Climate change and property insurance claims

A gathering storm for carriers

From wildfires across the West to hurricanes along the East and Gulf Coasts, climate-related catastrophes are growing more common and more costly, with impacts felt in many regions across the country. The increases in frequency and severity of these natural disasters bring corresponding surges in personal and commercial property claims-with growing payouts, too-straining insurers' ability to price risks competitively. Some insurance carriers have even been forced to exit certain high-risk markets altogether.

Loss costs are rising amid worsening weather events

The Congressional Budget Office (CBO) reported that in 2023 U.S. insurers covered $80 billion in losses due to natural disasters, though approximately 30% of total damages, which amounted to $114 billion in all, went uninsured due in part to increased premiums and reduced availability of adequate coverage. More recently, a report from Galagher Re estimated 2024's losses through the third quarter at $128 billion, with Hurricane Helene standing out as the year's costliest event to date. Globally, there were 63 weather or climate billion-dollar events in 2023, the most ever, and 2024 presently ranks second (with time remaining to set a new record).

These figures help illustrate why insurers view climate change as a major risk to their distribution models: The steady rise in more costly, more complex claims is pushing insurers' workflows to their limits, erasing thin margins, and creating (as one insurance brokerage president described it) a "crisis of confidence" in the ability to effectively predict loss. For example, the 2017 and 2018 wildfire seasons in California were so costly that insurers paid claims equivalent to more than 20 years of their profits. As a hotter, drier future becomes increasingly unavoidable in Western states, more insurers beyond California will face similar spikes in climate-related claims.

Wildfires in particular pose an increasing threat to more businesses and homeowners

According to the same CBO report, over 10 million structures in the United States, or about 7% of all buildings, have at least a 14% chance of experiencing a wildfire within the next 30 years, and twice as many have a 6% to 14% probability. Updated wildfire models predict that the number of structures destroyed by wildfires each year could double to roughly 34,000 within this timeframe, with annual economic damages growing from $14 billion to an estimated $24 billion.

A surge in climate-related weather claims is a burden for adjusters

When catastrophic events such as wildfires occur, insurers rely on a comprehensive claims adjustment process to evaluate losses and ensure policyholders are appropriately compensated for weather damage to their property. But the increase in climate-related disasters is overwhelming claims adjusters, many of whom struggle to manage a growing workload, choosing instead to retire from the industry. Canada, too, is experiencing a similar dearth of qualified adjusters, with companies anticipating an adjuster shortage of 10 to 20% over the next five years. Across North America, the ranks of adjusters are stretched thin as they now work through longer storm seasons across wider, unfamiliar territories, leading to delays and inefficiencies in claims processing.

For them, it's not as simple as just calculating the cost of a new roof and then cutting a check: Property losses from climate-related disasters often extend far beyond structural damage. In homeowner's policies, many claims extend beyond repairs to a physical structure (such as shattered windows or roof damage) to include additional expenses incurred during short-term relocation while repairs are underway. From hotel stays to dining bills, these extra costs add another layer of ambiguity adjusters must assess during the claims process.

Commercial insurers face additional considerations

On the commercial side, the scope of claims can widen even further. Businesses face not only physical damage to their premises, but also significant financial setbacks. Claims for commercial policyholders frequently include compensation for lost income and the increased costs of operating out of a temporary location. For insurers that hold both residential and commercial policies, these compounding claims underscore the complexity involved in accurately predicting climate-related losses.

Innovation can help insurers improve efficiency in claims

To keep ahead of these challenges, insurers are relying on data-empowered technologies and strategies to streamline their claims and underwriting processes. Advanced analytics improve risk modeling and could help insurers better predict which regions may be more likely to suffer atypical weather damage. By anticipating the new areas where climate-related weather claims may occur, insurers can more precisely price risks and, when necessary, allocate adjusters and resources to expedite the time it takes to settle claims.

Additionally, parametric insurance offers insurers viable tools to improve efficiency in claims processing by using predefined metrics (such as wildfire footprint and claim location) to trigger prompt payouts. Easing the burden on adjusters, parametric insurance can help provide relief to end-insured customers more rapidly, which is especially useful in commercial claims centered on financial losses.

The right technology to streamline claims processes

Encroaching climate change expands the zone of risk for catastrophic events from the country's coasts to its cornfields. This shift is driving up both the frequency and cost of insurance claims, while a shortage of adjusters left managing an increasingly complex claims process contributes to delays in settlements. Consequently, insurers are tightening underwriting standards and raising premiums, potentially leaving homeowners in high-risk areas underinsured or without coverage. At the same time, insurers also face an increasingly competitive business landscape, thus higher premiums and payouts could threaten their long-term sustainability.

To manage these pressures, new technologies and innovative distribution strategies offer the best solution for adapting to a world where climate-related disasters are an almost certain risk.

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