While the devastation from Hurricanes Helene and Milton has given all of us a lot to think about these past few weeks, I'd like to focus for a minute on a far less obvious but intriguing issue that the insurance industry could address as it helps the world adapt to climate change: What if we can insure against heat?

A construction company can purchase insurance covering, for instance, flooding that would raise costs and delay the completion of a project. What if that company could buy insurance covering delays and cost increases because heat made it too dangerous for people to work outside for days or at least required that they be given lengthy water breaks inside? What if property owners could buy coverage for the direct damage that heat might do to a roof? 

The idea of insuring against the direct effects of heat came up at an interesting gathering last month of a group called CIRCAD that is combining academic research capabilities with insurance expertise to advance the industry's ability to mitigate the effects of climate change.

The two-day, inaugural meeting offered a number of provocative ideas, including the possibility of using nature-based solutions to limit damage from storms and of having communities tackle prevention and purchase insurance, in some sort of combination with the property insurance that individuals and organizations buy now. 

I'll get to those ideas and introduce you to CIRCAD, but let's start with heat.

Jordan Clark, a senior policy associate at Duke University, who made the presentation on heat at the CIRCAD meeting in Atlanta, said the first requirement is an agreed-on way to measure heat. That may sound simple. Heat is temperature, right? But humidity is also a factor when it comes to the effects of heat on people and property. And, if you're insuring people, what you really need to know is how the heat might be endangering them — which means monitoring biometrics such as heart rate, blood pressure, and perspiration. 

So, not simple, but it feels to me like there's opportunity there. If construction can be covered for heavy rain and flooding, why not heat? Phoenix faced 113 consecutive days this year with temperatures above 100 degrees Fahrenheit. If construction wasn't halted or at least slowed on some of those days, well, it should have been. 

At the least, heat considerations should become a factor in existing lines of insurance. Heat can clearly impair health and even lead to fatalities, and it does more damage to property than we may understand, given our reliance on historical records.

When I caught up with Jordan after the meeting, he said: 

"There is increased wear and tear on siding and roofing materials and HVAC units due to extreme heat and fluctuations.... Homes, for instance, may be more likely to suffer wind damage than underwriters understand.

"This past summer, there were drawbridges in the New York City area where authorities had to bring out a powerful sander because parts had expanded so much that the bridges couldn’t close. Amtrak had to suspend service at times because the rails just got too hot. Heat increases wear and tear on bridges and other infrastructure at the county and municipal level. Heat can cause big problems for the electric grid."

For now, Jordan said, "We’re mostly looking at the data and having conversations [about how to possibly insure against heat]. But we’ve been increasingly engaging with certain sectors, such as construction and some municipal and county governmental organizations. And we have a pilot project going with an electric utility that pays it if temperatures reach a certain level, to cover the expected cost of shutting off power and having to compensate its customers."

He said more, too, in an interview. If you've stuck with me this far, you might also be interested in an insightful interview I did with Veronika Torarp, a partner with PwC, for this month's ITL Focus, which, as it happens is on Resilience and Sustainability. Among other things, Veronika said this about heat:

"There's an opportunity for prevention, through different ways to help with cooling and generally reduce exposures. That certainly will have implications on workers’ compensation and other lines, such as business interruption, when operations are affected by extreme heat. The first step for insurers is understanding the risk exposure that more severe heat is introducing to the lines they're already writing and products they’re already offering their clients. Once you understand what that risk profile is, there's also an opportunity to think about if you can introduce specialized coverage or specific endorsements or specific products around heat exposures."

The sort of back-and-forth between those two interviews — between the theoretical approach of an academic and the let's-find-something-valuable-to-do-now approach of an insurance pro — is the raison d'être of CIRCAD. (The back-and-forth may even have happened between Jordan and Veronika in real time at the meeting, as Veronika was among the 100 or so who attended.)

CIRCAD (which stands for the rather ungainly Center for Innovation in Risk analysis for Climate Adaptation and Decision-making) structured the meeting as mostly a series of 10 proposals by the academics (from Duke and the University of Georgia) for projects that would be funded by the major insurance companies represented there. The goals, timelines, and dollar amounts were placeholders, really just designed to get a conversation started — and they did. I've seldom seen a meeting as energized as this one.

