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 damage an asset.
- 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.
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