Innovation within the insurance industry to address evolving climate risks could see business opportunities for captive insurance, according to a new A.M. Best special report, ‘Insurance innovation under the spotlight after COP26’. The United Nations COP26 meeting saw world leaders agree on ambitious plans to reduce carbon emissions and protect communities and natural habitats from the effects of climate change. The A.M. Best report states that the transition to a low-carbon economy provides reinsurers with a variety of underwriting opportunities and challenges. Opportunities arise from the role of reinsurers as institutional investors, which allows them to help generate funds to support the development and scalability of the new technologies required for decarbonisation. The resilience of policyholders can be strengthened through enhanced loss prevention, adaptation and efficient claims payments. In terms of these underwriting opportunities, the rating agency says: “A.M. Best expects reinsurers to become increasingly innovative as they evolve to cater to the changing needs of societies. In this context, it is expected that existing insurance solutions and products will evolve, and new ones will emerge that address the evolving risk universe.” The report adds: “Shortage of insurance capacity could fuel business opportunities in the captive insurance space.” Reinsurers are in an important position to make a “unique contribution” to climate risk innovation, including new product development that incorporates social and environmental values. Other examples of insurers’ innovation in their fundamental role as risk managers include enhanced modelling of climate risks, the use of more sophisticated early warning systems (for natural catastrophes), and retrofitting of buildings to ensure resilience (particularly for flood risk). A.M. Best observes an increasing interest in parametric covers within product design and distribution, which the rating agency notes are relatively easy to understand, reduce dispute risk and enable quick indemnification of impacted communities. The report warns that owing to the accelerating pace of change in global operating environments, insurers that fail to embrace innovation may find it difficult to sustain long-term success. As with any new insurable risk, there are underwriting challenges associated with climate risk, particularly pricing challenges owing to the complex nature and lack of historical data. A.M. Best notes that the risk of mispricing can be mitigated through the use of policy exclusions and limits.
