Beyond Risk: Insurers’ Innovative Strategies for Extreme Weather Events

In Spain, extended droughts have impacted both agriculture and the supply of drinking water. In China, severe floods have displaced thousands and damaged critical infrastructure. In Chile, devastating forest fires have persisted for months, resulting in significant material and human losses. These are just a few examples, but they underscore the growing frequency and severity of climate-related events, signaling a potential shift in climate norms.

For insurers, these phenomena present a formidable challenge. The surge in frequency and intensity of such extreme events has led to a rise in insurance claims. Weather-related incidents, such as floods or droughts, incur higher costs in terms of compensation, prompting insurers to reevaluate their risk models and coverage policies.

This situation underscores the necessity of adjusting sector strategies to deliver more effective service amidst escalating climate uncertainty.

Climate change significantly influences the insurance industry, reshaping not only risk management but also the structure of the policies offered. One clear example is evident in agriculture, where climate change has notably increased the occurrence of extreme weather events. Consequently, there has been a surge in claims related to natural disasters like droughts and floods. This places a heavier financial burden on farmers, prompting increased involvement of insurers and the Compensation Consortium in regions such as Spain.

According to the Geneva Association, the escalation in severity and frequency of natural disasters has resulted in higher insured losses, underscoring the mounting influence of climate change on the sector.

Insurers are grappling with the challenge of adapting to an increasingly complex risk landscape, where traditional underwriting and compensation models fall short. This has spurred the industry to explore new approaches to risk assessment and management, including the introduction of additional prediction and assistance services to bolster disaster response.

Insurance companies increasingly rely on data to refine risk assessment and customize services, as well as to determine pricing for their products. Eduardo Sánchez Delgado, Group Head of Actuarial Office at MAPFRE, says that “we must maintain downward pressure on prices while making insurance as affordable as possible without compromising the sustainability of the product, which requires a focus on prevention and early detection.” Effective governance and use of the data collected are essential.

Insurers leverage big data analytics to sift through vast information sources like weather data, claims records, and consumer behavior. This depth of analysis facilitates the identification of patterns and trends that would otherwise be difficult to detect. Insurers can adjust their risk models to more accurately reflect changing environmental conditions and anticipate events with greater precision.

This is especially clear in Spain. “Heat waves pose a significant concern in Spain, underscoring the need to establish robust regional reference frameworks to tackle them. While Spain typically records health hazard data effectively, relying solely on historical data is no longer adequate for predicting future effects. Instead, there’s a call to transition towards scenario analysis, integrating historical data with climate patterns and trends to gain a comprehensive longitudinal perspective,” remarks Sánchez Delgado.

In this regard, innovations such as artificial intelligence (AI) and machine learning are reshaping how insurers handle data and make decisions. These enable us to automate risk assessment and claims management, enhancing efficiency and delivering superior service to policyholders.

The use of integration of IoT (or “Internet of Things”) sensors in sectors like agriculture or real estate enables insurers to monitor conditions affecting insured assets in real-time, enabling proactive measures to mitigate risks and minimize claim severity. Consequently, embracing these advanced solutions enhances insurers’ ability to respond to natural disasters and fosters the development of insurance products that are more tailored and sustainable in the long term.

At MAPFRE, we’ve long been dedicated to exploring new approaches for analyzing and testing predictive models to proactively address climate change and assess its risks.

In this pursuit, MAPFRE RE has partnered with Lobelia Earth to develop a project aimed at predicting the impact of climate change on the physical risks within our insured portfolios. This pilot project is being conducted through the Lobelia.Climate platform and enables us to automatically evaluate and quantify fourteen commonly used extreme climate indicators for seven climate hazards.

“As the frequency and intensity of these extreme events increases, the need to address this challenge becomes more acute. That’s why, at MAPFRE, we’ve invested years in studying natural risks and fostering partnerships with innovative startups like Lobelia to explore advanced solutions, assess risks, and contribute to mitigating them. Our ultimate goal is to safeguard what matters most to us and positively impact both society and the environment,” explains Juan Satrústegui, Director of Natural Risks at MAPFRE RE. 

In short, innovation is a cornerstone for insurers to optimize resource management and, above all, deliver superior service to customers. Leveraging data, artificial intelligence, and scenario analysis enables a more accurate risk assessment and swift response to extreme situations. This not only improves predictive capabilities and risk management but also fosters the creation of policies that better align with the evolving needs of their customers.

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