Insurance startups are eyeing the climate space as historic models struggle to keep up, but experimental underwriting models may not be a silver bullet.
Why is this important: Insurance models have struggled to keep pace with climate-related claims, but there is no clear sail for new insurance concepts.
The context: Traditional insurance coverage for businesses and individuals relies on historical data to predict the likelihood of a qualifying event and adjust the policy accordingly.
- Insurance companies themselves are insured through reinsurance, which helps to spread the underlying risk to preserve solvency during large qualifying events.
State of play: These historical models are less reliable in a world of increasingly severe weather events due to climate change, so some insurance startups have chosen to explore alternative models.
- Sensible, for example, provides something akin to a warranty product for consumers via a refund if a severe weather event damages an asset.
- It’s what Aon Securities CEO Paul Schultz calls a parametric approach to risk diversification, where the qualifying event does or does not occur.
- It’s also a common pattern in less mature markets, Schultz explained, due to the unreliable nature of historical data.
Yes, but: Inflation is wreaking havoc on the insurance industry as a whole, and young startups with lines of credit may not be able to keep up with more established groups.
- Asset prices are rising faster than insurance policies are being revised, meaning the company could end up paying more than it cashes in if a qualifying event hits a rapidly appreciating asset.
- Credit markets are stretched following yet another interest rate hike, and early-stage insurance startups may not be able to convince investors to overlook a model’s underlying business costs untested.
- And those who can get credit face rising costs, pushing margins even lower.
The bottom line: Experimental models do not insulate startups, and investors by extension, from the risky future that awaits them.