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Climate forces insurers to be creative and reinvent themselves

Climate forces insurers to be creative and reinvent themselves

This is becoming a big problem. Insurers give businesses and individuals the peace of mind that, for a small premium paid on a regular basis, they will be covered in the event of catastrophes such as floods or wildfires. However, if payments increase because more customers apply, then the insurance industry either makes less profit or is forced to increase the regular premiums paid by customers.

Such is the scale of the damage that the insurance industry has been forced to do both. Insurance companies’ annual profit margins are shrinking, even as premiums for products like home insurance rise. “The insurance industry is facing the climate challenge head-on,” said Nina Seegadirector of sustainable finance research at the Cambridge Institute for Sustainable Leadership.

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When the going gets tough for the insurance industry, it depends on the reinsurance industry to help. companies like Swiss Re and Munich Re they provide coverage to insurers that are affected by much higher payments. However, according to a Moody’s report published earlier this month, reinsurers are having a harder time, while their earnings are below those of insurers. That’s causing reinsurers to hike their premiums, limit the types of coverage they provide and even exit some markets.

Now, even reinsurance investors are unhappy with their investments, seeing lower-than-expected returns. After Hurricane Ian hit Florida last year, investors aren’t pouring as much new money into reinsurers, he said. Charles Graham, Bloomberg Intelligence Senior Insurance Analyst. Climate impacts are causing “a domino effect”said.

In an ideal world, as premiums rise, market signals should compel, for example, property developers and buyers to places that face less climate risk. But the insurance market does not always work well.

“Our price signal should imply that you should change your behavior”he said last week Christian Mumenthalerexecutive director of the group swissrein an interview at the World Economic Forum in Davos. “But humans generally don’t like to change their behavior”

Take the case of Florida. After Hurricane Andrew hit in 1992, the level of damage was so extreme that it bankrupted at least 16 insurers, so the state stepped in and created a fund that lowered insurance premiums.

That may sound like a good thing, but Florida’s vulnerability to extreme weather events has only increased. Since 2020, 15 property insurers have filed for insolvency as the state stepped in with a $1 billion fund to ensure more regional insurers don’t run out of reserves as Floridians are hit with more weather impacts. .

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The difficulties also force the insurance industry to be creative. There are three levers you can use to reduce climate risks: reduce your own emissions, force the companies you invest in to reduce their greenhouse gases, and create products that help your customers reduce their environmental footprint.

NN Group NV, one of the largest insurers in the Netherlands, now has an insurance product that not only replaces a broken smartphone screen, but repairs it. The product is currently the most environmentally friendly option on the market, but it is more expensive for the company than simply buying a new phone. However, the CEO David Knibetrust that in the long term it will become the most economical option.

“There is still much to be done”, said knibbe in an interview in Davos. “I have more examples, but it’s not a list of 20.”

The ultimate weapon the insurance industry could use is to stop insuring certain things altogether. reinsurers swissre Y Munich Re They reduced their capacity in Florida by up to 80%, as the state is more frequently hit by extreme weather events. mumenthaler of swissre It says it has a policy of not insuring new fossil fuel projects, though it did not say which clients it has had to deny as a result of that policy.

Seega says the insurance industry has come a long way since its early days of using hunches to make decisions about risk. The industry has become more data-driven, relying on history as a way to understand the future. The problem now is that climate change is making historical data a less reliable guide, which means more innovation is needed to ensure that the business survives.

Aksha Rathi

Source: Gestion