Climate insurance is risky business

Insurance startups are eyeing the climate space as historical models struggle to keep up, but experimental underwriting models may not be a silver bullet.

Why it matters: Insurance models have struggled to keep up with the pace of climate-related claims, but there's no clear sailing for new insurance concepts.

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 distribute the underlying risk to preserve solvency during large qualifying events.

State of play: Those historical models are less reliable in a world with increasingly severe weather events due to climate change, so some insurance startups have opted to explore alternative models.

• Sensible, for example, provides something akin to a guarantee product for consumers via a refund should a severe weather event impacts a ticketed or purchased experience.
• This is what Aon Securities CEO Paul Schultz calls a parametric approach to risk diversification, where either the qualifying event happens or doesn't.
• It's a common model in less mature markets as well, Schultz explained, due to the unreliable nature of historical data.

Yes, but: Inflation is taking its toll on the insurance industry broadly, and young startups with lines of credit may not be able to keep up with the more established groups.

• Asset prices are increasing faster than insurance policies are revised, meaning the company could end up paying out more than it collects should a qualifying event hit a rapidly appreciating asset.
• Credit markets are tight on the heels of yet another interest rate hike, and early-stage insurance startups may not be able to convince investors to overlook the underlying business costs for an unproven model.
• And those that can get credit face increasing costs, pushing margins even lower.

The bottom line: Experimental models do not insulate startups, and investors by extension, from the risky future ahead.