WEATHER CONDITIONS: RISKS AND OPPORTUNITIES FOR INSURERS

There is no doubt that climate change, manifesting itself in the form of weather change, has entered our minds and is making itself noticeable in our everyday life - most recently with the extremely mild turn of the year 2022/2023 with highs of up to 25°C in Europe.

Now these record temperatures may be astonishing in themselves, but at the same time they allow a deeper insight into the overall changes in the weather conditions.

Over the past 15 years, UBIMET has developed a unique meteorological artificial intelligence from which weather information can be individually extracted with pinpoint accuracy and transformed into scalable and innovative services, for instance for the insurance industry.

Michael, what is “climate” and what makes climate change a challenge for the insurance industry?

In a nutshell, climate is the long-term weather pattern in a specific area. The climate describes what can be considered “normal weather” in that area, and it is determined based on decades of measured weather data from the past. “Climate change” is what we experience when recently measured weather data starts differing compared to the measurements and the average values from the past – differing not only on a few days here and there, but in the form of a systematic change. That is: climate change also means weather change – what we actually notice in our everyday life is a difference in weather compared to the weather we know from the past. It may occur in the form of, for example, spring temperatures in the middle of winter, as mentioned at the beginning. This is a relatively solutions are part of the automated processing in coverage verification. More than half of all European insurers perform automated processing to a fair extent and there is no well-known insurer that is not currently working at full speed towards automation of their claims regulation.

So weather has become a strategic issue?

Absolutely! It doesn‘t matter whether the insurer wants to fulfil the requirements of the local financial authority or of the EU taxonomy, it is all about insurers becoming “weather-ready” and mitigating the consequences of climate change in the best possible way. Ultimately, this also means that climate change in terms of more intense events and increasing numbers of extreme weather events have taken on a strategic dimension and turned into an important topic for the board of directors.

How can insurers use weather and climate to their advantage in customer relations?

As a rule, in addition to the organisational optimisations already described, the “care” function for customers quickly becomes a key issue. If you manage to warn a customer of an upcoming severe weather event, you as an insurer have made it “into their living rooms”. You have the benefit of not only having protected the customer, but also of having avoided a loss for the insurer. It may seem a bit surprising, but the most successful channel for disseminating such warnings is actually still via SMS – this channel is accepted by everyone and the message is perceived as highly individual. If, in addition, you manage to ask the customer via SMS after an extreme weather event if everything is OK, offering a link to online claims reporting, you are on the ways towards successfully transforming your customers’ behaviour from analogue to digital business channels. harmless example, but climate change also reveals itself in the form of more extreme weather events – and these are increasing significantly in number and intensity. This is when climate change becomes a core issue for the insurance industry.

But don’t severe weather warnings and “are you OK messages” trigger more claims?

No. Nobody has anything to gain from taking the car out of the garage and putting it straight into a hailstorm – the insurance would pay, but your car will be damaged and need repair; who needs such trouble?

To be honest, we were not able to assess this risk at first either. Now we have completed numerous projects, statistically monitored in detail by the insurance companies. There has been no evidence of an increased number of claims reports compared to statistical twins – not in any country. Interestingly, the average loss amounts were even lower due to the timely, quick claims reporting.

In what role do insurers see themselves when it comes to climate and weather?

For historical reasons, insurers usually see themselves as risk carriers or intermediaries in this context. In that capacity, they know that the weather risk must be subject to ongoing reassessment, including consultation with reinsurers, in order to ensure an appropriate coverage for extreme weather events. They also realise that the insurance organisation must be able to handle more frequent and more intense severe weather situations. In order to cope with these requirements, the insurer needs an early warning system to ascertain that an accumulation event does not come as a surprise. Most insurers also want to provide their customers with the best service possible in the event of a claim, as well as taking on a “care” function for their customers. Ideally, insurers are able to influence their customers and convince them to take precautionary measures in order to prevent damage, which in the end prevents or decreases loss on the insurer’s side.

Is it possible to prepare specifically for accumulation events?

Yes, it is. We have accompanied many insurers worldwide on this journey. The goal is not only to identify upcoming severe weather conditions at an early stage, but above all to forecast the impact in terms of how an insurer will be affected: How many claims can be expected and what are the financial consequences? A severe weather event may be limited geographically and still trigger high level of impact, if the insurer has an unusually large client portfolio in the affected region. An insurer needs this type of impact forecast in order to know in advance how many customers are potentially affected by damage, what the corresponding staffing should look like, whether external service providers should be proactively reserved and much more.

In essence, the insurer’s aim is to deliver its best performance to the customers at the “moment of truth”, that is when the customers really need their insurer, and to settle claims as quickly as possible. The board of directors also needs relatively detailed information concerning damage and loss early on, ideally no later than the day after the event. What used to be managed based on very rough estimates can, with our help, now be done in real-time based on high quality data and in a fully automated way.

Sounds like a simple solution...?

Yes, it is simple – for the insurer. Calculating these correlations, based on the correct assumptions and causations, and then quantifying the results in order to create information that an insurer can work with, is not simple. It takes not only highly precise and granular weather analyses and forecasts – above all, it takes huge amounts of data and years of experience to reliably determine in which regions and to what extent impact relevant to a specific insurer is actually triggered. We have the advantage of having developed such models for more than a decade, so we have already made all the mistakes. With our background, we can help insurers avoid a costly, steep and lengthy learning curve.

You mentioned the “moment of truth” in weather-related claims – are insurers already efficient enough in claims processing or is there still room for improvement?

A lot is currently happening in terms of processing efficiency. We are confronted with this issue primarily in the field of plausibility checks. Essentially, we give the insurer a clear yes/no answer to the question of whether a weatherrelated claim is meteorologically justified or not. This is where the precision of the weather data plays an important role – the more precisely you can detect the location of a lightning strike or analyse the maximum wind speed, the quicker and easier you can approve justified claims and reject unjustified ones. In fact, thanks to our precision and reliability, we regularly see positive business cases with potential savings in the millions or tens of millions range for individual insurers.

What about the speed at which claims are processed?

That is one of the top issues in weather damage verification. The fact that our systems react in real time is only part of the answer. As a rule, our weather