# Insurers Must Reimagine Traditional Risk Models to Adapt to Climate Change  Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-04-22 Category: FINANCE Category URL: https://financedigest.com/category/finance Meta Title: How Technology is Transforming Insurance Offerings in Meta Description: Discover how technology is reshaping the insurance industry to address climate catastrophes with innovative and sustainable solutions, unlocking new revenue streams. URL: https://financedigest.com/insurers-must-reimagine-traditional-risk-models-to-adapt-to-climate-changehtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/responsibility-and-growth-1-1736815849575-compressed.jpg) _By **Dr Hema Prem,** Vice President, Insurance Europe at Infosys_ The harsh impact of climate change is escalating global insured losses due to extreme natural catastrophes such as floods, thunderstorms, and hurricanes. Recent estimates place this loss at US $105 billion in 2021alone. Even as the [economic damage from climate change rises](https://www.financedigest.com/euro-zone-economic-sentiment-rises-in-january-to-seven-month-high.html "Euro zone economic sentiment rises in January to seven-month high") alarmingly, around 50% of weather-induced catastrophes remain uninsured. As a result, governments, companies, and the public are left to bear the burden of repair. Insures are essential to bridging this gap. In the future, we may see insurance companies diversifying their role into insurers, investors, and [risk managers](https://www.financedigest.com/improving-risk-management-in-the-insurance-industry.html "Improving risk management in the insurance industry"). But they need to act now to devise climate-related offerings. From a business standpoint, these new offerings unlock new revenue streams for insurers, giving them a sharper edge in the market. Yet, without this swift action, there remains a looming deficit for customers. This is an opportune time for [insurance companies to lead the change by looking beyond traditional risk](https://www.financedigest.com/using-threat-intelligence-to-minimise-cyber-insurance-risks.html "Using Threat Intelligence to Minimise Cyber Insurance Risks") models and offering innovative, sustainable, and technology-driven solutions to address the climate catastrophe. **The Role of Technology in New Insurance Offerings** While there is no single solution to combat decades of man-made impact on climate, steady and surefooted steps in the right direction can bring about the desired changes. [Digital transformation paves the way for insurers](https://www.financedigest.com/insurers-beware-fraudsters-love-digital.html "INSURERS BEWARE: FRAUDSTERS LOVE DIGITAL!") to create smarter offerings at lesser cost for better outcomes. - **Strengthen [digital transformation](https://www.financedigest.com/how-digital-is-transforming-finance-in-2023.html "How Digital Is Transforming Finance in 2023") with sustainability** – Cutting-edge data and technology capabilities will be crucial. The combination of digital and sustainability [transformation](https://www.financedigest.com/making-sure-that-finservs-digital-transformation-doesnt-mean-digital-exclusion.html "Making sure that FinServ’s digital transformation doesn’t mean digital exclusion") increases an insurer’s digital density. With these capabilities, [insurers will be able to gather raw data](https://www.financedigest.com/how-data-is-revolutionising-car-insurance.html "How data is revolutionising car insurance") from innumerable sources such as satellites, remote patient monitoring devices, or building waste management solutions. Sophisticated analytics with AI/ML can model climate-related risks with more granularity in a hyper-localized fashion. The challenge is to aggregate and harmonize the data to enable decision-making for the different stakeholders of the firm: employees, investors, and clients. So, as part of their digital transformation, they should [consider building new frameworks and investing in the right infrastructure to support advanced data gathering and modeling](https://www.financedigest.com/7-factors-to-consider-before-your-business-moves-to-a-subscription-model.html "7 Factors to Consider Before Your Business Moves to a Subscription Model"). - **Leverage IoT** – The Internet of Things (IoT) creates new [data sources that