From Risk to Resilience: redefining affordable insurance in the face of climate change

When Actuaries Institute (Australia) came out with its Home Insurance Affordability Update earlier this month - its key insight on insurance affordability served as another example of the affordability vs. pricing debate which climate change has been posing for insurers in recent years.

The big question for insurers is how to charge enough premium to cover new risks posed by climate change, without making it too expensive for consumers to afford.

Home insurance rates in Australia rose on average 28% in just one year implying that at least for 1 out of 8 customers, the premium for home insurance amounted to more than four weeks of gross household income. Premiums for high risk properties, such as those in flood prone areas actually grew by ~50%.

While the rise is quite high in case of Australia, sharp rate increases have become a global phenomena with more frequent and more severe weather events (esp. floods, wildfires, famines) affecting reinsurance and insurance claims in turn raising prices across product lines. The problem is becoming acute in several lines - especially in commercial property, home and crop insurance. It’s already reaching a point where a lot of customers - both institutional and retail - might give up insurance altogether rather than paying for an unaffordable insurance plan.

This conundrum requires a proactive, collaborative, and adaptive approach from insurers, policymakers & regulators. Some measures which should be adopted and where we have already seen action from proactive insurers include:

Greater investments in Risk Assessment and Modeling:

• Insurers need to invest in sophisticated risk assessment models that incorporate climate change data. This will help them accurately assess the potential impacts of climate-related events on policyholders' properties and assets. In partnership with specialised firms, insurers need to invest in research & innovative technologies which can lead to new ways of assessing and managing climate-related risks.

Flexible Pricing & parametric Models:

• Insurers can explore usage-based or pay-as-you-go insurance models that adjust premiums based on real-time climate conditions, encouraging risk reduction while maintaining affordability. Parametric insurance policies, which trigger payouts based on predefined weather or climate parameters, can also provide faster and more predictable compensation after climate-related events.

Affordability Assistance:

• Providing financial assistance or premium subsidies for policyholders facing economic challenges due to climate-related risks can help maintain coverage affordability.

Customized Coverage:

• Insurers can develop tailored coverage options that account for specific climate-related risks in different regions. This ensures that policyholders are adequately covered without paying for unnecessary coverage.

Transparency, Education and Awareness:

• Educating customers about the risks posed by climate change & importance of proper insurance coverage can help them make informed decisions. Some actions involve providing resources, webinars, or workshops. At the same time, insurers should be transparent about how climate change factors into premium calculations. Clear communication can help customers understand rate changes and the reasons behind them.

Mitigation Incentives:

• Offering discounts or lower premiums to customers who take proactive steps to mitigate climate-related risks can encourage them to adopt climate resilient practices and technologies. E.g., a homeowner who invests in reinforcing her/ his property against potential flooding due to climate change can be incentivized by insurers through premium discounts or better coverage/ deductibles.

Long-Term Planning:

• Insurers, policymakers & user associations should engage in long-term planning that considers the evolving risks of climate change. This can help adjusting coverage and premiums periodically leading to longer term viability of insurance offerings.

Social Responsibility:

• Demonstrating corporate social responsibility by actively participating in climate initiatives and supporting community resilience efforts can enhance an insurer's reputation and customer loyalty. This can make customers more sensitive to any interactions with the insurer, ensuring better engagement, trust, and a heightened sense of collaboration in building a climate-resilient future.

Multi-stakeholder Collaboration:

• Collaboration among insurers, regulators, policymakers, researchers, and customer advocacy groups is crucial to develop comprehensive solutions that balance affordability and insurability. The collaboration is particularly important with government agencies to create incentive programs that promote climate resilience. This could involve tax benefits, subsidies, or grants for policyholders who invest in risk reduction measures.

In the context of climate change, finding the right balance between insurance affordability and coverage effectiveness calls for a synchronized approach. Insurers & customers must work together to manage risks sustainably. This involves crafting insurance solutions that consider customers' financial constraints while ensuring comprehensive coverage against climate-related uncertainties.

By blending foresight, cooperation, and ecological responsibility, we can create an insurance landscape that adapts to climate shifts while safeguarding both wallets and the environment.