By Tom Chamberlain, VP Customer & Consulting at hyperexponential
Specialty and Commercial insurers in particular, are grappling with the challenge of accurately measuring catastrophe risk in the face of growing climate complexity.
The urgency to comprehend the impact of climate change on their businesses is evident, and insurers must adapt quickly to the new reality.
Refining pricing models for climate complexity
When it comes to extreme weather, whilst traditional Catastrophe Models excel at primary peril assessments, such as earthquakes and hurricanes, they fall short in addressing secondary perils like hail, flood, storms, and wildfires.
As climate change intensifies and exposures increase in coastal cities and floodplains, elevated losses for insurers are inevitable.
The situation calls for sophisticated risk modelling that takes into account the evolving patterns of extreme weather events, and can plot several complex scenarios to understand the potential impact on existing exposure, as well as the appetite for, and optimal pricing of, new policies.
The challenge of handling vast datasets
The urgency to adapt pricing models is heightened by the reality that waiting for decades to collect data on new weather patterns is not a viable option. The world's average temperature this year is breaking records, making extreme weather events inevitable.
Fortunately, the digital age provides insurers with a wealth of data from internet-connected sources. With the growing frequency of extreme weather events, the quantity and quality of available data is expanding. Actuaries and underwriters must develop real-time analytical capabilities to capitalise on this wealth of data.
Surviving the tech gap
While other industries have embraced technology and real-time analytics, many Speciality and Commercial insurers still lack the necessary tech infrastructure to handle vast datasets efficiently. Outdated computational tools, including ‘super spreadsheets’ and siloed pricing platforms, are ill-equipped to cope with the speed and scale at which data is generated and analysed in today's digital age.
Lengthy pricing and underwriting processes, performed on legacy technology, also mean underwriters and actuaries lack the agility needed to respond to emerging risks. On average, underwriters spend three hours each day on data entry, and for actuaries, releasing new pricing models takes on average between 150 and 192 days. The main barrier to underwriting today’s evolving risks is the risk landscape shifting too quickly for most to keep up with.
Insurers who fail to embrace agile, data-driven pricing operations risk their very existence. The term 'legacy' may no longer only refer to an insurer's outdated technology; it could become synonymous with their inability to adapt and survive in a changing climate.
The path forward
To thrive in the face of climate complexity, insurers must embrace data and technology as integral components of their operations. In addition, actuaries and underwriters should collaborate to leverage analytics and real-time data to assess risks accurately and respond proactively to emerging meteorological trends. Implementing modern pricing decision intelligence technology enables insurers to efficiently process vast datasets and derive meaningful insights to drive decision-making.
Embracing modern pricing technology capable of processing data in real-time and providing actionable insights is the only way for insurers to stay ahead of the curve. Failure to digitalise and move to real-time is just storing up trouble, and in times of uncertainty and immense pressure, relying on inefficient technology won’t cut it.
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