insurers](https://www.financedigest.com/should-insurers-buy-data-direct-from-their-customers.html "Should insurers buy data direct from their customers?") can use to understand the people, properties, and devices they are insuring. This will [drive unprecedented efficiencies](https://www.financedigest.com/iforces-route-genie-to-drive-efficient-carrier-management-for-freestylextreme.html "IFORCE’S ROUTE GENIE TO DRIVE EFFICIENT CARRIER MANAGEMENT FOR FREESTYLEXTREME") into risk modeling through real-world insights. With AI/ML-based solutions such as natural language processing (NLP), [insurers can tap into unstructured and siloed data](https://www.financedigest.com/big-data-lowers-insurance-premiums-and-optimises-business-performance.html "Big Data Lowers Insurance Premiums and Optimises Business Performance") to analyze customer habits and organizational behaviour. For instance, in the property and casualty (P&C) [insurance business](https://www.financedigest.com/are-there-tax-breaks-for-business-health-insurance.html "Are there tax breaks for business health insurance?"), usage-based insurance (UBI) gives insights into CO2 emissions, encouraging companies to adopt green practices. In the case of individual customers, it can improve daily habits and foster practices that benefit the environment. - **Automate aggressively** – Automating processes such as claims management can promote internal sustainable operations for manufacturers and streamline claims submission and approvals for customers. In addition, as reporting becomes automated, it will enhance regulatory compliance and improve agility. This also calls for implementing next-gen technology across the [insurance organization to ensure](https://www.financedigest.com/vias-cloud-based-solutions-ensure-painless-office-move-for-insurance-body.html "VIA’S CLOUD-BASED SOLUTIONS ENSURE PAINLESS OFFICE MOVE FOR INSURANCE BODY") transparency across functions. **Roadmap to Building Sustainable Insurance Offerings** The larger objective of designing sustainable insurance offerings raises the question of where to begin. As part of their responsibility to the environment, insurers [must look at weaving sustainability and ESG](https://www.financedigest.com/occupational-health-and-safety-must-be-brought-back-to-the-forefront-of-esg.html "Occupational Health and Safety must be brought back to the forefront of ESG") into their offerings alongside digital transformation. Clearly, climate-related offerings can revolutionize the [insurance market](https://www.financedigest.com/a-look-ahead-to-2023-in-the-insurance-market.html "A Look Ahead to 2023 in the Insurance Market"). So, to begin with, insurers should adopt an approach that includes some of these key elements: - **Realign operations** [towards eco-friendly models](https://www.financedigest.com/investment-advice-moving-towards-a-new-model.html "Investment advice – moving towards a new model") Insurers must realign operations towards sustainable models, bearing decarbonization and emission commitments. It is also important to monitor metrics such as resource usage, the environmental impact of [supply chains](https://www.financedigest.com/minimising-supply-chain-cyber-risks-by-asking-the-right-questions.html "MINIMISING SUPPLY CHAIN CYBER RISKS BY ASKING THE RIGHT QUESTIONS"), and real state footprints for developing sustainability as a core competency in enterprises. Developing and publishing ESG reports that include climate-linked [financial disclosures is also crucial in improving](https://www.financedigest.com/5-ways-to-improve-your-financial-literacy.html "5 Ways to Improve Your Financial Literacy") transparency and drawing market traction. Global insurance majors such as Allianz, AXA, and Lloyd’s are active in the [task force](https://www.financedigest.com/britain-says-it-is-committed-to-leading-a-nato-task-force-in-2024.html "Britain says it is committed to leading a NATO task force in 2024") on climate-related financial disclosures (TCFD). **1.Enhance asset management** [Insurers need to stay clear](https://www.financedigest.com/post-brexit-insurance-reform-clear-before-december-says-boes-woods.html "Post-Brexit insurance reform clear before December, says BoE’s Woods") of companies that do not comply with ESG standards. Out of Allianz GI’s €582 [billion assets under management, €205.5 billion were of their sustainable investment