The insurance industry relies heavily on historical data to assess risk and set premiums. However, shifting climate patterns, with more frequent and intense weather events like floods and wildfires, challenge these traditional models. Rising sea levels and changing precipitation patterns are forcing insurers to re-evaluate risk profiles in certain areas, potentially leading to adjustments in premiums or coverage availability. Additionally, new climate threats like heat waves and droughts require adaptation of actuarial models.
To navigate this uncertainty, the insurance industry is embracing data-driven modelling. The technology incorporates climate science, stress testing financial resilience under various climate scenarios, and even developing new insurance products to address specific climate risks. “By adapting and innovating, insurers can continue to offer protection in a changing world, but collaboration with governments and climate scientists will likely be crucial for building a more resilient future for all,” said Neeraj Gupta, CEO of Policybazaar.ae.
In April 2024, the Gulf region, typically known for its arid climate, was overwhelmed by an unprecedented rainfall that exceeded a year’s worth in just one day. This extraordinary event led to severe flooding, particularly affecting the UAE and Oman. Dubai was among the hardest-hit cities, experiencing its largest single day of rainfall in the 75 years since records began in 1949. The downpour caused significant disruptions, flooding roads, buildings, apartments and critical infrastructure, including airports.
Since the GCC region has only recently experienced severe rainfall, insurers must thoroughly evaluate the impact on their models and methodologies. “The changing climate patterns and environmental damage will likely require updates to actuarial models and risk assessment methodologies,” noted Piyush Dubey, Partner, Financial Services Practice and Monti Daryani, Manager, Financial Services Practice, Kearney Middle East and Africa. “Developing new risk models is crucial, along with ensuring a more sustainable distribution of risk and value among insurers, reinsurers and alternative risk transfer systems.”
He is right. Traditionally, models relied on past weather patterns, but climate change throws a curveball. The rising temperatures, intensifying droughts, and spreading desertification in the Middle East are forcing insurers to revamp their approach. Insurers are now considering tailored products, risk-based pricing and data-driven decisions.
Data is the future
In the face of a changing climate, historical data becomes increasingly unreliable. Data analytics and predictive modelling are emerging as essential tools for insurers navigating this new reality. By crunching vast amounts of weather data alongside historical claims information, insurers can build more sophisticated models that account for the rising frequency and intensity of extreme weather events, like heatwaves, droughts and floods. “This allows them to pinpoint areas most susceptible to these perils, enabling more accurate risk assessments and, consequently, fairer pricing strategies,” added Gupta.
Furthermore, data analytics empowers insurers to develop new insurance products tailored to specific climate threats. This enhanced ability to assess and manage climate risks not only safeguards the financial health of insurance companies but also ensures continued financial protection for individuals and businesses grappling with the consequences of a warming planet.
“We are seeing the development of new insurance products tailored to climate-related risks, such as parametric insurance for extreme weather, including parametric drought insurance for agricultural concerns,” stated Atish Suri, CEO of Guy Carpenter IMEA. A parametric cover helps provide greater resiliency, working to complement traditional indemnity coverage. With these covers, a predefined benefit is paid based on a predetermined threshold being reached, such as the level of flooding or desertification.
“More widely, we are seeing climate risk assessments being incorporated into underwriting processes to better evaluate and price risks,” Suri added. “Companies are using advanced modelling techniques and data analytics to better anticipate and manage climate-related risks over time. Insurers and reinsurers are also reassessing their exposure and accumulation control, introducing catastrophe (CAT) exclusions, where CAT risks are covered separately at an additional cost.”
One example is GIG Gulf. The company develops response plans to address the impact of emerging climate-related risks with three key objectives. Firstly, it aims to estimate the expected frequency pattern of natural catastrophe (NatCat) events, utilising predictive modelling based on meteorological data series to inform insurance pricing. Secondly, these plans focus on forecasting which areas or locations are more exposed to risk when a NatCat event occurs. This enables insurers to price insurance more accurately for assets in high-risk areas. Lastly, insurers seek to estimate the potential severity of damage to exposed assets, such as buildings and vehicles, should they be impacted by a NatCat event. This is crucial for tailoring product covers and ensuring alignment between policy terms and actual loss scenarios.
