Emerging climate risks require P&C insurers to adopt forward-thinking strategies and tools that help them address shareholders' evolving needs while rethinking their underwriting practices to preserve profitability.
Over recent years, insurers have experienced a surge in losses from extreme weather events, and current projections don’t show this slowing down. Insurers have always been aware of the risks that weather and natural disasters pose to underwriting performance. However, the increased frequency of extreme weather events has drawn greater attention to the growing cost of climate-related weather catastrophes and what it means for the future of the insurance industry.
In this article, we’ll discuss the biggest challenges P&C insurers are facing due to extreme weather events and review the promising strategies and technologies they can adopt to better manage such risks.
P&C Insurance Industry Challenges Posed by Climate Change
The P&C insurance industry faces growing risks from the increased occurrence and severity of climate-related natural disasters, such as flooding, wildfires, droughts, and hurricanes. These events can produce staggering property damage, which may result in higher claims payouts and weigh on insurers’ profitability.
According to data from the National Centers for Environmental Information, in 2024 alone, the United States experienced 27 weather events with losses exceeding $1 billion. What’s more, researchers at Capgemini report that global economic losses caused by climate change have increased 250% over the past three decades.
Some geographies are more vulnerable to climate-related weather catastrophes than others. However, recent trends indicate that P&C insurers operating in any region can benefit from assessing how to combat climate risks and considering the tools and strategies they can adopt to become more resilient.
Strategies to Mitigate Climate Risks for P&C Insurers
Climate-related risks are expected to become more pronounced over the coming decades, though insurers can adopt forward-thinking strategies and innovative technologies to help manage and mitigate these risks.
Implement Climate-Responsive Technologies
P&C insurers can utilize innovative technologies to detect, monitor, and mitigate losses during extreme weather events.
Internally, they might start to use drones or satellite imagery to help identify which properties are at a greater risk of being damaged by a natural disaster and send out proactive alerts to affected policyholders.
Insurers might also encourage policyholders to install smart home or Internet-of-things (IoT) devices in covered properties. These intelligent sensors can alert policyholders when unusual levels of smoke or moisture are detected, allowing them to intervene promptly to minimize potential damages.
Conduct Proper Risk Management and Assessment
Going forward, insurers’ underwriting practices must adapt to account for the increased climate risk facing many policyholders. Insurance underwriters are already well-versed in assessing the risk of weather-related events, but the increasing frequency of anomalous occurrences demands additional consideration.
For example, the 2024 flooding in Asheville, North Carolina, caused by Hurricane Helene speaks to the evolving nature of climate risks. The flood was a largely unexpected event, given that the city is located 250 miles inland and 2,000 feet above sea level.
Thus, if they haven’t already, insurers must implement more advanced data analytics and comprehensive data during underwriting to better assess the evolving climate risks in the geographies where they operate.
Adopting ESG Strategies
Adopting robust environmental, social, and governance (ESG) strategies can help insurers take a more high-level approach to minimizing the impact of climate change on operations.
According to a survey done by PwC, the biggest reason insurers implement ESG strategies is to minimize impact from climate change, ranking above other reasons like improving the firm’s reputation or minimizing overall risk.
Adopting an ESG framework at the corporate level helps insurers align their strategy with sustainability and environmental goals. This might include supporting local non-profits that focus on climate change education and mitigation or investing in renewable energy products to help offset the exposure to climate risks.
Embracing Sustainable Insurance Products
Climate change will pose unforeseen risks and challenges, but it will also create plenty of new opportunities in the P&C insurance space.
Future-thinking players must remain agile and adapt to the changing landscape to provide consumers with sustainable insurance products that meet their evolving demands.
Insurers can differentiate themselves from competitors and directly contribute to positive change by offering products that encourage “green” or sustainable living. This includes usage-based auto coverage that incentivizes less driving for lower costs or discounts on coverage for low-emission or electric vehicles.
They may also offer special coverage for policyholders to make home repairs with sustainable or energy-efficient materials after a covered loss.
Innovate for Change with Insuresoft
In the insurance industry, quantifying and managing risk is the name of the game, though the emergence of unpredictable climate risks has created entirely new challenges for P&C insurers.
Looking ahead, insurers will be better equipped to navigate the uncertainty of climate change with the right technology partner, like Insuresoft. Insuresoft provides an agile, end-to-end core insurance processing system for all P&C lines of business. What makes Insuresoft stand out is our convenient COMPOSER tool, which gives your team the power to update and change the system when necessary to meet your evolving needs.
Contact us today to see how Insuresoft can help you compete and win in a complex insurance landscape.