offerings](https://www.financedigest.com/copper-miner-teck-resources-rejects-glencores-22-5-billion-offer.html "Copper miner Teck Resources rejects Glencore’s .5 billion offer") earning them an A+ grade by the Principles of Responsible Investment (PRI) association. Insurers should [consider re-analyzing their portfolios to divest](https://www.financedigest.com/pizza-firm-dp-eurasia-considers-divestment-of-russian-business.html "Pizza firm DP Eurasia considers divestment of Russian business") from carbon-heavy assets. Indexes such as PRI and UN’s Sustainable Development Goals (SDGs) are the right yardsticks to evaluate their investments. **2.Transform risk modeling and underwriting** The dearth of insurance product offerings [relating](https://www.financedigest.com/2020-the-paradoxical-year-that-has-reshaped-the-future-of-motor-insurance-and-related-sectors.html "2020: The paradoxical year that has reshaped the future of motor insurance and related sectors") to climate risk and catastrophe modeling is widening the insurance gap. Insurers can incentivize companies to embed sustainability into their corporate strategies. For example, underwriting of assets that are harmful to the environment can be restricted. Another option is hyper-localized offerings that insure from secondary climate perils. For instance, [Aon recently introduced a hurricane catastrophe risk](https://www.financedigest.com/aon-assists-freddie-mac-to-reach-5bn-risk-transfer-milestone-for-u-s-mortgage-credit-business.html "AON ASSISTS FREDDIE MAC TO REACH BN RISK TRANSFER MILESTONE FOR U.S. MORTGAGE CREDIT BUSINESS") model specific to Florida, known for its tropical cyclone risk. **3.Enable sustainable pricing** Advanced technology such as AI can be leveraged in several areas of the insurance value chain. For instance, it can speed up parametric climate insurance payouts. It can be used to [automate processes like claims management and monitoring of customers’ ESG compliance](https://www.financedigest.com/red-box-recorders-launches-worlds-first-automated-audio-recording-compliance-verification-tool.html "RED BOX RECORDERS LAUNCHES WORLD’S FIRST  AUTOMATED AUDIO-RECORDING COMPLIANCE VERIFICATION TOOL"). [Insurers can also promote climate-conscious behavior among customers](https://www.financedigest.com/5-ways-a-ccm-platform-can-help-improve-customer-engagement-in-insurance.html "5 Ways a CCM platform can help improve customer engagement in insurance") through product pricing. **Conclusion** As the threat from [climate risk](https://www.financedigest.com/institutional-investors-back-shell-board-lawsuit-over-climate-risk.html "Institutional investors back Shell board lawsuit over climate risk") increases worldwide, the need of the hour is for insurers to reimagine legacy risk models. Insurance companies must consider floating [innovative products that include catastrophe modeling](https://www.financedigest.com/future-cheque-clearing-model-places-emphasis-on-speed-and-innovation.html "FUTURE CHEQUE CLEARING MODEL PLACES EMPHASIS ON SPEED AND INNOVATION") to reduce the insurance gap. Insurers are in a unique position to gradually alter the curve of [climate change](https://www.financedigest.com/exclusive-world-bank-seeks-more-funds-to-address-climate-change-other-crises-document.html "Exclusive-World Bank seeks more funds to address climate change, other crises -document"). They can incentivize climate-friendly corporate choices, promote benchmarking of climate-conscious decisions, and invest in carbon neutrality. Leveraging technology such as AI and ML will also be pivotal during this transformation. Automation of processes such as claims verification and adjudication can be used to develop more intricate climate-related products. AI solutions can be used to monitor metrics such as emissions, [carbon footprint](https://www.financedigest.com/ecb-can-cut-carbon-footprint-by-shedding-bonds-of-biggest-polluters.html "ECB can cut carbon footprint by shedding bonds of biggest polluters") level, and other ESG compliance requirements by both insurers and customers. The advent of IoT devices has opened up access to multitudes of data that have been largely underutilized. With the help of tools such as NLP and deep learning, fragmented data can be unified and leveraged to diversify insurance product offerings. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---