Weathering the storm: Climate change issues for insurers

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The purpose of insurance is to manage risk and allow societies to grow and prosper. Our climate crisis is magnifying those risks, jeopardizing the insurance industry and its societal function. In just 2023 alone, there were 28 of what were previously considered “once in a lifetime” disaster events in the U.S. that each resulted in at least $1 billion in damages, for a total of ~$30B.

Facing this new reality of climate-related insurance risk, insurance leaders are faced with the two issues: 1) adapting to climate change in a way that they remain both profitable and affordable for their customers, and 2) influencing how societies respond to and mitigate damages. This will require a new agile and adaptable approach to how organizations assess and react to risks, which will position companies and societies for sustainable success in the long run.

The rapidly shifting macroenvironment insurance leaders are experiencing is heightening demand, increasing workloads, and augmenting the risk of burnout among employees as climate-related events increase. The following three strategies can help insurance leaders weather the storm.

Enable leadership at all levels
As weather events increase in frequency and the related responsibilities insurance companies must take on expand, teams need to be able to make decisions quickly and act with urgency, which can be hard when senior leaders are the only ones “authorized” to do so. Leaders must foster a culture of ownership to optimize the decision-making process across all levels and ensure that they are never a bottleneck.

Take time to determine what needs a senior leader’s direction and what can reasonably be delegated to more junior employees who may even be more familiar with the task or project than their superior. When an individual shows leadership or makes a good decision, be sure to recognize and celebrate that behavior. With this horizontal and vertical empowerment, decisions can be made as needed across centers of control to help keep operations moving swiftly. Encouraging innovative thinking will help empower professionals to problem solve and stay proactive in seeking efficiency and positive outcomes. When it comes down to it, insurance at its core provides stability during difficult times. Finding ways to streamline the processes through which that happens by encouraging leadership at all levels can continue insurers’ outcomes.

Prioritize innovation-centered adaptability
Climate changes push the insurance business to adjust — offering more innovative solutions for the more frequent events described above, whether that’s acute or chronic climate-related hazards. To be able to create these innovative solutions, insurers need a culture that allows teams to shift and prioritize (and re-prioritize) quickly and encourages employees to think beyond historical industry constraints. An agile organization can quickly adapt to changing regulations, market trends, and unforeseen events to push the market in the right direction while also minimizing disruption and maximizing resilience. This adaptive culture can be achieved by rewarding rapid testing, fast failing and accelerated learning.

One example of this: an insurer we partnered with faced the challenge of how to adjust the company’s risk tolerance and processes to quote more policies while mitigating the negative impact on loss ratio. They not only enlisted the expertise of the underwriting function to tackle this problem, but they also included several cross-functional stakeholders to rapidly design and test – in 90 days – a potential solution, that historically might have taken six or more months to develop.  The insurance industry is highly structured and relatively slow-paced; putting mechanisms in place that allow for a degree of innovation and flexibility can put companies in a better position to stay on top of increasingly violent weather events.

Invest in re/upskilling
While expanding decision-making powers and increasing adaptability are great first steps, making a concentrated investment in reskilling and upskilling will ensure employees are truly equipped with the tools and expertise needed to make agile decisions. If technology is being implemented to help keep up with the increased demand, formal training should be provided to ensure that all employees can adopt it into their day-to-day work. The best way to create an agile workforce is to provide intentional learning and development (L&D) programs to meet changing needs and demands. L&D programs go beyond initial training by providing ongoing opportunities for employees to develop new skills and stay current with industry trends. Equipping teams with resources and ways to fill gaps between skills will help keep them engaged, motivated, and ready to take on whatever is next for the team.

In a world increasingly shaped by climate change, agility and adaptability are not options for the insurance industry; they are imperatives for survival and growth. Insurance leaders who embrace agility and adaptability to navigate the changing environment will be best equipped to manage headwinds and shifts in demand. Moving into offense by establishing leadership at all levels, building adaptability, and creating an intentional L&D program can help you stay ahead of the ‘storm’ to navigate change and mitigate risks in a way that positions your company for long-term success in the face of climate change.