Climate change risks will lead to innovation in the US insurance market

Crucial for US insurance regulators to support innovative product development.

In 2020, increasing losses resulting from climate change will accelerate the need for innovative responses in the US insurance market. 

As losses for the insurance industry from natural catastrophes resulting from climate change continue to climb in the US, the result will be declining availability of insurance coverages especially in certain geographies and lines. We have already seen this, for example, in the aftermath of record wildfire losses in California over the past couple of years, as a result of which insureds have found it increasingly difficult to renew/buy insurance coverages from admitted insurers.  

The resulting need for insurance coverage will likely be filled to a certain extent by players such as the surplus lines market. However, both the insurance industry and insurance regulators in the US will need to be increasingly innovative in helping US insureds prepare for the consequences of climate change.

As the experience with natural catastrophes that are increasing in intensity and resulting losses due to climate change builds up, the insurance industry will rapidly respond by updating and adapting their models for the evolving risks as well as by developing new products to meet the needs of US insureds. The responses will need to include the greater use of products such as parametric insurance, which until now has not gotten much of a foothold in the US (including due to questions about how parametric fits within existing US insurance laws and regulations). 

As insurers deploy improved models and innovative products to meet the needs of insureds, especially in regions of the country that are particularly susceptible to the effects of climate change, it will be crucial that US insurance regulators help foster such innovation to ensure that the public in their states is able to prepare for climate change.

Read the rest of our insurance predictions here.