How Climate Risks Are Reshaping Commercial Insurance Underwriting

Climate change is no longer a distant issue; its effects are being felt across industries, and commercial insurance is no exception. Underwriters are increasingly grappling with the challenges posed by extreme weather events, rising temperatures, and environmental changes.

These changes are prompting a significant evolution in how risks are assessed, priced, and managed. While commercial insurance software can help streamline underwriting processes, it also enables underwriters to leverage advanced data analytics and predictive models, improving the accuracy of risk assessments and decision-making.

This blog explores how climate risks are reshaping the landscape of commercial insurance underwriting.

The Growing Impact of Climate Risks

Climate risks fall into two primary categories:

Physical Risks

Physical risks include direct consequences of extreme weather events such as hurricanes, floods, and wildfires. Businesses exposed to these events face heightened risks of property damage, operational disruptions, and supply chain breakdowns.

According to the World Meteorological Organization (WMO) , the number of weather-related disasters has increased fivefold over the past 50 years, causing $3.6 trillion in economic losses globally.

Transition Risks :

These arise from shifts in policies, regulations, and market expectations as the world transitions to a low-carbon economy. Companies in industries such as fossil fuels, heavy manufacturing, and agriculture may face increased scrutiny and operational challenges.

For commercial insurance underwriters, both types of risks demand careful consideration when evaluating coverage.

Key Changes Required in Underwriting Practices

Enhanced Risk Modelling

NatuTraditional risk models are being updated to incorporate the frequency and severity of climate-related events. In 2023, natural disasters caused £299bn to the global insurance industry .

Predictive analytics, geospatial technology, and AI-driven simulations are now standard tools for evaluating exposure to climate risks. For example, underwriters use flood mapping and wildfire risk assessments to more accurately price policies and set coverage.

Focus on Environmental, Social and Governance (ESG) Criteria

In a survey by PwC , 85% of global insurers have said that they believe ESG will impact all functions of their business.

ESG factors play a more prominent role in underwriting decisions. Businesses that demonstrate strong environmental stewardship, such as using renewable energy or implementing sustainable practices, may be viewed as lower-risk clients. Conversely, companies with poor ESG scores might face higher premiums or reduced coverage.

Customised Coverage Solutions

As climate risks become more complex, underwriters are offering tailored policies to address specific needs. These might include parametric insurance for natural disasters, which pays out based on predefined triggers like rainfall levels or wind speeds rather than on actual losses.

Collaboration with Risk Managers

Underwriters are working more closely with businesses to encourage proactive risk management. This includes incentivising companies to invest in climate-resilient infrastructure, adopt green technologies, or diversify supply chains to mitigate potential disruptions.

Industries Most Affected by Climate Risks

Certain industries are particularly vulnerable to climate risks and are seeing significant shifts in underwriting approaches:

• Agriculture : Droughts, floods, and unpredictable weather patterns are increasing the risks associated with crop yields and livestock.
• Construction and Real Estate : Properties located in high-risk flood zones or wildfire-prone areas face higher premiums and stricter policy terms.
• Energy : Transitioning to renewable energy sources brings unique challenges, while traditional fossil fuel operations face heightened scrutiny.
• Transportation and Logistics : Supply chain vulnerabilities, particularly for goods transported through climate-sensitive regions, are driving higher risk evaluations.

Challenges and Opportunities for Underwriters

The challenges facing underwriters in the era of climate change are significant. Reliable data on long-term climate impacts remains scarce, making accurate risk assessment difficult.

Additionally, evolving regulations around climate disclosures and sustainability add layers of complexity to the underwriting process. The growing frequency of catastrophic weather events also leads to increased loss ratios, as higher claims payouts can erode profitability.

However, these challenges also bring opportunities.

Climate risks are spurring innovation in policy offerings, such as green insurance and carbon offset coverage. Insurers that integrate climate resilience into their underwriting processes can position themselves as industry leaders, enhancing trust and credibility.

Additionally, collaborating with technology providers and climate scientists enhances underwriting accuracy and effectiveness, enabling insurers to offer more tailored and forward-looking solutions.

Preparing for the Future

As climate risks continue to evolve, underwriters must adapt their practices to remain effective. Investing in advanced risk modelling tools, staying informed about regulatory changes, and fostering partnerships with businesses committed to sustainability will be critical. By embracing these changes, commercial insurance underwriters can not only manage climate-related challenges but also play a pivotal role in building a more resilient future.

The impact of climate change on commercial insurance underwriting is undeniable. By integrating climate risks into their assessments, underwriters are reshaping their approach to better protect businesses in an uncertain world. As the frequency and severity of climate events grow, the industry must continue to innovate, adapt, and lead in supporting climate resilience for the businesses it serves.