Climate risk and the insurance industry: a view from Venture Capital

How is climate risk impacting the insurance industry?

Every year the insurance industry faces billions in losses due to climate change. To manage, many large insurers have scaled back their home insurance lines in states like California to avoid paying out billions in losses. Given the frequency and increasingly serious nature of environmentally destructive events, continually swelling premiums and payouts make the calculus for operating in these states very challenging. Though an enormous problem, this also represents an enormous opportunity for innovation, with several areas emerging to assist the industry adapt and meet climate where it’s at. One immediate area of innovation, one we at SVB Capital have spent a ton of time diligencing, is risk modelling, or technology assessing and predicting climate-related risks in light of the changing risk weather environments around us. In addition, parametric risk products, or products that pay out based on predefined triggers such as temperature, rainfall, or other environmental factors, are also emerging to disintermediate how the category thinks about payouts to begin with.

How will climate risk impact underwriting specifically in insurance and what is innovation doing to drive this forward?

The challenge of underwriting climate risks is that these risks are not static, but rather evolve over time. To that effect, innovation in the category has faced scrutiny for models that hint at outcomes as they might play out now versus tomorrow – a crucial difference needed to adapt to climate’s evolving nature. This would be akin to communicating we are currently in a burning building while we are still inside versus giving a few days notice so we can effectively manage our escape route.  As referenced above, predictive risk modelling and parametric insurance are two central approaches to accommodate this, with startups such as Delos and Mitiga leading the charge. Risk modelling above all else has the power to create these predictive insights and help insurers to adapt to the changing risk landscape and provide more effective coverage in the face of climate-related challenges.

What challenges do startups and the insurance industry face in coming together to adapt to climate changes’ impact on the industry?

The merits of startup and insurance industry partnerships in combatting climate change are obvious. But these types of partnerships are often easier in theory than in practice.  Think that large, incumbent insurers deal with the insurmountable task of moving an early-stage startup partnership through multiple layers of approval across departments. Incumbent partnership teams also deal with the constant balance of identifying the latest and greatest technology, with the caveat that the most cutting-edge technology is often coming from a very early-stage startup. In addition, to get a startup partnership past vendor approval checks, internal champions deal with a significant amount of questioning regarding product efficacy as well as going-concern questions. After all, any failure on a startups’ end, particularly in client facing situations, could materially damage the reputation of the incumbent partner. To help mitigate these challenges, startups should get in front of insurers early, and build a relationship with multiple constituents throughout an organization – be that the partnerships teams, product teams, or even the corporate venture capital organization where relevant. This multi-touchpoint approach assists with angles for feedback as well as the potential for multiple champions when it comes to decision time. This also helps with managing a single point of failure should chief champions move on to new roles internally or outside of the organization.

Across enabling technologies and approaches to incorporating innovation in insurance, what do you believe will be the most impactful in enhancing resiliency against climate change’s environmental risk? 

As mentioned above, there are several key applications of technology driving the industry forward as it adapts to climate change such as risk modelling and parametric underwriting. But what about the technology powering these applications? For one, artificial intelligence continues to be the engine powering analytics and risk modelling technologies. Crucial to developing this artificial intelligence is the data it is trained on – geospatial and otherwise. A third component of these enabling technologies is blockchain which is being used to enhance data integrity and transparency in the ecosystem. By using a decentralized and secure ledger, insurers can ensure the accuracy data, reducing the risk of fraud and improving overall ecosystem trust. The sheer magnitude of the climate problem in the insurance industry means all available enabling technologies should and will be used to drive the category forward – be that artificial intelligence, big data, and/or blockchain.