Among the other ideas that really popped for me was the notion of community-based insurance. Some perils clearly relate to community (if the brush in my yard ignites in a wildfire, it's a danger to all the houses around me, and vice versa) and some others can (a seawall is rarely an individual effort), so why shouldn't insurance happen at the community level? A community focus would certainly get people to cooperate more on prevention.

The insurance professionals raised plenty of questions. A key one concerned equity. If your house is up on a hill while mine is in a valley by the river, why should you pay as much for a community flooding policy as I do? Another concerned concentration of risk. Several insurance executives said any company offering community-based insurance would need to have a portfolio of risks — not just flooding in one region, but flooding spread geographically, together with wildfire and other perils. 

But the idea certainly sparked some interest and will be pursued. (If you want to read more, here is a long report on a pilot project for community-based insurance in New York City.)

The possibility of nature-based solutions also sparked considerable discussion. The idea is that some combination of individuals, organizations, insurers, and government might, for instance, plant mangroves along shorelines to prevent erosion in storms. 

You can already see the complexities here. It will take a lot of work to decide who pays what, given the benefits they receive. Nature-based solutions are also rarely quick fixes. Mangroves don't grow overnight. 

Still, I'm sure that idea will be pursued, along with those about heat, community insurance, and several others. We're in the very early days, but I suspect you'll be hearing in the next couple of years about projects with ties to CIRCAD.

I encourage you to check out the group. If you have questions, you might connect with Francis Bouchard, managing director, climate, at March McLennan, who is one of the leaders of the group. 

I think it will not only generate some important work about climate but could be a model for aligning research at universities such as Duke and Georgia with major questions and opportunities in the insurance world.

Cheers,

Paul

For more than a decade, the life insurance and annuities (L&A) industry has been undergoing a transformation driven by multiple factors. Since the financial crisis of 2008, the industry has faced a series of formidable challenges, including global uncertainty, volatile markets, and a worldwide health crisis. The overall industry has proven resilient, but in recent years we have seen a resurgence of the L&A market, and the impact of this boom will continue to be felt as we look to the future – even as we start to see rates decline.

Today’s savvy individuals view life insurance and annuities not only as a family security blanket but also as a smart investment option. In 2023, total U.S. annuity sales reached a record $385.4 billion, marking a 23% increase over the previous year, according to LIMRA. This trend is also mirrored in the data from our platform – which is currently used by a third of advisers in the U.S. and which shows a nearly 27% year-over-year increase in annuity sales to date, with no signs of slowing down. Payout rates for guaranteed lifetime annuities have been at their highest levels in more than a decade, driving increased demand from first-time buyers, who have been capitalizing on the higher interest rates of recent years. And even with the beginning of rate cuts, the L&A market is expected to remain resilient, with factors, including an aging population and a turbulent equities market, continuing to make structured annuities products attractive. What we have been seeing in recent years is a shift in consumer behavior, as more individuals recognize the dual benefits of financial security and investment growth that L&A products provide.

Let's delve into the recent developments in life insurance and annuities and explore areas where this sector can grow and evolve further to better support consumers, all while strategically positioning itself to meet future demands.

Consumers are increasingly driven by financial mindfulness

Today's consumers are increasingly vigilant about their spending habits, thanks in part to various technology tools that help them budget and track their expenses. Consumers are not only monitoring their expenditures but are planning for future stability, which includes setting clear financial objectives and aligning their short-term decisions with their long-term goals. When it comes to long-term financial planning and security, life insurance and annuities are the cornerstones. Further increasing focus on improving financial literacy and financial management will drive more demand in the L&A sector.

See also: Solving Life Insurance Coverage Gap

The lasting impact of an era of favorable rates  

The higher interest rates of recent years made life insurance products more attractive to consumers and more profitable for insurers, resulting in more competitive offerings. Higher rates also meant that the returns on the investments that back life insurance policies and annuities increased, which allowed insurers to leverage this era of higher profitability to innovate and diversify their product lines - enhancing their market appeal. This competitive edge has not only helped to attract new customers but to strengthen the loyalty of existing policyholders. Even with further cuts on the horizon after a prolonged period of high rates, the impact of this innovation, coupled with macro conditions such as the volatility of the stock market and a record number of Americans approaching retirement age, are likely to continue to fuel demand for annuities.

