The risks posed by climate change are no longer speculation. The deadly heat wave that swept across western North America in June would have been “virtually impossible” without climate change, a group of leading global researchers has determined. Flooding, extreme heat and tropical storms are just some of the “1-in-1,000-years” events that have already arrived.
Commercial property owners have moved toward seeing climate change as an economic risk, not just a social responsibility, and its impact on insurance premiums is increasingly an area of concern. However, climate change is still a complex and relatively new issue to add into an already burdensome load of risk data that, if poorly managed, is pushing up premiums and affecting property valuations.
According to Hemant Shah, CEO and co-founder of Archipelago, which has created an AI-powered platform for commercial property owners to manage risk data and improve their insurance outcomes, the question has become, how can property owners work with insurers to create an accurate picture that includes climate change risk?
“Climate change risk is increasingly at the center of priorities among large institutional real estate organizations,” Shah said.
“They own tens of trillions of assets in real estate and are taking it very seriously. They know it will affect their balance sheets for decades. But how can they ask the right questions about the resiliency of the properties they are buying? How can they be satisfied that they understand the potential risks both now and over time? The challenge they are working through now is how to make these questions actionable. It’s still early days.”
The Cost Of Poor Data
Even without factoring in climate change risk, applying for commercial insurance is a time-consuming process for all involved. Each year, a property owner’s risk management team creates a spreadsheet for insurers called the statement of values, which contains details such as an asset’s location, construction, occupancy and exposures. Insurers then rely on this information to provide a quote and an assessment of the owner’s risk management practices.
At the end of 2020, Archipelago partnered with survey provider TechValidate to conduct a survey of how submission data quality affects property insurance underwriters. A staggering 98% of underwriters surveyed said they were dissatisfied with the data they receive, 80% said data was missing and 67% worry that the data they receive is inaccurate.
Asset owners who might think this is a problem for underwriters alone would be wrong; 90% of underwriters said that the quality of the submission impacts pricing, and 52% said that impact can be 20% or more. Underwriters often decline to quote at all if the submission quality is too poor.
Climate change risk is only increasing the burden on both property owners and insurers. So there’s a real argument for streamlining this process, which is what Archipelago’s platform has been designed to do. Archipelago's secure AI-powered platform uses machine learning to digitize risk data, analyze and enrich that data, and provide a secure environment to connect risk managers, brokers and insurers during the insurance renewal process.
Connecting the data also breaks down silos. Shah said that in a large organization, the business department focused on sustainability and the environment is often not connected to the risk management or insurance department. Providing a unified platform provides more opportunities for these areas of the business to partner on climate change risk and elevate the issue of climate risk throughout the company.
A Move Away From Single-Year Policies
Shah said another challenge is the nature of insurance policies. They are almost always written on a one-year basis, but property owners need to assess risks that could happen over the lifetime of their properties.
“As a property owner, when you think about the economic impact of climate change, you’re trying to project it over the life of your ownership of the asset,” Shah said.
“What decisions can we make now to mitigate that total cost risk? What’s the ROI? Yet because insurers price year-on-year, it can be hard to see the pricing signals that owners need to justify their investments and reduce their risk. There is a disconnect.”
Shah has been part of discussions in the industry about whether multiyear policies are possible. This would incentivize property owners even further to think about risk more in the long term.
“A clear price signal from insurers to encourage the right behaviors among asset owners would be beneficial,” Shah said. “I think insurers are very on board with the notion of climate change risk. They want to incentivize customers to mitigate risk and become more insurable.”
As the discussion surrounding multiyear policies continues, asset owners will continue to move from understanding climate change risk to making decisions about managing these risks. With so many factors involved, the ability to clearly manage and analyze data becomes all the more important.