Insurers and regulators look for climate model tech and data to mitigate risks

Climate risk and disaster coverage problems that are proving costly to businesses and homeowners could find solutions in technology, according to industry analysts and service providers.

Vincent Plymell, assistant commissioner for communications and outreach at the Colorado Division of Insurance.

While technology makes it possible to model climate risks with greater accuracy and do more to mitigate the risks, communities will also have to work on mitigation themselves, according to Vincent Plymell, assistant commissioner for communications and outreach at the Colorado Division of Insurance. In December 2021, Boulder, Colo. had the Marshall wildfire, the worst in the state’s history.

“It’s got to be a community effort,” Plymell said. “We need to look at this and do a better job of educating people, but it’s something people don’t want to hear. Because it means taking action, spending money, doing something I don’t want to do for my home, my community, my neighborhood.”

Andrew Foote, senior consultant, Sigma7.

In California, for instance, industrial business owners may normally have annual insurance premiums ranging from $500,000 to a few million dollars, according to Andrew Foote, senior consultant at risk management consultancy Sigma7. In wildfire zones, the premium increases have spiked, he said. “I was working with a client who saw a premium increase from $230,000 four years ago, to $1.5 million in 2023. That’s a major shock to them and to their business.”

Jim Marks, head of the Central Region for the HUB Private Client Group, an insurance broker, said the rise in premiums could affect the overall housing market and mortgages, “because of the inability to find insurance coverage or to obtain insurance at a rate consumers can afford.” This issue could be compounded if the National Flood Insurance Program is not reauthorized by Congress when it expires on September 30, as our sister site National Mortgage News reported.

Technology exists to pinpoint risks more than they have been, but their use is not widespread. The use of wildfire risk models has gotten pushback from regulators, but might not necessarily increase the cost of covering that risk, according to Matthew Nielsen, head of global governmental and regulatory affairs at Moody’s RMS, who spoke at the NAIC/NIPR Insurance Summit in Kansas City on September 13.

Matthew Nielsen, head of global governmental and regulatory affairs at Moody’s RMS.

NAIC’s Catastrophe Modeling Center of Excellence provides risk modeling information to state regulators, intending to foster collaboration between regulators and insurers.

“What’s important is if a homeowner knows what their true risk rate is for wildfire, then it gives them that opportunity, and that onus to be able to say, ‘Okay, I can actually reduce what my risk is. And here’s some mitigation features,'” Nielsen said.

Catastrophe models have existed for almost 35 years, according to Nielsen. “The fundamental pieces are there,” he said. “Adding a new peril is only going to be as good as the data you have for that peril.”

Flood and wildfire models, however, only have had the necessary computing power for the past five to seven years, Nielsen added. The industry was slow to adopt these, generally waiting for revisions to improve upon the models. “But the fundamental structure of how to approach this problem is there and in fact, there’s some really good data, a lot of great public data that’s been there to help us build out some of those hazard pieces of our simulations,” he said.

The Insurance Institute for Business and Home Safety (IBHS) produces property data and researches hail, wildfire and wind risks. Nielsen said IBHS research and data links well with catastrophe models.

It is challenging for modeling and risk technologies to credit isolated instances in which mitigation efforts have made a property less risky than surrounding ones, or even saved such a property, like the house in Maui that survived the August wildfires in part because a metal roof had been added.

Jim Marks, head of the Central region at HUB Private Client Advisor.

However, it may be possible to apply mitigation measures and then get credit for them, perhaps building up to a whole neighborhood, town or region becoming less risky to insure, as Marks of the HUB Private Client Group acknowledged.

“We’re pivoting toward figuring out ways to prevent losses from happening in advance, while at the same time advising our clients on methods to make their properties more insurable than others in their community down the road,” he said. It is possible for insurers to account for such improvements in the underwriting process, according to Marks.

“They’re looking at it more on a case-by-case basis: How close are the trees on a particular $15 million property to the actual house? Has the brush been trimmed back? Do they have backup generators? Do they have wind-resistant windows?” he said. “They are now looking at specific risk factors for a particular property as opposed to the zip code or territory in which the property is located.”