Climate Change: Three Ways Data Can Narrow the Protection Gap

Investment Rating - The report indicates a growing demand for insurance due to climate change, suggesting a positive investment outlook for the P&C industry as it adapts to new risks and opportunities [2][16]. Core Insights - Climate change is causing an increase in the frequency and severity of natural disasters, leading to a significant rise in insured losses, with global insured losses from natural catastrophes reaching US$89 billion in 2020 [5][9]. - The protection gap between economic and insured losses is widening, driven by a retreat from the market in response to rising losses, which could lead to an unacceptable level of "uninsurable risks" [11][14]. - Insurers must embrace nontraditional data and modeling techniques to better assess risks associated with climate change, as reliance on historical data is becoming less effective [20][21]. Summary by Sections The Protection Gap - Natural disasters are occurring four times more frequently than in 1970, with secondary perils causing the majority of insured losses in recent years [4][6]. - The protection gap for global weather-related catastrophes has been increasing since 1980, indicating a growing disparity between economic losses and insurance coverage [12]. Insurance Demand and Market Response - The demand for insurance is expected to rise as individuals and businesses seek protection from extreme weather, creating both opportunities and responsibilities for insurers [15][16]. - Insurers are responding to the challenging environment by increasing premiums and exclusions, with a trend of non-renewal for high-risk perils [10][14]. Data Gaps and Challenges - The industry's reliance on traditional models limits its understanding of future climate risks, with estimates of exposure to natural catastrophe risk potentially underestimated by 33% to 50% [21][24]. - There is a need for granular data to assess secondary perils effectively, as current data sets are often inaccessible or outdated [19][25]. Steps for Improvement - Insurers should leverage existing data more effectively, invest in new types of data, and enhance their infrastructure to process and analyze data in real-time [25][34]. - The adoption of nontraditional data sources, such as drone and satellite imagery, can improve risk pricing and product development [30][32]. Conclusion - The insurance industry has a critical role in mitigating the impact of climate change, with small improvements in coverage potentially leading to significant reductions in disaster costs [38]. - A proactive approach to closing the protection gap is essential for maintaining relevance in a changing market, as demand for insurance is expected to grow [39][42].