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Two Hottest Topics in Insurance: AI & Robotics and Climate

Artificial intelligence, robotics, and climate change are disrupting and transforming the insurance industry in unprecedented ways. These two meta-trends are creating both tremendous opportunities and vexing challenges for insurers as they seek to adapt to a rapidly evolving world. Let's take a closer look at how AI & robotics and climate change are impacting insurance.

AI and Robotics: The Rise of Robot Insurance

As robotics proliferate, a new category of insurance is emerging to cover the unique risks posed by robots - appropriately named robot insurance. Robots can malfunction and cause property damage or injuries, resulting in costly liabilities and lawsuits. 

Real-world examples of robot insurance in action include:

  • Energy company GE taking out a $2 million insurance policy from AIG to cover potential injuries or property damage caused by the robots working in its facilities

  • UK online grocery Ocado purchasing a £10 million policy from Lloyd's of London to insure against damage to its automated warehouse robotics systems

Robots operating in closed environments like warehouses, factories, and hospitals also require specialized insurance coverage. As these robots become more sophisticated and autonomous, the potential for costly accidents increases. In 2015, a robot at a Volkswagen plant in Germany killed a worker by crushing him against a metal plate. The incident highlighted the need for robust safety protocols and insurance coverage for industrial robotics applications.

The rise of autonomous vehicles on public roads presents another significant opportunity for insurers. According to a report by Accenture, autonomous vehicles could shrink the auto insurance sector by 71% by 2050, as accidents become rarer. However, the shift in liability from human drivers to automakers and software providers will create new categories of risk that insurers must underwrite. In 2020, Tesla launched its own insurance product specifically for its semi-autonomous vehicles, which uses real-time driving behavior data to price policies.

Generative AI applications like ChatGPT and DALL-E are another frontier for insurance innovation. These powerful AI systems can create highly realistic text, images, and even videos, blurring the line between human and machine-generated content. This raises thorny questions around intellectual property rights, data privacy, and content moderation that insurers will need to grapple with. Some companies are already exploring insurance products for generative AI, such as Assurant's partnership with AI video platform Synthesia to offer liability coverage for deepfakes.

Climate Change: Confronting Denial

While AI and robotics present exciting innovation frontiers for insurance, climate change is an existential threat that will define the industry's future. The escalating frequency and severity of natural catastrophes like hurricanes, floods, and wildfires is pressuring loss ratios and challenging insurers' risk models. According to the world's largest reinsurer Munich Re, global losses from natural disasters reached $210 billion in 2020, with $82 billion of those losses insured.

Despite the scientific consensus around anthropogenic climate change, climate change denial persists, including within the insurance industry. A 2018 study published in the journal Environmental Communication found that some U.S. insurers have funded climate denialist lobby groups, even as the industry at large has publicly expressed concerns about global warming.

This alarming finding underscores the need for insurers to align their investment policies with the climate science. Pressure is mounting on carriers to divest from fossil fuels and channel more capital toward clean energy technologies. Activist groups like Insure Our Future are campaigning for insurers to immediately stop insuring new oil and gas projects.

Real-world examples of insurers taking action on climate change include:

  • Swiss Re announcing in 2020 that it will completely phase out thermal coal exposure in its treaty business by 2040

  • Allianz ceasing to offer insurance for coal-fired power plants or coal mines as of 2023, and launching a new line of green energy insurance solutions

  • AXIS Capital committing to not provide new insurance or facultative reinsurance for oil and gas projects in the Arctic National Wildlife Refuge

Climate change is already making homeowners insurance unaffordable or unavailable in high-risk areas. In Florida, which is heavily exposed to hurricanes, insurance premiums have tripled in some parts of the state over the past five years. Many insurers have pulled out of the Florida market altogether, leaving homeowners with fewer and more expensive coverage options. The state-run insurer of last resort, Citizens Property Insurance, has seen its policy count swell to over 1 million as private insurers retreat.

California's devastating wildfires in recent years have created a similar crisis for homeowners insurance. In 2020, insurers non-renewed 235,250 homeowners policies in the state, a 31% increase from 2019, according to the California Department of Insurance. In wildfire-prone counties like Sonoma and Napa, non-renewals jumped by more than 100%. As with Florida, California's insurer of last resort, the FAIR Plan, has become the only option for many homeowners.

Forward-looking insurers recognize that climate risk is investment risk. BlackRock, the world's largest asset manager with $8.7 trillion under management, has put sustainability at the center of its investment approach. Its CEO Larry Fink has been outspoken on the risks that climate change poses to financial markets and companies' license to operate.

In addition to mitigating their own climate exposures, insurers have an opportunity to incentivize policyholders to adopt risk-reducing behaviors. For example, Nationwide offers premium discounts for LEED-certified energy efficient commercial properties. PURE Insurance grants a premium credit to coastal homeowners who install automatic shutters to protect windows from hurricane debris.

As climate risks escalate, parametric insurance is gaining traction as an alternative to traditional indemnity-based coverage. With parametric insurance, claim payouts are automatically triggered when pre-specified parameters are met or exceeded, such as wind speed or rainfall levels. This allows for faster payouts untethered to on-the-ground loss assessments.

The Caribbean Catastrophe Risk Insurance Facility (CCRIF) is a parametric insurance pool that provides hurricane and earthquake coverage to 23 Caribbean and Central American governments. When Hurricane Dorian struck the Bahamas in 2019 as a Category 5 storm, CCRIF rapidly paid out $12.8 million to the Bahamian government based on the storm's intensity level.

Insurers are also exploring how technologies like IoT sensors and drones can enhance climate risk monitoring, loss prevention, and claims management. Floodbot by UK flood specialist Previsico uses IoT sensors to provide real-time flood alerts, allowing at-risk properties to deploy mobile flood defenses. Australian insurtech Descartes Underwriting analyzes satellite imagery with AI to assess crop yields and automate claims payouts to farmers impacted by droughts or flooding.

Practical Tips for Insurers to Stay Ahead

As the twin forces of AI and climate change transform the risk landscape, insurers have no choice but to adapt and innovate. So what can insurance companies do to stay ahead of the AI & robotics and climate change curves? Here are some practical tips:

  1. Partner with or acquire insurtech startups that are developing cutting-edge AI applications for insurance. Don't try to build everything in-house.
  2. Develop specialized insurance products for emerging risks like autonomous vehicles, industrial robots, and generative AI. Be proactive in understanding and underwriting these new risk categories.
  3. Collect and analyze granular data on climate risk exposures using technologies like IoT sensors, satellite imagery, and machine learning. Use this data to dynamically price risk and incentivize risk mitigation.
  4. Educate customers and society at large about climate risk and resilience. Leverage the insurance industry's risk expertise to shape public policy and drive collective action on climate change.
  5. Collaborate with stakeholders across the public and private sectors to close the global climate risk protection gap. More than 90% of natural catastrophe losses in developing countries are uninsured.

The insurance industry has a critical role to play in building a more resilient and sustainable world. By proactively embracing AI, robotics, and climate action, insurers can not only survive but thrive in the age of disruption.