- Where Insurance & Technology Meet

Winds Of Change: Emerging Weather Science Supercharges A New Generation Of Risk & Insurance Solutions

by Stephen Applebaum and Alan Demers

Mark Twain is credited with saying that “everybody talks about the weather, but nobody does anything about it.” That’s no longer true.

Well before the climate change debate focused the world on meteorological threats, insurance companies were well aware of the risks associated with extreme weather events. What is less understood is how technology and weather science have evolved to help predict and warn of approaching events, giving advanced notice to alter course and relocate to safety. And now, when sophisticated highly specific weather data is integrated with high-resolution geospatial imagery, artificial intelligence and telematics, the results are exciting and unprecedented. Consider the merging of high-quality weather information with property imagery at the ground level or the blending of surface conditions, atmospheric conditions and driving patterns. These advancements in weather technology and innovation show that today somebody is doing something about the weather.

Weather and Insurance

Weather has a wide-ranging impact on the P&C Insurance industry and its policyholders. Namely catastrophic and other property damage events as the result of a hurricane, isolated storms producing hail or tornadoes. Events that impact large populations such as wildfire and flooding have been dominating the headlines over the last decade with record-setting payouts in the billions of dollars. These frightening scenarios are just some of the obvious ways in which insurers and their customers are impacted by weather.

Insurance is all about gauging the likelihood and degree of risk and transferring the exposure by charging appropriate premiums in exchange for protection.  Therefore, insurers and their expert risk modeling partners need to be rigorous when it comes to assisting with rate making, pricing, accepting/rejecting risks and deciding how much exposure in a given geography or how much premium to cede to reinsurers. Each of these critical decisions are made and projected into the future and have tremendous impact on profitability when disastrous events do happen.

Beyond Just Weather: Climate Change

According to Swiss Re, the effects of climate change threaten to cut the world’s economy by $23 trillion by 2050. In the U.S., wildfires, hurricanes, tornadoes, winter storms and extreme temperatures were among 20 weather and climate disasters in 2021 that each cost $1 billion or more, totaling $145 billion and killing 688 people, according to the National Oceanic and Atmospheric Administration (NOAA).

These events highlight the need for businesses, communities, and individuals to proactively prepare and react. In addition to the frequency and severity of weather events, there is also an increase in secondary perils associated with weather – including flooding, wind, and hail.

According to a Deloitte study, most U.S. state insurance regulators believe all insurers will face heightened risks — physical, liability and transitional — over the medium and long term. Half of those surveyed believe climate change will have a high or extremely high impact on coverage availability and underwriting assumptions. For those that get it right (the product, the pricing and the reinsurance), there’s a market ready to buy. For those that get it wrong, there could be significant losses

Despite these difficulties, insurers also must balance selling and underwriting new business to remain competitive, maintain and gain market share.

Modeling Risk

Insurance carriers tend to model future risk on past occurrences where mounds of historical weather data are relied upon to make those decisions.  This coupled with risk modeling sciences aid in planning and calculating forward. Yet, climate change along with the increase of property located in harm’s way and the higher costs of materials to repair and replace structures converge to suggest the need for even more predictive efforts.  The emergence of increased capabilities for insurers to ingest data, greater precision in geospatial mapping, and real-time data are allies in the battle for managing risk.

Given all the importance and rigor within the industry however, little is known about just how weather data is developed – at least among insurance executives and other key decision makers.  Afterall, weather information is essentially “free” and supplied through governmental agencies like NOAA (National Oceanic and Atmospheric Administration) and the National Weather Service which gather information from satellites, radars and other meteorological sensors.  Think of this as the raw material which is repackaged, sold and distributed in places like your favorite weather app. Weather providers use this very information to, in turn, be incorporated in real-time weather analysis algorithms, predictive models, forecasts and ultimately an insurer’s decision-making process.

Weather Data and Use Cases

But is all weather data created equal? The short answer is no.  There is a matter of refinement, meteorological science, algorithms, and knowledge that makes all the difference when it comes to accuracy for both historical and predictive uses.  Advanced technologies take multiple data sets and generate indices from them that communicate the impact of a weather peril. These analyzed insights combine historical, climatological, and predictive technologies to produce actionable decision support before, during and after a major weather hazard. High resolution in the weather data along with street level or geocoded detail is key to accuracy.

