Traditional insurance products may not be fit for purpose in the face of evolving climate risks
Risk managers have been having their say regarding their approach to climate risks - the resounding opinion resulting from a survey of 46 Airmic members, published in September 2022, is that current insurance products are simply not fit for purpose.
If insurers thought they had weathered the storm over the Covid-19 business interruption claims saga, then they are mistaken.
Risk managers who answered the trade association’s survey believe that traditional property damage and business interruption policies do not adequately cover natural perils, largely because of restricted coverage or excluded items within those policies.
More than three-quarters of Airmic’s respondents also said they had no faith in property damage and business interruption products themselves.
Around 75% of risk managers polled said the increase in premium costs for this line of business now presents them with a real challenge in terms of tackling the business threats they face from climate risks.
Interestingly, approximately 70% of respondents said there was a clear lack of cover for non-damage business interruption risks, which they viewed as a significant threat to their business.
To tackle this concern, nearly two-thirds of risk managers had examined parametric insurance policies as an alternative to traditional products – however, these respondents ultimately decided they would not purchase this type of cover.
Indeed, just 4% told Airmic they had actually purchased a product which contained a parametric element.
Pumping the breaks on the ‘highway to climate hell’
The question here is where does this quandary leave the insurance industry?
If the results of Airmic’s research are to be believed, there is now a large majority of risk managers who believe the products they are being offered are not fit for purpose due to a range of factors.
The United Nations’ secretary general António Guterres warned at the 2022 United Nations Climate Change Conference: “Humanity has a choice - cooperate or perish. It is either a climate solidarity pact or a collective suicide pact.
“The world on the highway to climate hell – with its foot still on the accelerator.”
For the insurance industry, there is now a need for a solidarity pact to change the structure of the products it offers in order to mitigate risks such as climate change and avoid its own collective suicide pact.
For many years, insurers have warned of the need to remain relevant if they are to prosper. However, Airmic’s survey respondents clearly believe that the products on offer are becoming increasingly irrelevant in the current and future risk landscape.
Brokers are being asked to recommend products which their clients do not believe meet their needs.
Risk managers are clearly demanding the industry undergo a reset and it may well be time for a change in approach.