Digital Vision: Digital Insurance

Greener Insurance

Deploying digital to close the climate protection gap

At a Glance

Exploring the way in which insurers are using digital technologies to close the climate protection gap created by the growing risks related to climate change.

5 Minute Read

Mark Fry

Global Strategic Business Development Director, Financial Services, Atos

Today we are confronted with a real risk that up to $20 trillion of assets could be wiped out by climate change.1

It is in this environment that insurance firms, from long established providers to new upstarts, are grappling with the need to close the climate protection gap. This represents the share of non-insured economic losses in total losses after a climate-related event and has increasingly come to refer to the notional gap between likely climate-related impacts and existing resilience measures. The impact of this emerging gap is already becoming apparent. In the EU, losses related to climate change already average over €12 billion annually and projections suggest that global warming of 3°C above pre-industrial levels could result in annual losses of at least €170 billion.2

1Firms ignoring climate crisis will go bankrupt, says Mark Carney
2European Commission: Closing the climate protection gap

Closing the data gap

The first step towards reducing and, ultimately, closing the climate protection gap is developing as complete an understanding of the nature of the risks posed by climate change as possible. This means insurers need to develop a nuanced understanding of the risk landscape, informed by detailed data, gathered in real time. However, achieving this is fraught with challenges, particularly given the variability of the data available and its uneven quality and level of detail. Nevertheless, a greater volume of more robust data is becoming available, enabling insurers to understand the relationships between exposure and overall resilience to climate-related risk. This presents the possibility of developing fair and accurate assessments of risk that enable us to enhance the overall resilience of communities impacted by climate change.

Even as insurers race to develop new data analytics tools tailored to specific climate-related risks, the sector still has no shared response to support those who climate change threatens to render uninsurable. As the impacts of climate change become better understood by insurers, some communities risk being deemed as too high risk to insure, potentially further widening the protection gap in some regions.

Building understanding

It isn’t enough for insurers to better understand the risks created by climate change. The improved understanding that is making new insurance tools and products possible also needs to inform the decision making of business leaders, policy makers, and individual citizens. Perhaps one of the most important steps that insurers can take to help close the climate protection gap is by helping their customers understand their own climate risks and working with them to identify affordable solutions to protect against these.

The potential benefits of this type of approach could be transformative. Research from Lloyd’s has estimated that a 1% increase in insurance coverage could reduce the global cost of climate-related disasters to taxpayers or governments by as much as 22%.3

3Pinset Masons: Innovation in insurance services can help address the climate change dilemma

This demonstrates the importance of taking action to improve financial education around the importance of life insurance and retirement savings, as well as empowering consumers to save, set financial goals and make more informed financial decisions.

This commitment to broader understanding can also be reflected in the way in which new technologies are deployed by insurers, with the potential to design AI-enabled underwriting models to promote fair and unbiased pricing decisions.

Unlocking AI’s potential

AI has the potential to make a major contribution towards bridging the climate protection gap. From supporting a quicker and simpler claims process for consumers, to providing more accurate predictive tools that can help prevent claims in the first place, AI can have a transformative impact across the insurance sector. In the future, insurers will be able to leverage advances in AI and Intelligent Algorithms further to help build resilience against climate change, providing data that is vital to everything from where new homes are built, to the construction of more resilient infrastructure.

Despite its potential, insurers will need to ensure that the data which informs AI decision-making is sufficiently robust and that the risk of relying on inaccurate or incomplete information is successfully minimised.

With climate change presenting many novel risks and challenges, insurers will find it unsustainable to rely on historic or partial data and will instead need to find new ways to share up-to-date information.

For these reasons, it could still be some time before the full potential of AI in helping to close the climate protection gap is realised. Nevertheless, its future potential is clear and will become more evident as the technology continues to mature. Insurers should therefore view it as a key component within their long term strategies for narrowing the climate protection gap.

Where next?

Collaboration will be essential if insurers are to successfully close the climate protection gap. At the same time as deploying new and innovative technologies, insurers will need to adjust to their role within a more diverse and complex ecosystem of insurance providers. It is within this complex and diversifying landscape that insurers will need to explore new forms of cross-sector collaboration. This collaboration cannot simply be limited to those within the insurance sector but must also include governments and non-governmental bodies if insurers are to effectively manage the risks posed by climate change. This will enable insurers to build a robust system of risk management, which is able to weather the extreme events and risks generated by climate change and enhance the resilience of society as a whole.

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Carol Houle, Global Head of Financial Services and Insurance, Atos