Our expert panel at Fintech LIVE London, 2022, saw three, leading insurtech climate risk experts discuss the future of insurance in an increasingly erractic and unpredictable world.
Johnny Stubbs, Head of Partnerships at Previsico, manages and drives partnerships across the UK and US insurance markets, He was previously head of Insurance and Business Development at Getsafe and an operations manager at insurtech unicorn, Zego.
What are the challenges that are facing underwriters when it comes to climate crisis assessment?
Adam Rimmer: The big challenge that is going to engulf particularly the catastrophe insurance industry over the next few years is the fact that the future is starting to look less and less like the past. If we're doing most insurance products, like car insurance to take the simple example, we can look at all the policy holders we had previously, we can look at how many crashes they had, what they've claimed for, but we could use actual statistics to work out with a pretty reasonable degree of accuracy what claims there might be in the future. For something that is inherently dependent on the stability of the climate, so for example, the number of tropical cyclones that might fall in a year that Jamie and his team are working on or the number of floods that happen in the UK every year that Johnny and his team might work on, that is starting to become harder and harder to use historical data sets to predict. So that increase-
You can't use the past to extrapolate the future in the same way that you previously could. So that increasing uncertainty's a big challenge facing underwriters as the climate crisis presents upon us. And on top of that, even outside the climate sphere, you have other pressures as well, the ones that you just mentioned, meaning that costs are more and more and more a factor for everybody, not just for households but for small businesses and for large businesses as well. So even without the pressures that go with uncertain underwriting in the catastrophe insurance space, it's becoming more and more difficult for underwriters because of increased costs. So uncertainty and costs, those are the big challenges that underwriters are having to deal with.
What technologies are proving most useful would in discerning risk and collecting the data?
Jamie Rodney: We have the slogan, "Today's risk is not the past." You can't look at things that happened 10, 20, 30 years ago in a climate that's significantly different. That means as a company, we were really founded out of the technology that we have today. I think if we tried to create the company 10 years ago, I don't think we would have been able to do it. We now take observations of the climate on 25 kilometre grid cells, these are top academics in Europe, in the U.S., improving the ways that we can observe the state of the climate, that sea surface temperature, wind speed, soil moisture. And they do this thing called reanalysis where they match up observations through these really funky computer simulations.
we can look at correlations between different types of physical based climate phenomenons, sea surface temperature, soil moisture, and look at how that impacts the risk that we quantify. but we also have ambition to model every single atmospheric peril globally. Climate is global and we need a global system, to understand it in a global, connected way.
Adam Rimmer: FloodFlash is what's called the parametric insurance product. We pay based on a physical parameter that we measure. In our case, that is the depth of water we measure by an IoT sensor that we install on the external wall of a property. It detects water of a certain depth, sends the data to us and then we can settle the claim.
Low power and regular IoT networks, such as narrowband IoT, Cat M1, allow us to pull down the cost of sensors down to a point where we can make them at a cost that enables us to sell this type of policy to small businesses, and ultimately homeowners or rented properties, and not just the preserve of people like the giant corporations that we used to work on in our days at RMS. It's allowed us to democratise the technology to protect more people from catastrophe.
In what ways or can the insurance industry help to tackle climate change?
Johnny Stubbs: I think the first thing is education, so insurers can leverage the relationship they have with commercial customers to help inform them on the increased volatility and that historic data is not as relevant as it used to be. In doing so, they can upskill their customers to understand the risk that they're now facing. I think there's still a huge knowledge gap. We focus on flash flooding in the UK and a lot of our commercial customers don't believe it's an issue for them. I think for insurers to be able to step in there, that's a big opportunity.
I think helping commercial customers to become more resilient by identifying opportunities basically for resilience. Historic data is no longer a great predictor of the future, so how can insurers take on new data sources? How can they take on new models that are more predictive but allow them to become more preventative in their approach to insuring their customers? I think that's a really big opportunity that a lot of insurers are starting to move into.
How much value does historic data still have in relation to climatic tracking technologies today?
Jamie Rodney: When these catastrophe models are being built, even when we're trying to extrapolate to an uncertain future, we're still using the past as an input, but we have to increase the bounds of uncertainty with which we're simulating those past observations.
For example, we might be modelling the way that floods accumulate in the UK based on certain patterns of rainfall that we've seen over the last 20 years, but when we're looking forward, we're still going to use those same patterns that we've observed from the last 20 years, where we have to say, "Okay, the patterns might not just fit in similar patterns to that 20 years but also, they might go beyond there. They might go beyond it this way, this way, they might change in frequency, they might change in intensity."
As a company, we've thought about this fundamentally. But we started to think about, how can we build models differently so they don't necessarily extrapolate the past but they take the climate of the past and simulate risk based on that. And if you physically drive your model, you can actually validate it by saying, "We don't calibrate to the past, we can just reproduce the past." It's actually the strongest form of validation.
We try to understand the physics of history and how often they reproduce, sea surface temperatures are going to increase, if everything's warmer, then things are going to increase. If everything's cooler, things might slow down. If history was a little bit warmer or a little bit cooler, you're just representing that state of the climate.
What types of coverage are best suited to climate related cover would you say?
Adam Rimmer: Parametric insurance reduces uncertainty, because the underwriter is only exposed to one point of water depth. It massively reduces the cost because there's no loss adjustment process. McKinsey very recently, suggested that loss of adjustment costs to the insurer could be up to 10 to 20%, which in a time of cost challenges is huge. So parametric insurance gets rid of that process, it gets rid of the uncertainty, and that is whyparametric insurance is the best and the most efficient way to cover these low frequency, high severity events.
