Why insurers need to rethink traditional approaches

Climate risk necessitates rethinking traditional approaches to risk management, pricing and claims modelling, says a report from global professional services firm EY.

Insurers must adapt pricing strategies, leverage innovative technologies such as parametric solutions, and collaborate with industry stakeholders to build resilience and better respond to unforeseen climate events, says EY’s 2025 Global Insurance Outlook.

“The increasing frequency of severe weather events is challenging insurers to enhance risk prediction and adjust underwriting models,” the report says. “NatCat premiums are on the rise.”

Substantially higher rates are slated to take effect in 2025 in France, says the global report. Insurers in Germany, Italy, Australia and the U.S. have seen similarly large increases.

Here in Canada, consumers can also expect to see increases to property premiums following last year’s record-breaking Cat loss year, Canadian Underwriter reported in September 2024. Four NatCats last summer cost billions in insured losses, and 2024’s total stood at $8.9 billion as of February, Catastrophe Indices and Quantification Inc. (CatIQ) told CU at the time.

“Whether higher rates are driven by government action or market forces, they reflect the harsh financial reality of climate risks,” EY’s report says. “Overall, climate risk necessitates rethinking traditional approaches to risk management, pricing and claims modelling.

“Furthermore, insurers must anticipate potential regulatory or government mandates, such as those imposed in Italy, that could require them to cover high-risk areas and events. That should be a sufficient prompt to develop sustainable solutions and coverage options.”

Parametric solutions

One example of a non-traditional and innovative product is a parametric solution. Commercial insurers and reinsurers are looking to parametric coverage to deliver more protection to customers.

EY’s report notes improvements to the accuracy and timeliness of ‘earth observation’ data (such as information about atmospheric and water conditions) are now possible through remote sensing platforms and tools, including satellites.

And the range of parametric use cases is expanding. Small farmers are using parametric coverage for crop insurance and renewable energy providers to protect against low sunlight and sub-par wind speeds. The World Bank uses parametric triggers to provide funds for developing countries responding to natural catastrophes, as well as disease outbreaks or pandemics, the report says. The Nature Conservancy and Swiss Re work together to fund coral reef restoration in Mexico with payouts linked to storm intensity.

Public-private partnerships

Whether mandated by government authorities or industry-led, EY says joint public-private programs will be multi-faceted, featuring prevention services, advanced notifications, mandated premium levels and new safety standards for policyholders in vulnerable regions.

It uses the example of the Dutch Association of Insurers, which is engaging multiple stakeholders to improve the country’s resilience against climate risks, including floods. “From public education, risk prevention and early warning systems, to efficient claims processing and adaptation strategies, Dutch insurers are working on multiple fronts to address these huge and proliferating risks.”

Late last year, Canada’s federal government reneged on its commitment to fund a flood insurance backstop, which was expected to be in place this year. The move preceded political upheaval which culminated in the resignation of former prime minister Justin Trudeau in January.

ILS and NatCat bonds

Another non-traditional approach to risk transfer strategies is use of insurance-linked securities (ILS) and NatCat bonds.

“The impressive expansion of captives and MGAs is likely to continue as they are satisfying vital market needs and external investors are drawn to the capital-light nature of these businesses,” the report says. “M&A (particularly deals involving promising insurtechs) will be another common growth strategy.”

As an example, Swiss Re Corporate Solutions offers a virtual captive — a multi-year framework that mimics that mechanism of a captive and brings a lot of the same benefits but doesn’t require establishing a captive.

There’s an interest in structured solutions, or insureds exploring how they can retain more risk or control their cost of risk transfer, James Gasco, head of Canada for Swiss Re Corporate Solutions, told Canadian Underwriter last year.