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Climate change is the underlying reason for a dramatic change in risk assessment for the insurance industry. Robert Muir-Wood, the chief scientist of Risk Management Solutions (RMS), says, “In the past, when making these {risk} assessments, we looked to history. But in fact, we’ve now realized that that’s no longer a safe assumption—we can see, with certain phenomena in certain parts of the world, that the activity today is not simply the average of history.”

The Geneva Association, an insurance industry research group, described the new challenges insurance companies will face as climate change progresses. “In the non-stationary environment caused by ocean warming, traditional approaches, which are solely based on analyzing historical data, increasingly fail to estimate today’s hazard probabilities. A paradigm shift from historic to predictive risk assessment methods is necessary.”

The emerging challenge of reducing risk exposure due to climate change creates new opportunities for insurers that can innovate. Innovative pricing strategies for individuals and local governments will provide societal resiliency and allow the insurance industry to profit from insuring for climate risk. Differential pricing is essential to remain competitive. Medical insurers already raise rates for smokers, property insurers need to use geospatial science for house-by-house premiums in flood zones and discounts for self-protection and preventative measures like climate proofing homes.

Economists have always emphasized the role that price signals in markets. Here are some reasons offered by The Boston Consulting Group as to why accurate and competitive pricing continues to grow in importance for insurers:

Transparency

Price and feature-comparison websites allow consumers to compare and contrast hundreds of insurance products by price, value and benefits.

Sophisticated Consumers

With all this transparent information consumers are increasingly open to policies and premiums based on a variety of variables and non-standardized format.

Regulations

Regulations requiring insurers to maintain higher capital levels without decreasing overall returns means insurers must reduce costs or increase pricing.

Nontraditional Competitors

E-commerce, automotive OEMs, retailers and other nontraditional players in the insurance market are increasing competition by offering new, innovative business models and products.

New Technology

Big data, the internet of things and predictive modeling are giving insurance companies the information and methodology to design usage-based individual pricing models.

Interested in taking advantage of these changes in your career or for your firm? Contact Smith Hanley Associates’ Data Science and Analytical Recruiter Nancy Darian at ndarian@smithhanley.com or 312.589-7582.


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