AI is helping the insurance industry adapt to a climate-changed world

Many parts of the world experienced some of the warmest weather on record during 2023. It’s likely that this year will set a new benchmark for global average temperatures. This is a stark reminder that our world is changing, and it is changing a lot faster than many people predicted.

Climate change will undoubtedly impact most aspects of our society, but the insurance industry is one aspect that is not often talked about in the climate change discussion. This may seem like a minor subject to bring up in the context of the great danger we all face, but the reality is that insurance is a fundamental part of how our economies work. Without insurance, businesses and many parts of life grind to a halt.

As the climate changes, natural disasters will become more frequent and unpredictable. The knock-on effects of this erratic weather will be felt across supply chains, business operations, and critical sectors such as agriculture. In short, the world will become more unstable and unpredictable. Unless the insurance industry changes its approach, costs for individuals and businesses could become unsustainable. Indeed, Swiss Re has projected that by 2040, climate-related risks could contribute an additional $183 billion to property insurance costs.

Now, before things get too depressing, let’s quickly look at what can be done to head off this scenario. Artificial intelligence is one of the most talked about, and exciting, tech innovations of recent years. While plenty has been written about AI’s capacity to do harm, I believe AI could provide a crucial tool for the insurance industry to adapt to climate change.

AI is already being used to streamline and automate many functions within insurers. Not only does this significantly reduce costs (which can be passed on to customers), but it also frees up insurance professionals to undertake higher-value and more complex work. Freeing up space for more creative thinking is a critical lever in enabling insurers to find innovative solutions that address the complicated scenarios of climate change. As AI grows in capability, more and more of the standard functions of the insurance industry will become more efficient. This will also empower insurers to take on a higher volume of work - which again, could help to keep costs down.

Outside of the operational efficiencies, one of the most exciting possibilities is that AI will enable insurers to take some of the unpredictability out of climate change. Through more granular risk differentiation, insurers can make more accurate assessments, reduce errors and improve their capacity to take on risks. With each passing year, we use more and more advanced data sources that provide large tranches of actionable insight. Operationalizing these data sources into risk workflows increases insurers’ ability to understand differences in risk at a granular level, including how risks change over time and providing more tailored and contextualized insurance products to businesses.

In fact, as AI becomes more sophisticated, it can be used to help insurers provide more usage-based insurance solutions. Many will have seen insurers use telematic units to measure how a car is driven. That’s just the start. Our connected devices could soon be used en masse to provide incredibly valuable real-time information.

I am not saying that AI will be a silver bullet. Even with the best use of AI, there will be scenarios where businesses and individuals find certain activities uninsurable due to how the climate has changed. An ideal scenario would be one in which we take the action needed to head off climate change. However, with little sign of that happening any time soon, the responsible thing for the insurance industry to do is to prepare for the worst.

Now is the time for insurers to integrate AI platforms into their tech infrastructure, upskill workers so they understand and can leverage AI to better do their jobs, and invest in insurtech innovation. Many insurers are already taking this action, but to be truly ready for what climate change may bring, we need industry-wide action.

Zaheer Hooda is head of North America at Cytora. Contact him at [email protected].

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