An opportunity knocks

The 2024 Insurance Barometer Study revealed that many middle-income Americans, those with household incomes ranging from $50,000 to $149,999, are still facing a significant life insurance coverage gap. Even though more than half of this group (54%) expressed a strong intention to purchase life insurance, a large segment of this 50 million-person demographic remains hesitant to pursue life insurance due to a lack of information. When it comes to empowering middle-income Americans to bridge their shortfall in coverage and more effectively protect their financial futures, it is crucial that the L&A space addresses this information gap. Both manufacturers and distributors of life insurance alike should consider how they can do this in the way policies are sold and distributed, with necessary support from technology. 

Plugging the gap 

While it is clear that a lack of knowledge around life insurance acts as a bottleneck, it also presents a significant opportunity. Various tools in the market today can help manufacturers and distributors make complex financial products easier to understand for clients. For example, advanced digital illustration software uses imagery that simulates real-time scenarios and predictive analyses to make the information much easier and clearer to understand. Tools like this also enable advisers to quickly provide more accurate and personalized recommendations. Moving beyond traditional sales methods, digital sales platforms, including e-applications and illustrations technology, offer interactive and engaging experiences that significantly enhance consumer education and power self-service decision-making processes. These advancements are critical in making life insurance more accessible and understandable, which ultimately drives higher adoption rates and closes the information gap.

Expectations of digital experiences remain high 

When it comes to any type of purchasing, it’s no secret that technology has revolutionized industries. Consumers are now setting the standard for digital transformation, and it is not a one-way street. Both customers and those who work in the L&A industry now expect seamless and connected solutions across all aspects of their interactions. It’s important for the L&A sector to take note. 

Digitization is not a one-time transformation, but rather it’s an evolution that requires companies to continually analyze and adapt. Initially, offering online purchases of insurance did significantly simplify processes. Yet, with the emergence of specialized software for functions such as case management and underwriting, many companies found themselves dealing with incompatible systems and fragmented data. This fragmentation of data substantially complicates product delivery due to simultaneously fragmented processes across the entire value chain, hindering speed and efficiency.

Although fragmentation can be a challenge, recent technology advancements are leading the industry toward more integrated, end-to-end systems that connect the entire L&A value chain, reducing complexity and improving not only scalability but also the end-user experience. 

See also: Revolutionizing Life Insurance Uptake in Younger Markets

The season of change 

Life insurance and annuities can serve as a valuable complement to retirement and investment strategies, offering significant advantages that enhance overall financial planning. To effectively support customers on their financial security journey, the L&A industry must answer the call of technology to build seamless experiences. Traditionally, the L&A sector accepted outdated technology and manual processes, but now the industry is realizing that it can no longer settle. As technology infiltrates the space, we are seeing a shift in how motivated the market is to accelerate digital transformation. This has sparked a newfound competitive spirit, with carriers and distributors prioritizing digitization efforts to enhance speed, accuracy, and customer experience -- from quote to commission. This mindset shift is a driving force for the industry. Those who choose to embrace it now will position themselves with a competitive edge in a season of change.

Traditionally, life insurance underwriting has relied heavily on medical data to assess risk, but the use of data is encouraging insurers to expand their approach by incorporating non-medical data sources, such as driving reports, credit histories, and public records. When used together, these data points create a fuller picture of the applicant, enabling more nuanced risk segmentation, offering new opportunities for both insurers and applicants. 

Medical and non-medical data are commonly used in life insurance underwriting workflows, but their simultaneous consideration is less typical. The 2024 Life Insurance Mortality Risk Management Study, published by LexisNexis Risk Solutions, highlights that, by combining medical and non-medical data, insurers can better segment applicants, even within populations traditionally deemed high-risk. 

The Shift Toward Data Integration

This trend toward diverse data usage within the underwriting process is a fundamental shift in how risk is assessed. For decades, life insurers used medical data alone to determine an applicant’s insurability. While effective, these methods are often time-consuming and costly. By introducing non-medical data into the equation, insurers can develop a more comprehensive understanding of an individual’s risk profile without relying solely on medical information.

