The Climate Change Conundrum Part 2: Insurtechs Unravel Solutions

Part 1 discussed ways in which carriers are reorienting themselves with the long-term view on climate change. In this final Part 2, read about the differentiated approaches that leading insurtechs are adopting.

John Neal, CEO of Lloyds market opines, “Climate is the ultimate systemic risk and represents the biggest single opportunity the insurance industry has ever seen”. An extreme freeze in U.K. during 2018 caused payouts for burst pipes totaling £194 million. The same year, an extreme heatwave affected 10,000 homes with damages exceeding £64 million.

Amid hastening climate change impact, a slew of “climate intelligence” insurtechs have emerged that enable organizations to better anticipate and prepare for extreme weather events. They mostly combine machine learning with traditional weather modeling techniques, leveraging a mix of public, proprietary, and customer-specific data to train their models.

One of the early mover startups – One Concern – developed a “digital twin” of natural and man-made environments to hyper-locally model the effects of climate change. The company has focused primarily on the Japanese market to date.

Jupiter Intelligence is another well-established player, with blue-chip customers that include NASA,  Liberty Mutual Insurance and the City of Miami. Jupiter helps companies gauge the threat that climate change poses to their bottom line, having booked more than 10 times as many contracts in the first quarter of 2021 as it did a year earlier. It assesses exposure to climate change by combining projections of future temperature, rainfall, wildfires and other threats with data on a company’s assets and their surroundings.

Jupiter has developed tools to help customers plan for hazards two hours to 50 years into the future down to the street and building levels. Its ClimateScore platform leverages cloud computing to run multiple prediction models that ingest data from millions of ground-based and satellite sensors.

While some startups help organizations better understand and predict climate risks, others are using artificial intelligence to help organizations protect themselves financially from those risks.

Legacy insurance companies struggle to effectively assess and price the novel financial risks posed by climate change. Consequently, coverage is prohibitively expensive or unavailable for many risk types. Per Aon, a whopping $171 billion gap exists in climate insurance.

New entrants are leveraging alternative data sources, real-time analytics and AI to price risk more accurately and create novel insurance products. One such upstart is Kettle, which offers reinsurance for climate risk with a dominant focus on wildfires. Using a proprietary neural network architecture, Kettle makes hyper-local predictions about wildfire risk. It successfully predicted the locations of California’s largest wildfires in 2020. Its AI-powered risk modeling enables it to offer more competitive pricing to its insurance customers, delivering 25%+ higher returns than traditional players.

Several startups are leveraging parametric insurance, which eliminates the need for agents to assess insured losses and guarantees payment on breaching parameters e.g. inches of rain, heat indexes, hurricane intensities. The parametric model engenders more automated, data-driven and transparent insurance, with faster and guaranteed pay-outs.

Paris-based Descartes Underwriting offers parametric insurance for a wide range of climate-related risks such as floods, droughts or renewables yield. It uses machine learning to underwrite and monitor its parametric policies. Data is ingested in real-time from many sources including satellite imagery, sensors, and Internet-of-things devices. Arbol, another player offering parametric insurance for climate risk, uses smart contracts on the Ethereum blockchain to codify its insurance policies. This enables it to automatically pay out claims in two weeks or less.

Climate change will reshape property and casualty insurance in the years ahead. Both incumbents and insurtechs are gearing up to capitalize on the emerging opportunities. The upheaval is creating massive opportunities for those challengers that are data-driven, AI-powered to grab market share. We can expect to see more big venture-backed winners in climate insurance.

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