Do you think that insurers are adopting new practises fast enough? Or are they behind the curve?
Johnny Stubbs: It depends. I think there are definitely insurers that are ahead of the curve but I think this is not a one moment in time, this is something that's going to be a direction of travel over the next years and decades. So there are definitely early adopters, and some of the partnerships that we have in place. But again, I think it's about getting those into the culture and the DNA of the insurance market. There are certainly examples where individual parts of organisations are striving forward, but it's about bringing that whole organisation along with you. There's still a long way to go but I think the positive sign is that this space has been developing rapidly over the last five years in the insurtech scene and we've seen a lot of progress in that time and that will continue.
Jamie Rodney: Reinsurers that are in property haven't met their cost of capital for the last five years, so they're big bearers of this risk but now they're being hit. They do have a history of bouncing back and incorporating these new methodologies. I think if you're holding stock in a reinsurance company or an insurance company as an investor, the easiest difficult question to ask is climate change.
People are very much aware of it and I think the industry will react, because actually, given its history, we believe that the solution from a risk quantification perspective will come from the insurance industry.
How is movement in this area positively impacting the consumer?
Johnny Stubbs: We have a forecasting model that lets our customers know up to two days in advance whether the flash flood is going to hit a property of theirs. We work with insurers, who then provide this service to their own customer. The customer is getting a notification hours in advance saying, "This thing is coming, you need to do something." So they can put in place their full action plan, they can move stocks and assets, move cars, whatever it is, which is going to reduce any claim that they might make. And it also means they can get back on their feet more quickly. An estimated 40% of SOEs will go under if they get flooded, so if you can give them that information beforehand, that's hugely beneficial.
For the insurer, it means reduced claims, reduced exposure and it can bring insurers closer to their customers. Historically, insurance has not been great at building those kind of relationships. If we start looking at this more preemptive approach to insurance, it's more about predicting the event beforehand. And that's hugely elevating to the proposition, and I think certainly from the insurer's perspective, it can be a massive point of differentiation in terms of building that relationship.
How are are new climate risk technologies addressing the protection gap that exists as well, particularly in both developed and developing countries?
Adam Rimmer: A lot of those technologies that we've talked about, like increasing computing power, IoT networks, are allowing us to model catastrophes in a resolution and monitor those catastrophes in a way that wasn't possible before. I think it's true to say, or it's certainly 95% true to say that every policy FloodFlash has written is a new premium to the insurance industry. So by that, what I mean is, in the UK, flood insurance is not typically sold as a standalone product line. Most people, unless you live in the Calder Valley or Carlisle, has never thought of buying flood insurance because it's included with your main property, whether you're a homeowner or whether you're a business.
You only do that if your traditional insurer is saying, "I'm going to exclude flood losses." Those are the people that we need to cover and they're not being covered at the moment. By using parametric insurance in the way that FloodFlash does to be able to cover them, we're not just pulling premium away from somebody else, we're actually growing the size of the whole insurance market. That means covering risk to loss we've covered before, which means closing that protection gap. We're only at the first bit, about $58bn a year, but you've got to start at the start.
Jamie Rodney: When we think about tropical cyclone risk, it's modelled in exactly the same way as it is in the US, as it is in China, as it is in Japan. This actually gets around the data issues that we've had in the past… If you have a globally consistent model that tackles climate change and has high resolution information on the hazards, how often does a certain type of hurricane occur in Australia? That allows you to treat insurance on a global scale in exactly the same way. Similar to yourself we see a lot of new policies in regions where maybe insurance hasn't been as high in terms of penetration.
We see a lot of queries for our product coming in in Southeast Asia, where there's no other model in the world to do this stuff. So we're enabling the market to provide new policies in new areas. But it's not just innovation and data and technology, it's also innovation and insurance. So parametric insurance, yes, it's an old product theoretically but it's only really getting noticed now because people are realising that you need to think about different ways to insure people in different locations.
Where do you see parametric insurance developing in relation to climate change?
Jamie Rodney: It has this long track record of being resilient or building resilience to the impact of natural disasters. Our belief is that we want to support the industry to do that because we know it's actually pretty scary. Imagine if you couldn't get insurance globally, it has significant knock on impacts for the resilience of the global economy. And if you think about that, we always think about insurance being the first protector against natural catastrophes, so if the industry shows that the insurance industry has been bearing this risk, it's exactly what they do.
Johnny Stubbs: I think my starting point probably is what the Environment Agency said pre-COP26, it's that or die basically. The level of volatility now means that the historic model and business model for insurance is not going to be sustainable going forward. So fundamentally, first the model has to change and it has to become more about anticipating and preventing before the event. I think in order to do that, that has to be really focused on customer centricity, whether that's an individual or an organisation. So insurers need to understand their customers better. So yeah, Adam's already referred to IoT but also it's just more investment in data in terms of understanding better the customer.
Adam Rimmer: I'm an optimist, right? I think both the human race and the insurance industry, not that those two things are entirely overlapping, but they have both demonstrated their ability to innovate and change, adapt or die in Johnny's phrase. Insurance makes the world go round. Planes don't take off without insurance, businesses don't take off without insurance, the buildings don't come up without insurance, it is absolutely necessary. And insurance has been thinking about climate and climatic perils for longer and more deeply than other industries have, so I do think insurance is going to be the one that leads the way.