AI for Climate Risk Assessment in Insurance

Sam Naji, Joseph Tekriti
June 13, 2023
3 minute read
Table of Contents

Reducing Climate-Related Property Risks with AI:  

Some say, "Technology will solve climate change!". Leaders from ZestyAI, an AI-enabled property and risk analytics platform, have highlighted the significant potential of AI in helping US property insurers address the challenges associated with climate change in their underwriting models. As the need to evaluate the price and offset risks related to climate change becomes increasingly crucial, the integration of AI into the insurance industry offers significant benefits to insurers and customers.  

AI's Potential in Better Risk Analysis

ZestyAI leaders emphasized that adopting AI can bring significant benefits to insurers. This allows them to better evaluate, price, and mitigate risks. By applying AI models, insurers can protect their market share and improve their profitability margins. Specifically, individuals such as Kumar Dhuvur stated that the principal value lies in creating a better risk-analysis model that accurately assesses and prices the underlying risks.  

AI and Risk Management

Other individuals, such as Attila Toth, stressed AI's benefits to risk management. Specifically, by aptly utilizing AI-powered technologies, such as machine learning and natural processing models, insurers gain valuable insights into risks (based on a score) and underlying risk drivers for individual properties. Such AI-powered models enable insurers to assess and reduce risks at an individual property level rather than disputing the risks across multiple properties, i.e., across their portfolio. Upon a disaster, AI-powered models can also help determine whether the costs of risks should be borne by individuals, policymakers, or the government. 

ZestyAI leaders also discussed the significance of AI solutions' interpretability. Transparency in risk-assessing AI models is crucial for passing regulatory checks and gaining trust from insurers and insurance firms. ZestyAI outlined an approach that includes providing reason codes. These codes justify the risk assessments and alternative recommendations for risk mitigation. This outline has had a positive impact and approval from regulators. Despite this, the application of AI in the insurance industry continues to face regulatory issues. Many say the application of AI in the insurance industry is still in its early stages.  

Transitioning to the Excess and Surplus Insurance Markets with AI Capabilities

AI plays a crucial role in the transition between the admitted market to the excess and surplus (E&S) insurance markets by providing AI capabilities, such as machine learning and language learning models. Kumar Dhuvur strongly believes that these capabilities help insurers appreciate the changing dynamics allowing for improved decision-making. Property-specific insights and their forward-looking risk management are vital for improving overall risk management and performance in such markets. Attila Toth further states that the (E&S) insurance market is powered by a crisis of not-so-accurate traditional risk models that spread risk across regions, highlighting the need for property-specific insights enabled by AI to address individual risk and ensure forward-looking assessments.  

The Graphic Truth: The rising (insurance) costs of climate change - GZERO  Media

Future of AI in Insurance

Now, in terms of future developments, ZestyAI and McKinsey envision a collision between exponential improvements of AI-powered products versus the relatively slower pace of regulatory and IoT developments. The leaders believe that technology is already developed enough to drive significant innovations. Sebastian Kaszz mentions, however, the insurance industry's risk-averseness and conservative regulatory conditions pose substantial challenges to full adoption in the insurance sector.  


In conclusion, the collaboration among homeowners, businesses, insurance firms, and the government are crucial for ameliorating the impact and costs of climate change. While AI gives the potential to significantly analyze and reduce the risks associated with property pricing, address climate change-related risks, and optimize insurance models, it can be further strengthened by adding more data and case studies. Specifically, by showing specific instances where AI-powered risks analysis and pricing models have been successfully implemented, e.g., infrastructural projects supported by relevant data and statistics, one can provide robust evidence of AI's effectiveness in addressing climate change risks. Such real-world examples and statistical evidence would improve the credibility of AI's potential across insurance and other industries. Therefore, by integrating AI aptly and overcoming regulatory and infrastructural challenges, the insurance industry would be able to provide decision-making processes and reduce risks contributing to a better environment.  


Acknowledgment: This article was skillfully crafted with the help of Ansai R.

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