June 28, 2022
In April, Steve Bennett, Demex’s Chief Climate Officer, and I had the pleasure of meeting with members of the National Association of Insurance Commissioners (NAIC)’s Climate and Resiliency (EX) Task Force to discuss climate-related risk solutions.
The NAIC sets standards for the U.S. insurance industry through data and analysis that drive effective regulations and customer protection. The NAIC formed the Climate and Resiliency task force in 2020 to evaluate financial regulatory approaches to climate risk and resiliency and consider innovative industry responses and solutions to climate-related risk. The task force’s primary objective is to foster dialogue and movement surrounding climate resiliency.
Demex has pioneered a comprehensive approach to climate risk management to immunize organizations from the financial repercussions of volatile weather. Our customized solutions for modeling, assessing, and managing climate-related risks provide the necessary tools that allow organizations to protect against the costs of volatile weather events. These products and services provide essential protection for businesses and communities facing increasingly severe weather patterns.
Risky Reality: Extreme Weather
Extreme weather events have become 5 times as common in recent years versus 50 years ago. Severe weather conditions from snowfall, precipitation, and high and low temperatures are increasingly common. The frequency of these events is fueled by climate change, which has altered oceanic and atmospheric conditions and shifted global weather patterns.
There is no doubt that extreme weather leads to higher costs. Economic losses from extreme weather events during the 2010s increased by 7 times compared to the 1970s. In the U.S., there were more than double the number of weather events that cost at least $1-billion in the 2010s compared to the 2000s.
At Demex, we call extraordinary weather events which cost between $1-billion and $2.5 billion “kits,” and distinguish them from larger catastrophes, or “cats,” which cost over $2.5-billion each. “Kit” events have an increasingly strong positive trend over time, resulting in major financial losses for individuals and businesses.
As the charts below indicate, the number of both “kit” and “cat” events has increased significantly since the 1980s. The cumulative number of kit events has surpassed the count of cat events in the last decade and continues to trend upward. While associated with lower damage costs individually, kits are becoming more and more common, and pose an increasingly significant economic threat.
Businesses must address the increasing burdens, financial risks, and costs of climate change. Traditional insurance policies are creating an “insurance gap” as a result of these “kits.” Demex provides the necessary insurance solutions to bridge this gap.
Understanding this risk is the key to managing it. The severity and probability of risks will inform how the risk should be approached. Demex works to custom-fit solutions to mitigate the risk presented by weather events.
Localized Weather Effects
Climate change is often referred to as global warming, but the reality of changing climate patterns is not that simple. Climate risk differs from one place to another and shifting weather patterns drive a range of conditions that threaten or benefit businesses and property owners with economic loss or gain. The individualized nature of climate-linked economies means that every business will be uniquely impacted by weather volatility.
For example, recent rainfall trends vary greatly across the islands of Hawaii. Rainfall trends in Kahului are strongly increasing and the area is getting significantly wetter, while rainfall trends on the island of Oahu have remained relatively constant.
In an ever-changing natural environment, climate risk is location specific and solutions must be hyper-localized to meet these shifting needs. Climate-related risk management requires customization to meet the individual trends and variability posed by the fluctuating weather patterns of each business location.
Demex helps companies become climate resilient by modeling localized climate conditions, assessing financial climate risk, and building innovative coverage options to protect that risk. We model by calibrating global weather data with a customer’s specific location and financial outcomes. We then assess a baseline financial performance with a focus on near-term risk. Finally, we build risk management structures that fit the risk using parametric insurance policies and reinsurance.
Demex takes a three-step approach to climate risk management: model, assess, and manage.
- Model – We create custom parametric models to capture weather exposures across your portfolio.
- Assess – Using a market risk framework, we assess how weather variability is impacting your economics.
- Manage – We integrate parametric models and climate assessments into a bespoke, comprehensive risk management solution/program.
The Demex Solutions Center is the foundation of the climate resilience we deliver; it powers the complex data analysis required to solve your unique challenges. Clients use our proprietary platform to derive tailored recommendations and can also license the Solutions Center to build their own applications for innovation beyond our products.
Our policies provide custom management solutions that protect against extreme weather events including snow, rain, and fluctuating temperatures.
The Demex team analyzes data in a way that ultimately frames risk in terms of management strategies. Climate Risk Appraisals, our assessment step, directly addresses a business’ individual risk. Climate appraisals analyze weather trends using two factors: trends and variability. If a weather pattern, like rain or snow, is becoming more frequent, its trend score will increase. If the range weather pattern increases from year to year, the variability score will be higher. This enables hyper-localized weather analysis, which informs climate risk management.
Risk management plans will obviously differ depending on the trend and variability of a location. In Colorado, for example, climate change is felt in thousands of hotels and resorts across the state. Snowfall trends in the mountainous ski areas significantly decrease from year to year, with the image below highlighting locations with the strongest decreasing snowfall trends. In 2021, Denver went 230 days without snow – the second-longest stretch in a century. Demex can structure coverage that provides financial recovery for resorts in these areas facing revenue losses or increased expenses (perhaps from snow-making) during these unusually low snowfall years.
Insurance innovators are building financial resiliency in the face of climate volatility. Parametric solutions fill the insurance gap left by standard policies and are the essential solution to address rising exposures and the resulting coverage gaps. Coverage is based on an objective policy triggering event that is modeled and aligns with the policy holder’s individualized risk appetite. If the triggering event occurs payment is triggered immediately, allowing for a rapid recovery. These policies augment traditional indemnity-based coverages and provide increased flexibility, which can create ideal solutions for these difficult weather exposures including excess or drought of precipitation (rain, snow), temperature (hot, cold), and wind.
Parametric insurance is already getting embedded into existing admitted insurance policies, seamlessly protecting policyholders from the cost of severe weather events. These coverages offset the cost of volatile weather and secure financial resiliency in the face of climate change.
For example, extreme temperature insurance powered by Demex and Vave delivers coverage for policyholders in the event of extreme cold weather. This cutting-edge insurance product bundles parametric coverage within a standard insurance policy. It simplifies the underwriting process and creates efficiencies throughout the policy life cycle. Extreme Cold Protection delivers each policyholder an automatic cash payout whenever a predefined temperature trigger is met, for example, weather below 20 degrees Fahrenheit in a specific zip code in Texas. The Demex Application Programming Interface (API) provides daily updated temperature trigger calculations for all US ZIP codes.
Potential for Scale
Business leaders, investors, and regulators are demanding increased transparency about climate impact. The TCFD and SEC proposed rules for Climate Disclosures are impacting all of us in different ways. ESG-R programs are getting increased scrutiny and organizations need to understand the drivers and consequences of climate impact.
Demex provides a comprehensive solution for climate risk management, not just a product delivery infrastructure. We’ve built a robust, end-to-end ecosystem that leverages the trust and relationships we’ve cultivated over decades. At Demex, we empower our clients to become climate resilient and thrive.
InsurTech is paving the way to climate resilience: parametric insurance is easily adapted and customized to provide comprehensive solutions for financial volatility across many sectors, managing previously uninsurable climate risks at scale.
We were thrilled to participate in April’s meeting, contribute to the ongoing conversation regarding climate-related resiliency, and help facilitate dialogue between state insurance regulators, industry, and other stakeholders.