By Amrit Santhirasenan, CEO and cofounder, hx
We’re seeing this play out in action in the UK as the British Beet Research Organisation (BBRO) warned farmers about frost damage, and bad weather in southern Europe and northern Africa left fruit and vegetable shelves in UK supermarkets bare. Clearly climate change is not just a temporary trend.
Why Actuaries care about climate change
Put simply, Actuaries cannot afford to put their heads in the sand when it comes to climate change. Insurance companies have a vested interest in ensuring they don’t rely on outdated models. It makes sense, then, for these companies to be the ones to innovate in climate modelling and contribute towards the necessary research and development to help actuaries price faster. A lot of this R&D has been led by several groups from the Institute and Faculty of Actuaries (IFoA), from its General Insurance climate change working party that became the Climate Change Working Party, and today the The IFoA Sustainability Board. Insuring against today’s climate and sustainability risks requires all Actuaries to fully understand and be equipped with the skills to embed these risks into all actuarial practices.
Modelling for climate change
Protecting people and businesses from risk if the de?nition of insurance, and climate change is effectively creating more reasons for both to seek out insurance policies. The digitization of insurance means we can better price and protect today using new models that simply didn’t exist ?ve years ago - a key example for climate-change protection is parametric insurance.
Parametric insurance basically ties the payout of a claim to a predetermined trigger event rather than more traditional ‘indemni?cation against loss’. When a predetermined trigger event is me, let’s say once rainfall hits 5mm, a payout is made that’s connected to that trigger. The need for either side to argue or debate whether the claim will be paid is reduced or removed, as it is a matter of objective facts.
If we look at the previously mentioned sugar beet harvest story, after being warned about the incoming freeze, the threshold on the NFU Sugar's Frost Insurance policy was met. No arguments or discussions - a payout is agreed based on anticipated production for the unexpected loss of crops. But these types of cover rely on access to various types of data. For the beets its real-time weather data, for car insurance it could be monitoring your speed and general driving patterns against country limits. Parametric insurance - or any new type of climate change or disaster-related insurance - is not possible without access to relevant data insights in real-time.
Getting ahead of claims complaints with transparent data transparency
As analytical techniques advance and become better at building and supporting the creation of technology on products like parametric insurance, the more areas we’ll see this product expand into - and the happier clients will be. Think about it from a claims perspective - for both insurer and customer basing on a parameter being met or not very quickly relieves any anxiety or uncertainty over whether that claim will be paid.
Pricing and claims go hand in hand, both having a huge impact on customer satisfaction if not handled in the right way. Price too high and you lose custom, price too low and you could go bankrupt. And then, of course, there’s the small print not everyone reads or understands. Both leave a sour taste in a customer’s mouth unless properly explained - transparent data can do just that. For example, showing which data used in a pricing model resulted in an increased policy cost can help alleviate disgruntled customers. You cannot argue against facts - or maths.
Data from Big Tech could offer an added bene?t here so long as explicit consent is given by the customer. The more data actuaries can access on individuals and risks, the better the insights they can identify delivering faster models and fairer prices.
Data is an asset for insurers
As the amount of data in the world increases, it permeates every area of the industry. Being able to convert that data into insights puts you in a position to offer different types of cover in lots of areas. There is no limit to the amount of data that can be ingested if modern tools and technologies are being used. However, continue relying on Excel spreadsheets and you will struggle at best to provide current models that deliver accurate pricing.
Data and the rise of new technologies like AI and ML enabled by data also aid the emergence of new ways insurance is delivered. The world has turned everything into “X-as-a-Service” - there’s no reason why this won’t also happen to the insurance industry to enable real-time cover that changes in response to external factors.
If you look at a tech-enabled business like Dominos, it’s easy to imagine how you could couple insurance products to, for example, protect against food spoilage. Tech monitoring the ?ow of food from fridge to fork can react and update insurance cover in real-time. The utopian view is to have something where if a fridge malfunctioned - say due to a sudden heatwave, the on-site sensors immediately generate real-time alerts and the moment the food spoils the claim is immediately paid.
The way Actuaries price risk today is already different to how it was priced just ?ve years ago. We have more data, better quality data and ?nally the tools to ingest and analyse that data. Square eyes from staring at Super Spreadsheets are becoming a thing of the past, which is opening up a new era of insurance where new types of cover can be created to continue to protect people and businesses from the risks of the future. You can’t insure a world that is on ?re, but you can protect against the risks of that ?re.
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