2021 proved to be yet another challenging year for property & casualty insurers with significant variations in reconstruction costs, growing threats to property from natural catastrophes, and the persistent impact of the COVID-19 pandemic. With the start of 2022, CoreLogic experts are sharing their predictions for how insurers will better protect policyholders from natural hazards in 2022:
1. Insurers will adopt parametric insurance programs and incorporate the full spectrum of hazard modeling tools.
Parametric insurance is rooted in the probability of a predefined event occurring, such as a natural catastrophe event, and then distributes payouts according to the magnitude of the event. This is contrasted with traditional insurance, where the payout is determined based on the magnitude of the actual loss incurred.
Parametric insurance is proving to be a valuable supplement to traditional indemnity insurance. These technologies are perfectly suited to provide insights into the high-gradient perils which are most impacted by climate change, such as flood and wildfire. Insurers will adopt hazard modeling tools into parametric insurance to avoid adverse selection and set rates at a level associated with the risk levels. This will allow insurers to write business previously out of reach while also providing policyholders with fair and transparent pricing of their coverage needs.
2. Mounting climate change concerns will spur rapid implementation of climate-adapted catastrophe risk models.
Climate change is an insurance industry wildcard, and the events of 2021 were indicative of the climate’s increasing unpredictability. Winter storm Uri highlighted the fragility of insured assets to simultaneous events, which in this case were the deep cold combined with an extended power outage. Hurricane Ida’s losses in the U.S. Northeast reminded insurers of an existing vulnerability to flood losses. Insurers will adopt the next generation of climate-adapted catastrophe risk models to project losses into the future, which will influence the insurance market for years to come. Artificial intelligence (AI)- and machine learning (ML)-enabled tools will continue to learn from past natural catastrophe events to ensure the underlying science is up to date with current conditions. This will increase the ability to create measurements in the form of probabilities for various natural hazard and climate outcomes.
3. Insurers will expand mitigation-based credits as pricing incentives.
As insurers apply more sophisticated risk modeling to underwriting, they will continue to expand pricing incentives that better protect policyholders and reduce losses. Insurance premium credits for policyholders that take part in mitigation efforts is a good example of this. Insurers will continue to focus more resources on educating property owners on what kinds of actions they can take to help protect their property—such as storm shutters, vegetation clearing, and plumbing insulation. This includes implementing new communication strategies that educate policyholders on how to get involved.
Communication – and overpreparation – are key
As for 2022, only time will tell what natural hazards are in store and it appears nothing is off the table. One thing is for certain – insurers need to prepare for these unprecedented events by committing to open communication with policyholders and understanding all possible risk scenarios. We expect insurers to equip themselves with the latest insights to stay competitive and provide their policyholders with the best service possible. Ultimately, insurers who provide the fairest pricing to policyholders and incentivize risk mitigation, while protecting against large, often unexpected losses, will build the most resilient businesses – and as a result, increase resilience in impacted communities.
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