In each stage of analyzing risk for the insurance company, sophisticated weather technologies combined with details on staffing, policyholder assets, and past property impacts can inform numerous constituents in the process. While inaccuracies in weather reporting may translate to a minor inconvenience for the general public when a rainstorm unexpectedly occurs, the stakes for insurer accuracy is dramatically different. High value weather data can bring clarity and insights to your decision making to help you avoid costly impacts to your business.

Use Cases

Much is also changing in the ways insurers use weather data including new products, like parametric insurance models which automatically payout immediately following a qualifying event. Combining contextual data with telematics monitored driving behavior is yet another recent use case expanding the ability to better determine automotive risk.

Other newer uses include actionable alerts to relocate or protect property in advance of a dangerous storm. The key here is pinpoint accuracy to ensure responsiveness.

Some of the more traditional uses include

  • Financial loss impact projections – post event for reserving and assessing probable exposure
  • Resource deployment, pre and post weather event
  • Underwriting; risk selection, risk scoring, geo mapping for purposes of pricing, management of risk exposure
  • Loss and claim investigation
  • CAT modeling, e.g., hurricane, wildfire
  • Enterprise risk management, portfolio perspectives

Winds of Change

Numerous recent developments have emerged to focus society in general, and the insurance industry specifically, on various aspects and applications of sophisticated weather technologies.

The ESG (Environmental, Social, and Governance) movement is suddenly causing corporations to embrace long-term value creation, with its emphasis on stakeholders, society and sustainability, and has become a strategic imperative for insurance companies. Incorporating climate change and other potential disruptions into business models can help insurers drive long-term value for all constituents.

A wide variety of new and emerging technologies are enabling transformative improvement across the insurance enterprise, including product pricing, underwriting, distribution servicing, and claims. Integrating hyper-local historic and real-time weather data, into new solutions that leverage artificial intelligence and other high value third-party data, is creating powerful new capabilities in claims and risk scoring.

Driver safety solutions powered by contextual telematics including weather and road conditions, is enabling new and important safe driving and travel features. New and exciting integrations of multiple data sources will continue to drive innovation in the insurance sector. Marrying this with greater weather data accuracy is the key to making these developments even better. And, knowing which data and models produce the greatest accuracy is paramount to making these emerging and known uses cases most optimal and actionable.

The P&C insurance industry, through proactive collaboration with innovative data and weather scientists, have an opportunity to minimize the impact of changing weather conditions to the benefit of all stakeholders, including their policyholders.

About the Authors

Stephen E. Applebaum, Managing Partner, Insurance Solutions Group, is a subject matter expert and thought leader providing consulting, advisory, research and strategic M&A services to participants across the entire North American property/casualty insurance ecosystem focused on insurance information technology, claims, innovation, disruption, supply chain, vendor and performance management. Mr. Applebaum is also a Senior Advisor to Waller Helms Advisors.  WHA is the premier investment banking boutique focused on the crossroads of the Insurance, Healthcare and Investment Services sectors.

Stephen is a frequent chairman, guest speaker and panelist at insurance industry conferences and contributor to major insurance industry publications and has a passion for coaching, mentoring, business process innovation and constructive transformation, applying disruptive technology, and managing organizational change in the North American property/casualty insurance industry and trading partner communities. He can be reached at [email protected].

Alan Demers is founder and president of InsurTech Consulting LLC, with 30 years of P&C insurance claims experience, providing consultative services focused on innovating claims. After initiating and leading claims innovation at Nationwide, Demers collaborates in the forefront of InsurTech, partnering with insurance leaders, startups, design thinking experts and service providers to modernize personal, commercial and specialty claims.

As Vice President of Claims Innovation at Nationwide, Alan conceptualized a vision and road map to build next-generation claims, automating and digitizing claims experiences, progressing from inception through prototype testing. He served as a founding member of the Corporate Innovation Council and played a key leadership role in establishing goals, practices and an innovative culture at Nationwide.

Alan is an accomplished executive leader and has worked for two separate Fortune 100 insurance companies in a number of corporate, national and regional leadership roles among personal, commercial, non-standard and specialty lines claims. Prior to leading claims innovation, he served as head of claims for Nationwide’s commercial agribusiness and non-standard claims. Other noteworthy roles include: field vice president, regional claims officer and national catastrophe director, quality assurance director.

Alan began his career with Aetna as a claim adjuster and advanced to a corporate claim consultant, prior to joining Nationwide in 1995.