Risk managers urged to modernize climate models
WTW is urging risk managers to modernize their approach to climate-driven losses as traditional insurance models become less effective. New guidance advocates for advanced methods to identify and quantify climate risks, supply chain exposures, and related cyber threats.
- Traditional insurance models are proving insufficient as they primarily rely on historical data, which is becoming a less reliable predictor of future losses due to the increasing frequency and severity of extreme weather events. - In 2024, global insured losses from natural disasters were estimated at $154 billion, which is 27% above the recent 10-year average of $121 billion. Severe convective storms were a major contributor, accounting for $64 billion of the insured losses. - Advanced modeling techniques are now integrating artificial intelligence, satellite imagery, and predictive analytics to create more precise risk assessments that are not solely dependent on historical data. Companies like Munich Re and Swiss Re are at the forefront of implementing these advanced models. - Parametric insurance is emerging as a viable alternative, providing rapid payouts based on pre-determined triggers like wind speed or rainfall levels, rather than lengthy loss adjustment processes. This approach is also utilized in catastrophe bonds to transfer risk. - The protection gap, representing the portion of economic losses not covered by insurance, was a significant 63% in 2024, amounting to $263 billion. This highlights the vast amount of climate-related financial risk that remains uninsured. - Climate change is increasingly disrupting global supply chains, with events such as floods and droughts leading to significant manufacturing and logistics delays that are often not adequately covered by traditional insurance policies. - The interconnected nature of modern supply chains and the growing reliance on technology for risk management create new cyber threat landscapes, where cybercriminals can exploit vulnerabilities that arise following climate-related disasters. - Supervisory bodies, including the International Association of Insurance Supervisors (IAIS), are advocating for a globally consistent approach to climate risk, urging insurers to incorporate these risks into their financial stability and solvency assessments.
