Insuring Against Climate Change: How Traditional Insurers and Start-Up Companies are Implementing Innovative Technologies to Address Climate Risks
By: Adam M. Berardi and Marianne Bradley
Over the last decade, there has been a global increase in the focus on climate change and the risks and dangers associated with it. And for good reason. Damage from climate-related disasters was in the billions of dollars in 2019 alone. California wildfires caused $25 billion in property damage, while Typhoon Hagibis in Japan cost an estimated $15 billion. Other extreme weather events, including rampant brush fires in Australia, widespread droughts in East Africa and severe flooding in South Asia, have had devastating consequences.
Insurers seeking to underwrite weather-related risks face growing challenges. While the availability of insurance can help mitigate some of the impacts of climatic shifts, insurers stand to lose billions of dollars from catastrophic weather events. As a result, some insurers have had to significantly increase premiums in particularly risk-prone areas, while others have found it difficult — if not impossible — to economically write or renew coverage.
Already, some state regulators have taken steps to limit insurers’ ability to decline these types of risks. For example, in response to the Sandalwood and Hillside wildfires, the California Insurance Commissioner issued a mandatory, one-year moratorium prohibiting insurance companies from declining to renew policies issued to residents in wildfire disaster areas. Under the prior regulation, carriers were prohibited from terminating policies for homeowners who sustained a total loss in a wildfire; the moratorium expanded that rule to include homeowners living adjacent to wildfire emergency areas who had not been directly impacted by the fires.
The stated purpose of the moratorium was to allow time for the state and insurance carriers to work on lasting solutions that would aid both in reducing wildfire risk and stabilizing the insurance market. The decision came amid growing evidence that homeowners insurance had become increasingly difficult for certain Californians to obtain from traditional carriers. By necessity, those carriers that did offer insurance to homeowners living in wildfire areas had to charge higher premiums. The moratorium, then, was designed to provide homeowners with affordable insurance options until the devastation caused by wildfires subsides.
California was the first state to impose such requirements. But regulators in other at-risk states may follow suit. That could force insurers to take on significant additional risks arising out of climate-related events, such as flood and drought. To address these concerns, traditional carriers and start-ups have begun to develop new technologies (InsurTech) that are tailored to provide innovative solutions to the unique risks associated with climate change.
One such start-up is Jupiter Intelligence (Jupiter). Founded in 2017, Jupiter provides asset-level, data-driven risk analyses designed to predict the likelihood of extreme weather events. The platform uses a program that continuously refreshes satellite and sensor data. Jupiter integrates probabilistic climate prediction with comprehensive risk analyses to project the likelihood of and risks associated with flood, fire, heat, drought, cold, wind and hail events.
Their customers include insurers and risk managers, who utilize Jupiter’s services to assess risks associated with extreme weather, sea-level rise, storm intensification, and increasing temperatures over time. Some major carriers, like QBE, one of the world’s largest property and casualty insurers, have begun working with Jupiter to assess climate risk. According to David McMillan, Group Chief Operations Officer at QBE, “Jupiter and QBE are collaborating to improve underwriting and pricing processes and to offer climate risk adaptation expertise to our customers.”
Another company providing similar services is Kin Insurance (Kin). Kin’s goal is to update traditional underwriting models in order to provide customized coverage for homeowners living in coastal areas. Founded in 2016, Kin began as a tech-driven home insurance provider in Florida, offering products tailored to the needs of customers in a region known for severe weather events. Kin functions by leveraging thousands of publicly-available data points to recommend appropriate coverage to homeowners.
In August 2019, Kin announced that it had raised $47 million in funding to launch Kin Insurance Network. It has used this funding to become a licensed homeowners insurance carrier in Florida.
Like Kin, NYC-based WorldCover was created in response to climate-related disasters. It works to provide drought insurance to farmers in Africa. When first launched, WorldCover was available only in Ghana and covered only one crop: maize. Since then, the company has expanded to multiple markets in East and West Africa, covering four categories of crops: cereals, legumes, root vegetables and perennials. WorldCover uses a combination of satellite imagery and on-the-ground sensors to understand local weather patterns in order to create insurance options for farmers facing some of the world’s worst droughts. The company uses its satellites to monitor rainfall patterns and trigger payouts immediately.
Companies outside of the United States also specialize in climate risks. MeteoProtect is a French-based global insurance and reinsurance broker dedicated exclusively to weather risk management. MeteoProtect issues parametric policies, which pay out when a pre-agreed event — such as a hurricane or tornado of a specific intensity — occurs.
The company uses climatology or meteorology to measure the “climate resilience” of businesses with a solution it calls “Weather Neutral.” Using this technology, MeteoProtect is able to offer insurers real-time exposure assessment and contract pricing. MeteoProtect uses its data to integrate climate risks into mainstream insurance portfolios, which allows insurers to balance their overall exposure to climate variability and transfer undesired risks through weather derivatives. In April 2020, Cooper Gay France, the European brokerage and wholesale managing general agency, acquired MeteoProtect’s brand and technology.
Traditional carriers are also investing in new technologies to address climate-related risks. Allianz, an industry leader, offers customized policies to assist customers in managing weather extremes such as sea level rise, rainfall, temperature fluctuation and wind surges. Swiss Re recently launched FLOW, an index-based product designed to protect companies in Europe from the financial impact of high or low river water levels. Unlike traditional insurance coverages, which typically require loss investigations, FLOW provides fixed pay-out amounts based on a defined index. For example, when water flows drop below an agreed-upon level, a payment is automatically triggered.
While the rise of InsurTech is necessary and beneficial, it is also likely to have regulatory implications. For example, anti-rebating laws generally prohibit insurers from offering policyholders anything of value, apart from insurance. These laws present challenges for InsurTech companies that seek to market telematics devices that monitor a user’s personal data. In response, the National Association of Insurance Commissioners has moved to amend its Model Unfair Trade Practices Act, with the goal of rewriting anti-rebating prohibitions.
Some InsurTech products also offer virtual agent services. This may present licensing issues, as many states require professionals who sell, solicit, or negotiate insurance to obtain an insurance producer’s license specific to that state. The use of virtual agents also raises potential claims handling and trade practices act considerations.
That said, efforts are underway to free InsurTech’s advancement from some of the restrictions typically applied to insurance industry innovations. For example, in March 2019 the Kentucky legislature enacted House Bill 386, which established the first InsurTech “sandbox” in the country. The law establishes a two-part regulatory safe harbor, or sandbox, that permits insurers to submit technologies for participation in an initial beta test and, if approved, an extended period of relief from regulation. Administered by the Kentucky Department of Insurance, the sandbox is intended to provide innovators with a safe space to test and launch insurance-related technologies not contemplated by the Insurance Code.
While Kentucky’s approach suggests that states can see the benefits of InsurTech to insurers and policyholders, traditional carriers and start-up companies must remain aware of existing regulations and other bureaucratic impediments to the introduction of new technologies. Nevertheless, investment, development and implementation of InsurTech products will be crucial as the frequency and severity of climate-related disasters looks to be on the rise.
Adam M. Berardi is Counsel at White and Williams LLP and represents major national and international insurance companies in coverage disputes and complex commercial litigation around the country. Marianne Bradley is an Associate at White and Williams LLP and advises insurance and corporate clients on commercial matters.