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Environmental issues challenge insurers to step up beyond risk transfer


Environmental issues have certainly captured the attention of the insurance industry’s clientele, accounting for the top-five long-term concerns in a survey of the world’s business leaders presented to the recent World Economic Forum.

February 19, 2020

An article by Sam Friedman, Insurance research leader at the Deloitte Center for Financial Services, Deloitte Services LP

Topping the list was the possibility of extreme weather events, such as floods or storms, along with the lack of proper planning for climate change.1 The survey report also cited “mounting pressure on companies from investors, regulators, customers, and employees to demonstrate their resilience to rising climate volatility.”2

Therefore, it was no surprise that the impact of climate-related events was one of the prime topics covered at the recent Property and Casualty Joint Industry Forum, where leaders from many of the major insurance carriers and associations gather annually to hash out the greatest challenges facing the business.

A major part of the program focused on the need to take a more active role in mitigation of damage from floods, wind, and wildfires. Industry-led research into construction and retrofitting of properties to make them more resistant to such exposures was cited. Campaigns to upgrade building codes and rethink zoning regulations to limit development in catastrophe-prone areas were recounted.

Spotlight on the ‘protection gap’Mostly, however, forum participants pondered how insurers might help society close the “protection gap”—the difference between total economic losses sustained during weather-related events and how much of that is insured. A report by Aon noted that between 58 percent and 81 percent of global weather-related damages since 2005 have been uninsured (see figure 1).3 While the gap is a bit narrower for US-only results, it remains quite wide—from a low of 37 percent in 2018 to a high of 59 percent the year before that.4

Figure 1: 'Protection gap' persists for climate change exposures

Proportion of global uninsured losses from weather events 2005-2019

While catastrophe bonds have picked up some of the slack by having investors securitize weather risks, with Artemis reporting deals totaling $11.13 billion last year,5 that alternative risk transfer option still accounts for a relatively small portion of insured losses (totaling $88 billion in 2018), let alone overall economic losses ($215 billion in 2018) resulting from such events. Traditional insurers and reinsurers therefore still appear to be the best positioned candidates to close the protection gap.

Insurers look to enhance risk managementHowever, before insurers can confidently dive even deeper into the property-catastrophe market, those at the forum emphasized the importance of promoting and facilitating more proactive risk management. Educational initiatives to increase awareness of rising natural disaster risks and emerging mitigation options among policyholders and public policymakers was presented as a logical first step.

Indeed, panelists at the forum noted that while insurers often complain about being seen by the public as the ‘black hat’ industry because of availability and affordability issues in property-catastrophe insurance, here is a chance for them to wear the ‘white hats’ by helping communities and individual customers prevent loss of life and property and recover from disasters more quickly and cost effectively.

Many insurers have already moved in this direction, looking to engage policyholders on an ongoing basis rather than only when a policy is purchased or renewed, or a claim is filed. Risk management advice, products, and services are increasingly being pitched as an added-value and competitive differentiator. For example, some carriers use data analytics and artificial intelligence to identify and monitor high-risk areas for wildfires, alerting policyholders if their property is threatened. If a wildfire is approaching, private fire-fighting services can be dispatched to defend the insured property and try to limit losses, from clearing debris to applying a fire-retardant gel or foam to protect endangered structures.

Other carriers go a step further, offering on-site consultation well before an event occurs on how homeowners might reduce risk on existing properties, or take mitigation into account when building or renovating a home—such as by installing ember-resistant venting. Insurers could provide additional motivation to upgrade the resilience of properties and communities by offering premium reductions as incentives for mitigation investments.

Innovation initiatives launchedSpurring greater innovation to contain natural disaster losses was a second step highlighted. The Insurance Information Institute, which hosted the forum, is a hub for the industry’s Resilience Project, through which insurers work together to better understand climate-related risks, promote mitigation, and close the protection gap.6 As part of this campaign, the Institute last year launched a ‘Resiliency Insurance Innovation Challenge’ in conjunction with the InsurTech Connect conference.7 Open to startups less than five years old and with fewer than 100 employees, the contest was designed to spotlight “innovative approaches to the long-standing problems of disaster preparedness and responsiveness.”8

A trio of finalists were showcased in a shark tank exercise at last year’s InsurTech Connect conference. The winner was WeatherCheck, a monitoring service that warns homeowners at specific street addresses about incoming weather systems, while helping determine if damage is weather related—confirming that a leaky roof is due to a recent hailstorm, for example, rather than long-term, uninsured wear and tear.9
Others are innovating in terms of product design. Take Zurich Insurance, which launched a parametric policy as part of its “underwriting nature” initiative, teaming up with The Nature Conservancy and regional governments to help protect the Mesoamerican coral reef off the coast of Mexico's Yucatan Peninsula.10 If a hurricane hits, the policy would automatically provide funds to repair reef damage and head off beach erosion that might threaten the local tourism industry.11

Such proactive mitigation initiatives could enable carriers to expand individual and community risk management capabilities and limit damages, making specific properties and entire regions more insurable and thus narrowing the protection gap. A recent Deloitte research report based on a survey of state insurance commissioners found that such actions could also help meet possible new regulatory demands for greater disclosure of how insurers assess, account for, and limit climate-related risks.12

However, while there was much talk at the forum about the need to promote greater education, loss control, resiliency, and a narrowing of the protection gap, what wasn’t discussed was how the insurance industry might become more actively engaged with efforts that do more than just help society adapt to and recover from the terrible consequences of weather-related events.

In fact, more insurers are hiring chief sustainability officers to lead environmental, social, and governance initiatives. In addition, a growing number of insurers and reinsurers are changing their energy-related investment and/or underwriting strategies to reflect growing climate change concerns.13

What do you think?

Will the high investment trend in fintech continue? Will there be a sudden spike in new startups being formed?
Join the conversation on Twitter: @DeloitteFinSvcs.

  1. 1 Pan Pylas, “Environmental issues top worries for those heading to Davos,” Associated Press, January 15, 2020,

    2 Ibid

    3 “Weather, Climate & Catastrophe Insight: 2018 Annual Report,” Aon,

    4 Ibid

    5 “Catastrophe bond and insurance linked securities market reports,” Artemis, website accessed January 21, 2020,

    6 “Building resilience: How insurance protects and empowers communities,” Insurance Information Institute website, accessed Jan. 22, 2020,

    7 “InsurTech Connect and the Insurance Information Institute Launch the Resiliency Insurance Innovation Challenge,” Insurance Information Institute press release, June 11, 2019,

    8 Ibid

    9 Gavin Souter, “Weather monitoring InsurTech firm wins resilience award,” Business Insurance, September 25, 2019,

    10 “Designing a new type of insurance to protect the coral reefs, economies, and the planet,” Swiss Re press release, December 10, 2019,

    11 Gloria Gonzalez, “Parametric insurance policy launched for coral reefs,” Business Insurance, March 9, 2018,

    12 Nikhil Gokhale, Prachi Ashani, and Michelle Bachir, “Climate risk: Regulators sharpen their focus,” Deloitte Center for Financial Services, November 2019,

    13 Erin Ayers, “Insurers, reinsurers alter underwriting, investment policies on energy sources,” Advisen, December 23, 2019,

    QuickLook is a weekly article from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this article are those of the author and not official statements by Deloitte or any of its affiliates or member firms.

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