Inflation and rising credit hurt weather insurance startups


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.


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