How Cutting Edge Technology Helps Firms Avoid Being Burned by Climate Change
The impact of climate change on extreme weather events has become all but unavoidable in recent years. From stronger storms and hurricanes, to more frequent and damaging wildfires and floods, insurers and consumers alike are faced with an unprecedented challenge when it comes to assessing the natural risks posed to properties in the United States, and indeed around the world.
Population growth and urban expansion have also contributed to putting more American homes, literally in the line of fire. In the Western United States, in particular California, wildfires over the last 5 years have been among the costliest from a property damage perspective on record. According to AON’s 2021 ‘Wildfire Risk in the United States’ report, of all wildfire losses paid by the insurance industry since 1950, a remarkable 70 percent have occurred since 2015 alone including over $12 billion in insured losses in 2017, 2018 and 2020. The new prevalence of wildfire has disrupted the normal course of life in many parts of the country (San Fransiscans now plan for ‘smoke season’, and potential homebuyers now want to know the fire risk before they buy). The insurance industry, having been burned (pun intended) by losses, has been faced with a new challenge – mainly – how can it more efficiently and effectively assess the risk profile of properties, and take a dent out of the billions of dollars in losses it has incurred from increased wildfire activity.
For insurers, the challenge has become identifying and assessing the level of risk on an individual property basis, to provide a more accurate policy – but with the growing rate of urban expansion, the sheer volume of homes needing policies in these regions, and the climate change that has made older models far less effective, that task is easier said than done.
As with any industry, the most significant challenges tend to beget the most consequential innovations. Faced with not only the recent expansion of wildfire risks in the region, but also the almost certain continuation of the trend in years to come, major insurance companies have turned to new and innovative insurtech firms for solutions.
Factors like roof characteristics (size, composition, age), property (size, vegetation), presence of pool, debris, and presence of trampoline, as well as recent fire data all need to be taken into account to provide a more fulsome and accurate picture of the insurability of any given property.
Some significant advances towards improving the efficiency and accuracy of these efforts have come in the way of aerial and satellite imaging paired with advanced machine learning technology and data science techniques. This innovation is being driven by a small number of insurtech firms developing real impact-making technologies
At Centana, our focus is on identifying companies operating on the forefront of financial technology. We wanted to find companies who had real, actionable solutions to this industry-wide insurance problem.
Enter San Francisco-based Zesty.ai, an insurtech firm that leverages powerful data and analytics models to analyze and assess a wide array of data inputs, including aerial imagery, weather data, permits transactions and sensor data to provide a complete risk profile for each individual property, residential and commercial, it assesses.
What Zesty has built is a property analytics platform, and the flagship products is a risk rating model that is far more powerful than anything that the major insurers had prior access to, and is capable of handling the significant volume of property-specific analysis now required to keep up with the increased impact of extreme weather and climate related events. According to Milliman, one of the premier risk management firms, Zesty provides 12x more predictive power than typical insurance models.
While Zesty’s solution is applicable to risks posed by fire, wind, hail and floods, there are also significant future applications of their modeling capabilities that establish them as frontrunners in the future of insurtech. For example, their model can be applied to compare consumer-provided information against satellite imagery to provide insurers with the most up-to-date property information (ie. did the property owners make any changes to their property that would impact its insurability like a pool, or an extension).
It can also be applied to the benefit of the insured in much the same way – have they made changes to their property that make it less vulnerable to extreme weather events, and subsequently less costly to insure, for example. Ultimately, what Zesty is affording the insurers is a way to have a much more complete and accurate view of the properties they are assessing, and helping them help homeowner understand the risks they face (and even how to mitigate them).
The Future of Insurtech in the Face of Climate Change
We know that the frequency and severity of extreme weather events and climate related disasters are likely to continue to increase, even if significant advances are made in terms of reducing our impact as a society on the environment, let alone reversing the effects we’ve already made.
What we also know is that we’re only at the beginning of a massive expansion of companies and solutions aimed at reducing climate change’s impact on our environment, and the institutions we’ve come to rely on for our everyday life. The shifting and increasing demands climate change has, and will continue to place, on the insurance industry in particular will almost certainly continue to both demand, and breed new and innovative solutions, and we feel that in the years to come the insurance and insurtech industries are poised for an interesting and exciting period of increased innovation.