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Charting New Waters: The Intersection of Climate Change, Technology, and P&C Insurance

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16 July 2023
Andrew Schwartz

In the intricate tapestry of P&C insurance, carriers have demonstrated a remarkable ability to underwrite a vast array of risks, from the unique to the commonplace. Yet, the escalating impact of climate change presents a novel and formidable challenge that is reshaping the industry's landscape.

The traditional pillars of actuarial science, once effective in predicting risks such as mortality rates or car accidents, are now grappling with the unpredictable nature of climate change. The increasing frequency of extreme weather events disrupts the conventional business model of insurers, which typically relies on a cycle of heavy payouts in disaster-stricken years, followed by quieter periods that allow for the rebuilding of reserves.

The financial implications of this shift are significant. Between 2020 and 2022, insured losses from natural disasters in the United States reached an unprecedented $275 billion (U.S. P & C Insurers Facing Hardest Market in a Generation: New White Paper Examines Mounting Inflation, Claims, Reinsurance and Other Capital Costs | APCIA). Concurrently, inflation and supply chain disruptions have escalated the cost of rebuilding, further straining insurers' financial health. In 2022 alone, the U.S. P&C industry recorded a net underwriting loss of $26.5 billion (Best’s Special Report: U.S. Property/Casualty Industry Suffers $26.5 Billion Underwriting Loss in 2022 | Business Wire) .

To combat these challenges, insurers are increasingly turning towards impactful technologies such as geospatial data and aerial imagery. These tools offer a more sophisticated approach to areas such as underwriting, risk mitigation, and NatCat response enabling insurers to better understand and manage the evolving risks associated with climate change.

Geospatial data, which provides information about geographical locations, and aerial imagery, which offers detailed visual representations of areas, can provide insurers with a more comprehensive understanding of risk. These technologies can help insurers more accurately assess the potential impact of climate change on specific locations, allowing for more precise underwriting and more effective risk mitigation strategies.

In addition to these technological advancements, the market is also seeing shifts. For instance, Farmers Insurance, a major player in the industry, recently announced its withdrawal from Florida, affecting around 100,000 policyholders. (Farmers pulling reins on property lines in Florida, California) The company cited the need to manage its risk exposure in the hurricane-prone state as the primary reason for its decision.

Two of the most prominent property insurers, State Farm and Allstate, have decided to stop selling new homeowners insurance in California (Allstate, State Farm pullout aggravates tough Calif. business environment) The moves have been driven by the rising costs associated with climate change; specifically in areas prone to wildfires. That two of the largest carriers pulled out of the prominent California market is indicative of the growing impact of climate change on the insurance industry and the need for innovative solutions to navigate these perils.

As carriers confront the increasingly costly and ominous threats posed by climate change, the use of advanced technologies such as geospatial data and aerial imagery will be vital. These tools offer the a potential way for carriers to effectively manage the evolving risks of a changing climate. The journey is far from over, and it is incumbent upon us all to observe, learn, and adapt as it charts its course through these new waters.