Mitigating risk
Insurance companies are adopting various strategies to ensure long-term sustainability to mitigate the financial impact of climate change-related losses. They are enhancing risk assessment models with advanced data analytics and predictive modelling to better understand and manage climate-related risks.
Additionally, insurers are conducting climate-specific stress tests to evaluate the potential impacts of extreme weather events on their portfolios, allowing them to adjust their strategies accordingly. By diversifying investment portfolios, insurers aim to reduce exposure to high-risk areas and sectors, investing instead in sustainable and climate-resilient assets.
One of the primary tools for insurance companies is reinsurance, often referred to as “the insurer’s insurance.” Specific reinsurance protections are in place to cover NatCat events that exceed insurers’ risk appetites.
“Equally important is raising awareness among the insured about their ‘duty of care’ to act diligently and minimise losses in the event of NatCat events,” explained Paolo Ogno, Head of Retail Product Offering and Claims, GIG Gulf. “Balancing these two strategies—robust reinsurance protections and proactive risk management by the insured—has proven effective in maintaining coverage and minimising losses during recent NatCat events.”
Suri agreed, stating that reinsurance is playing an increasingly important role in the insurance sector. More insurers are transferring a portion of their risk to reinsurers who specialise in managing catastrophe and climate risks. Additionally, alternative risk transfer solutions such as catastrophe bonds and parametric insurance policies can help mitigate long-term exposure and build resilience.
Furthermore, insurers are promoting innovative products like parametric insurance, which provides quick payouts based on predefined weather events, helping to manage risks more effectively and supporting customers in the aftermath of climate-related disasters.
Regulatory framework
As climate change alters historical weather patterns, the insurance industry is grappling with how to adapt its risk assessments and product offerings. Regulatory frameworks and government interventions are playing a growing role in shaping this response.
On one hand, regulations can incentivise insurers to take climate risks more seriously. Governments might mandate the inclusion of climate data in risk models or require insurers to offer specific climate-related products, like flood insurance in flood-prone areas. However, a lack of clear regulations can create uncertainty for insurers. With clear guidelines, they may be able to develop new climate-resilient products or adjust pricing strategies for fear of regulatory hurdles.
“To navigate this evolving landscape, insurers need to be proactive,” explained Gupta. “Collaboration with governments and regulatory bodies is key. By working together, they can develop clear and adaptable frameworks that encourage responsible risk management and innovative product development, ultimately ensuring the insurance industry remains a safety net for communities facing the brunt of climate change.”
At a global level, the International Organization of Securities Commissions has endorsed the final disclosure standards published by the International Sustainability Standards Board in 2023, indicating a trend toward achieving climate regulatory convergence in the long run. “Collaborating with policymakers and environmental experts to develop climate adaptation measures is another key approach,” noted the experts from Kearney Middle East and Africa.
For insurance companies, these evolving regulatory frameworks will play a key role in standardising and disclosing climate risks, providing stability for the sector. Moving forward, bringing in the right expertise and investing in training and development to ensure adherence to these necessary standards will be essential. The industry needs to engage with a full range of stakeholders–regulators, policymakers and business organisations–to ensure that the emerging policies and initiatives are sustainable and actionable in the era of climate change.
As the fingerprint of climate change deepens on weather patterns, the insurance industry needs to adapt its risk assessment and product offerings. A two-pronged approach is crucial. Firstly, insurers must prioritise incorporating climate science data into their actuarial models. This allows for a more nuanced understanding of future risks, like increased heatwaves or flash floods, enabling them to develop targeted insurance products. Secondly, industry-wide collaboration is vital for effective adaptation. Sharing data on emerging climate threats and best practices in risk mitigation can lead to a more standardised approach. This collective effort will strengthen the financial resilience of the industry and ensure communities facing new climate perils have access to the financial protection they need. By working together, insurers can become a bulwark against the rising tide of climate risks.