models are helping businesses determine whether they’re exposed to hurricane or wildfires risks, for instance, and they can then purchase coverage accordingly.
“On the traditional side, the better underlying data about the portfolio of assets that is exposed to natural catastrophes, the better the catastrophe models responsible for doing the risk assessment will perform,” Linkin said.
When a claim occurs, technology can help conduct remote damage assessments, speeding up the adjustment process. Insureds can also use data gathered from these tools to inform future climate models, allowing predictive analytics to continue improving.
“Being able to more rapidly assess claims using remotely sensed data, using data that you don’t physically have to be on site to obtain, can allow for improved claims assessment as well,” Linkin said. “The more refined data you have, the more clear answers you can get.”
Parametric Insurance: An Innovative Risk Management Solution
In addition to helping insureds better predict and respond to climate risks, improved data and technology tools are helping carriers craft new insurance policies — and, in some cases, helping create products for previously uninsurable risks.
Parametric insurance policies are just one example of an insurance product that is built to use data to respond to natural disasters. Parametric insurance policies pay out if a given metric (like inches of rain or wind speed) is met, allowing policyholders to quickly access funds after an event like a hurricane.
“It’s very straightforward to determine if the index is met and if proceeds are due under the terms and conditions of the policy,” Linkin said. “The data is available in real time or near real time within the days after the event. So we are able to go through our claims process very rapidly and communicate to the buyers if they’re eligible for a payout — and if they are, to get them that payout.”
The concept first entered the weather derivative space after the 1997-1998 El Niño event, where mild winters led to revenue shortfalls for utility companies. Utilities realized they needed to hedge against lower-than-expected revenue, and index-based temperature options did just that.
Governments soon turned to the products because, as Linkin put it, “There’s no way to capture that budget shortfall via traditional insurance programs,” and private companies soon followed after experiencing devastating losses from Hurricanes Irma and Maria.
Since 2017, interest in parametrics has only continued to increase. Linkin said she’s seen Swiss Re’s book go from tens to hundreds of parametric policies. “There’s been just an explosion in interest,” she said.
A Leader in Responding to Climate Risk
It’s clear corporations need to take a holistic approach to managing climate risk. Data and technology will play a critical role in assessing these exposures and effectively mitigating and insuring shifting climate risks.
“Climate change is no longer a future problem,” Linkin said. “It is a current problem, and it is here, and we are going to have to figure out a way to address it.”
Swiss Re has long been a leader in the industry when it comes to analyzing shifting climate exposures. It first brought attention to the risks of climate change in 1979. Since then, it has become a pioneer in adopting new risk modeling technologies and developing insurance products like parametrics for exposures that were previously uninsurable in traditional markets.
“We’re not designing structures that are not designed to pay. We are designing parametric insurance structures that are meant to protect our clients from disruptive to catastrophic events. And we have the claims and we have the proof to demonstrate that it works,” Linkin said.
One example of a product Swiss Re has recently brought to the market is its parametric hail cover. It partners with CoreLogic’s high-resolution hail footprints to determine hail size, and its parametric policy pays out accordingly.
These policies are easy to understand and they pay out quickly. Their speed is one of the main appeals for some parametric policyholders, who often want to have funds immediately available to aid in recovery from a disaster.
“Our policies are short. They’re between 20 and 30 pages. And when we say we will run the numbers, we will deliver the conclusion and we will get you a payout in 30 days — that really is how it works,” Linkin said.
To learn more, visit: https://corporatesolutions.swissre.com/innovative-risk-solutions/parametric-solutions.html.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Swiss Re Corporate Solutions. The editorial staff of Risk & Insurance had no role in its preparation.
