Climate change is a major challenge for insurers, but AI and cloud can help

With the rise in global warming-induced severe weather events, insurance regulators and institutions have placed a greater emphasis on sustainability. Sustainability drives the need for insurers to mitigate risk in underwriting and help ensure business continuity in case of catastrophic events. And while climate change impacts every industry, it has some of the greatest implications for insurance institutions due to their broader risk exposure. In fact, in 2021 alone, natural disasters cost insurers $120 billion, up from $100 billion in 2020 and $52 billion in 2019. 

A recent IBM Institute for Business Value (IBV) study surveyed 3,000 CEOs, including 150 insurance leaders in 40 countries, to better understand their priorities relating to sustainability. The survey found that 44% of insurance CEOs identify increasing sustainability as a top priority over the next 2-3 years. Believing that sustainability is critical in business and financial risk assessments, insurance CEOs are engaging their Chief Financial Officers on sustainability at a higher rate, 55%, compared to their peers at 47% across industries. And 83% of insurance leaders also expect sustainability investments to produce improved business results within the next 5 years.

As underwriters of risk and major institutional investors, insurance institutions are considering sustainability in their business operations in multiple ways:

1. Insurers are looking at their investment portfolio, beginning to divest from fossil fuels, and increasing their investment in sustainable business models. This investment in sustainability encourages progress in other sectors.  
2. As severe weather becomes more common, the job of underwriters becomes more complex. To deal with this, insurance institutions are creating stronger underwriting models that gather more data from more sources to predict risk more accurately and to identify hidden risk concentration.
3. Insurers are considering how to more actively manage risk, both through policy advocacy and pricing, and by partnering with the insured to build more resilient behavior.
4. Regulators are demanding reporting on climate and sustainability exposure more and more, requiring more active data gathering and management by insurers.

Advanced technology and green software are at the helm of driving sustainability forward for insurers

What is the top barrier to achieving sustainability business objectives? Insurance CEOs say it’s an unclear ROI and economic benefits of sustainability initiatives. That’s where IT and exponential technology can help, including data, artificial intelligence, and cloud.

Artificial intelligence captures, aggregates, and analyzes data that can be used to create personalized solutions to manage climate-related risks in a repeatable, provable way. For example, The Weather Company,® owned by IBM, is using AI capabilities to develop leading-edge technologies that measure and analyze an array of geospatial, water, and climate data. The insights from this data help insurers understand how natural ecosystems are impacted and take preventive actions. AI can also tailor risk alerts to elicit action from insureds to materially reduce their risks.

Cloud computing technology offers another way for insurers to contribute positively to sustainability. Data centers are expected to make up 3.2% of global emissions by 2025, and insurance institutions still own and run many of them. IBM has an end-to-end approach to measure, analyze, and optimize the carbon footprint for sustainable hybrid cloud environments. In the UK, for example, IBM Cloud® already uses a network of data centers that are powered 100% by renewable electricity.

Insurers can tackle the difficulties of climate change with new business models

Climate change presents an opportunity for the insurance industry. As severe weather wreaks havoc on our world and challenges insurance underwriting, these institutions can leverage hybrid cloud and AI to build more sustainable business models. This approach can ultimately support business continuity and help insurers build new products to meet the needs of our changing world.