For instance, combining medical data with non-medical insights uncovered that applicants with type 2 diabetes or asthma, typically considered high-risk, might still qualify for accelerated underwriting. Specifically, the research showed that 10% of applicants with type 2 diabetes and 60% with asthma have average or better-than-average mortality risk. However, an applicant with both a recent DUI record and a diagnosis of alcohol abuse was found to have a mortality risk five and a half times higher than average. This level of insight is invaluable for tailoring risk management strategies.

See also: The True Cost of Big (Bad) Data

Enhancing Operational Efficiency

The integration of medical and non-medical data is also transforming the operational efficiency of the underwriting process. The traditional underwriting model often involves multiple layers of review, including medical exams, lab tests, blood draws, and detailed health histories. This process can be slow and drawn out, leading to delays in policy issuance and, in some cases, applicant drop-off.

The study by LexisNexis Risk Solutions found that incorporating non-medical data could reduce the need for invasive medical exams and allow for quicker decision-making. Applicants who might have been flagged for manual review based on medical data alone could be reclassified for accelerated underwriting when their non-medical data suggests lower-than-expected risk. LexisNexis Risk Solutions was able to identify 60% of applicants with asthma who are good candidates for accelerated underwriting, as well as the 20% who warrant closer scrutiny in manual underwriting. With insights like this, carriers can more effectively analyze applications and make optimal use of underwriting resources. This not only speeds up the underwriting process but also reduces costs for insurers, making the entire operation more efficient.

Further, the ability to make faster, data-driven decisions is increasingly important in today’s market. Consumers are becoming more accustomed to seamless, digital-first experiences, and the life insurance industry is no exception. In addition to incorporating non-medical data, the availability of electronic health records (EHRs) can further expedite the life underwriting process. By having near-real-time access to both non-medical data and electronic health records (EHRs), insurers can quickly retrieve and analyze comprehensive medical information side by side with non-medical data, eliminating the need for time-consuming manual collection and review of paper-based records. A streamlined underwriting process that delivers quick results can significantly enhance the customer experience, making it less likely that applicants will abandon the process due to frustration or delays.

Broadening Access 

Another aspect of using more data is its potential to broaden access to life insurance, particularly for populations that are traditionally underserved. High-risk applicants, such as those with chronic conditions like diabetes or asthma, often face challenges in obtaining life insurance or are subject to higher premiums and lengthy underwriting processes. However, by considering non-medical data, insurers can identify segments within these populations that present lower-than-expected risks. 

The 2024 Life Insurance Mortality Risk Management Study found that among the 50 million individuals studied, 10% have type 2 diabetes. While traditionally not selected for accelerated underwriting due to a high standardized mortality rate (SMR) of 157%, the study found that 10% of these individuals could be good candidates for accelerated underwriting by combining medical and non-medical data. These individuals might otherwise be overlooked for faster processing under traditional models that rely solely on medical data. With more data sources, insurers can offer competitive rates and streamlined processes to applicants who may have been previously categorized as high-risk, thus expanding coverage to a broader demographic.

See also: A Data Strategy for Successful AI Adoption

Future Implications for the Industry

As the life insurance industry continues to evolve, the integration of medical and non-medical data is poised to play an increasingly important role in shaping the future of underwriting. This aligns with larger trends in the insurance sector, where data-driven decision-making is becoming the norm. Advances in artificial intelligence and machine learning are enhancing the ability to analyze complex data sets, enabling insurers to refine their risk models and make more informed decisions.

Beyond improving the accuracy and efficiency of risk assessments, this approach could also lead to the development of new insurance products tailored to specific risk profiles. Insurers might also use integrated data to identify emerging trends and risks within their portfolios, allowing them to adjust their strategies and offerings. As the industry becomes more data-centric, those who embrace these innovations will be better positioned to meet the evolving needs of their customers and remain competitive in a rapidly changing market.

Since the COVID pandemic, there's been a dramatic rise in costs associated with insurance claims. Many factors, including climate change, inflation, and the increase in the price of repairs or replacement items, have driven the increase. There is now enormous pressure to reduce insurance claims costs.

