How carriers, reinsurers and new entrants can confidently and profitably operate in high-risk regions

EY’s Julie Eichenseer on why it is still possible for insurers to operate successfully in catastrophe-prone markets

If you work in the insurance industry, you are all too familiar with the staggering scale of natural catastrophe losses and the massive – and still growing – protection gap for climate-related risks worldwide.

For the last decade, insurers have faced an average of $89bn in insured nat cat losses every year, according to the Swiss Re Institute, with losses of $100bn projected for 2023. Uninsured losses amount to several times that figure.

EY research has found that, in 2022, only 42 percent of global economic losses from natural disasters were insured.

The Swiss Re Institute estimates the global protection gap at $1.4trn overall, up more than twofold since 2000, with climate risks making up a large percentage of that figure.

The increased frequency and severity of floods, wildfires, tropical storms and other natural catastrophes mean the protection gap is sure to grow even more in coming years. It is, to put it mildly, not a sustainable situation.

And no government or industry will be able to close the massive climate risk protection gap by itself. Many different stakeholders must be involved and each have important roles to play.

Those stakeholders include insurance customers (both individuals and businesses), insurers and reinsurers, insurtechs and other start-ups, government authorities, academia, real estate developers and investors.

While headlines often call out carriers that exit high-risk markets, we see ample opportunity and incentive for carriers to develop innovative solutions to address climate risks.

Carriers that accept the challenge and take the lead will see their brand reputations improve, their share of wallet increase, their margins grow and their competitive position against new market entrants strengthened.

External research predicts that billions of dollars in additional profits are within reach for firms that develop solutions that protect individuals, businesses and communities. Governments and taxpayers will be able to save huge sums of money, too.

Though environmental threats are getting worse, technology is getting better. All types of risk – including climate risk – can be accurately priced with the right information.

Technology can already capture precise data – including streams from Internet of Things sensors – to accurately assess and price every peril, even down to the level of individual homes and properties.

Real-time insights and tools can better predict risks and help customers prevent and avoid more of them.

Therefore, we believe it’s possible for insurers and reinsurers to proactively and confidently enter nat cat-prone markets and lines of business.

Insurers should build on the efforts and investments they’ve made in climate risk management (e.g. variable pricing, more precise risk modelling, transparent information sharing). New products and services (e.g. multi-peril crop insurance, parametric policies) should be a priority, too.

Insurtechs and other disruptors are leading the way in this area. Carriers can also look to new forms of risk capacity (e.g. cat bonds, insurance-linked securities) and advanced technology (e.g. AI-based modelling and predictive tools), to link index insurance with traditional risk management techniques.

As part of our commitment to addressing climate risks, EY has developed Nexus for Insurance, a business transformation platform designed to accelerate innovation and bring new products and services to market faster.

It connects many of the most powerful technologies and data sources necessary to develop new climate risk solutions, as well as to an extensive network of innovative collaborators.

If you’d like to learn more about our approach to addressing the climate protection gap, please contact us.

Julie Eichenseer is EY Nexus for Insurance Leader