Home Global warming Inflation and rising credit hurt weather insurance startups

Inflation and rising credit hurt weather insurance startups


Insurance startups are eyeing the climate space as historic models struggle to keep up, but experimental underwriting models may not be a silver bullet.

Why is this important: Insurance models have struggled to keep pace with climate-related claims, but there is no clear sail for new insurance concepts.

The context: Traditional insurance coverage for businesses and individuals relies on historical data to predict the likelihood of a qualifying event and adjust the policy accordingly.

  • Insurance companies themselves are insured through reinsurance, which helps to spread the underlying risk to preserve solvency during large qualifying events.

State of play: These historical models are less reliable in a world of increasingly severe weather events due to climate change, so some insurance startups have chosen to explore alternative models.

  • Sensible, for example, provides something akin to a warranty product for consumers via a refund if a severe weather event damages an asset.
  • It’s what Aon Securities CEO Paul Schultz calls a parametric approach to risk diversification, where the qualifying event does or does not occur.
  • It’s also a common pattern in less mature markets, Schultz explained, due to the unreliable nature of historical data.

Yes, but: Inflation is wreaking havoc on the insurance industry as a whole, and young startups with lines of credit may not be able to keep up with more established groups.

  • Asset prices are rising faster than insurance policies are being revised, meaning the company could end up paying more than it cashes in if a qualifying event hits a rapidly appreciating asset.
  • Credit markets are stretched following yet another interest rate hike, and early-stage insurance startups may not be able to convince investors to overlook a model’s underlying business costs untested.
  • And those who can get credit face rising costs, pushing margins even lower.

The bottom line: Experimental models do not insulate startups, and investors by extension, from the risky future that awaits them.