When insurers consider the consequences of extreme weather driven by climate change, they are endowed with varying degrees of visual acuity.

There are the myopic: those who say, “We can change our prices every year, so why should we care about forward-looking climate metrics? (Unless, of course, the regulators tell us to.)”

At the other end of the spectrum, there are the foresighted, who believe that “failing to prepare now is preparing to fail in the long term.” This is the posture of vanguard insurance firms, who are taking steps now to quantify the potential impacts of physical climate risk on their portfolios and business strategies.

Earlier this year, when we assessed this trend, we called such firms builders, but some insurers clearly are on a faster track to becoming integrators: they’re driving toward a holistic view of both current and future climate-related risk—and opportunity—empowered by an enterprise-wide understanding of climate impacts that’s integrated across key processes and strategies.

During the summer of 2021, we concluded a highly successful, ten-week-long collaboration with the Lloyd’s Lab (Cohort 6) focusing on Jupiter ClimateScore Global, our portfolio-level (90m resolution) climate risk analytics tool. The Lab is where innovative technology companies and insurance professionals meet and work together to create and demonstrate solutions that add value to the Lloyd’s market and the insurance industry as a whole.

Five Challenges

Our collaboration illuminated the trail that “builders” in the insurance sector are blazing. It enabled us to identify five key challenges that our mentors in the Lab have confronted and are in the process of overcoming:

1. How confident am I about our current-day climate risk and future rates of change?
2. How will it affect my portfolio exposures and catastrophe pricing—now and in the future?
3. Should I adjust my underwriting strategies to account for climate risk?
4. What if I am the last insurer to adopt a robust, climate-change-adjusted view of risk?
5. How can climate data be used to improve my long-term profitability and address regulatory requirements?

Three Use Cases

With this information in mind, we co-created with our Lloyd’s Lab mentors three use cases that address these issues, chosen from a business-critical standpoint and because they’re likely to display clear climate signals over time:

1. Flood risk faced by residential policy-holders in the United Kingdom ^[1]
2. Flood risk for commercial customers in Canada ^[2]
3. Hurricane and sea-level rise risk affecting infrastructure along the North Atlantic and Gulf coasts of the United States. ^[3]

Based on sample data sets supplied by our mentors, we used ClimateScore Global to examine the impacts of these perils, from the current year to decades into the future. For the final presentation to the Lab and the wider Lloyd’s market, we then created the video demo above (demo begins at 3:00); for a text summary of the use cases, please see the appendix.

Four Key Takeaways

We came out of the Lloyd’s Lab process having learned much from our mentors. Among the most important things we all took away from it were:

1. It’s crucial to look beyond the traditional, one-year cycle when considering the future potential impact of climate change on portfolio management, risk management, pricing and underwriting, longer-term profitability (including identifying market opportunities as well as risks), sustainability, and regulatory response. There will likely be gradual impacts and risk of additional shocks along the way that will steadily erode profitability.
2. Impacts are not uniform across a portfolio but have variances within it, depending on peril, asset type, and geography. Identifying “winners” and “losers” within a portfolio can help drive strategic decisions on realignment.
3. Even small percentage increases in the Average Annual Loss (AAL) due to climate change will accumulate and have an impact on portfolio metrics such as the combined loss ratio and technical premium rates. This can have profound impacts on books that already have small margins. Having foresight about this is critical, particularly with regulatory requirements limiting the pace and magnitude of rate changes.
4. Climate change has increasingly become a key, board-level issue within insurance sector organizations. It will affect reputation and profitability. Building in the right metrics now will prepare insurers for increased scrutiny and disclosure later.

Insights Gained by All Involved

We also were gratified by our mentors’ reception to our work and Jupiter’s overall value to the insurance industry.

Alex Curtis of Atrium Underwriters said: “Jupiter’s tools have provided powerful insights into physical climate risk across our portfolio, using the latest available climate science.”

Ian Robb, head of risk engineering at Liberty Mutual Specialty Markets, said: “Jupiter’s ClimateScore Global model provides a unique insight into how climate change could impact the natural catastrophe exposure that our customers face in the future, enabling them to take mitigating action to mutually protect their assets and our portfolio.”

Toby Pughe of AXA XL said: “Jupiter’s model clearly demonstrates that climate change will have a material impact on an insurer’s portfolio and that the effects are not as long-term as we initially thought.”

We’ll be lastingly grateful for the opportunity to work so seamlessly and productively with thought leaders in the insurance world to address some of the climate risk management challenges it confronts.