By Hasri Hamidan, MII Senior Vice President Product and Course Development
Typically, insurance companies base their business models and design their products on historical data. Specific to risks related to weather changes, companies will look at historical data from a few decades to understand changing weather patterns.
An increasing number of sophisticated technologies are built for the purpose of precision in modelling. With better technologies, risk factors can be pinpointed to specific risk areas. If an area is prone to flooding, companies will have to insure more homes in low-risk areas to offset the potential costs. However, as climate change intensifies in frequency and severity, historically low-risk areas have become risk areas.
According to Jason Thistlethwaite, an assistant professor at the University of Waterloo who studies insurance and climate change, climate change has changed the equation, making the past no longer indicative of the future. Hence, many insurance companies use third party companies that they say take climate change into account. But an analysis Thistlethwaite conducted earlier this year found those third-party models often do not integrate climate change as much as insurance companies think they do.
Growing Business for Reinsurance
Insurance companies buy their own insurance to control losses for large disasters such as typhoon or earthquake. This transfer of risk to another entity is known as reinsurance. Reinsurance helps to take some of the risk away from insurance companies.