The good news is that several technologies can help. Leveraging AI and cloud computing and combining with rich data sets and low code/no code platforms can reduce costs and the time it takes to service claims. The hidden bonus is that these technologies go a long way toward improving the customer experience.

The key is to use these technologies to develop and deploy a comprehensive multiyear strategy with agile, incremental capability delivery—what we like to call the "perform while transforming" journey. 

However, embarking on a claims transformation and cloud adoption voyage can often lead to cost and schedule overruns. Migrating from legacy platforms to newer solutions is fraught with issues, including difficult business processes, manual, time-consuming tasks, and challenging integration issues. In addition, shuttering legacy systems, saving valuable records, and coming up with ways to address integration issues across multiple claims platforms can be very taxing. 

Understanding the potential issues is critical when heading down this path. Insurers must take a strategic approach to claims transformation to ensure short- and long-term success. 

Experience shows that using a modular plug-and-play architecture simplifies the transition. One strategy is to map a series of micro-transformations in three- to six-month increments to complete the transformation in one to two years. Taking a "bite-sized approach” to transformation leads to better results in both productivity gains and creating a better customer experience. For example, adding a claims tracker to customer-facing applications offers customers real-time insights into the claim status, reducing the number of calls to the agent.

One key to success is sourcing the correct data from existing platforms to ensure it matches what claims servicing agents see when fielding customer calls. For payments, it's the same—accessing information in digital apps in real time instead of via mailing checks leads to a better customer experience and improved customer retention. 

See also: How to Optimize Insurance Claims Management

Build a better data hub

Going down the path of claims transformation begins with a journey toward creating a solid data hub that democratizes valuable data. When a single data source is used throughout the entire company, all departments benefit. However, it's essential to establish access and control guidelines to ensure that data is used to generate positive results. IT leaders must design and implement data governance and access controls. 

One strategy is to use a multi-tenant architecture to separate company data and data from outside resources. Another option to get the most out of claims transformation is to design a system where the data hub can be segregated into domains with specific purposes for staging, transforming, testing, and providing data to the claims applications.

A benefit of this process is that IT departments don’t have to tackle challenging and complex legacy applications, reducing the core systems’ reporting and analysis workload. This helps reduce the time it takes to process claims since legacy applications frequently were built as “mods” or customized to meet the needs of the vendors’ products. IT leaders should also consider that new and improved data hubs can train GenAI solutions to create synthetic test data, which helps simplify test scenarios while not potentially tainting the original customer data. Over time, data hubs can deliver important training data for customer-facing AI solutions. 

See also: Why Do Insurance Claims Take So Long?

Keys to success for a claims transformation journey

While claims aren't the most exciting part of the insurance sector, they are a critical part of the overall success of any insurer. 

In today’s highly competitive insurance industry, company leaders focusing on designing and implementing a claims transformation increase their odds of financial success. Modernizing claims platforms, designed with incremental improvements to showcase benefits to stakeholders, will put insurers on a better path. 

While large-scale cloud reinvention and digital transformation may take a few years to implement, this type of agile approach greatly improves the claims ecosystem. It reduces costs, spurs innovation, streamlines operations, and leads to a vastly superior customer experience.

A new report on the cyber risk outlook by Allianz Commercial reveals that cyber claims have continued their upward trend over the past year, driven in large part by a rise in data and privacy breach incidents. The frequency of large cyber claims (>€1 million) in the first six months of 2024 was up 14% while severity increased by 17%, according to the insurer’s claims analysis, following just a 1% increase in severity during 2023. Data and privacy breach-related elements are present in two-thirds of these large losses. Overall, the total number of cyber claims in 2024 is expected to stabilize, following a 30% increase in frequency during 2023, which resulted in 700-plus claims.

The growing significance of data breach losses among cyber insurance claims is driven by a number of notable trends. A rise in ransomware attacks, including data exfiltration, is a consequence of changing attacker tactics and the growing interdependencies between organizations sharing ever more personal records. At the same time, the evolving regulatory and legal environment has brought an uptick in so-called "non-attack" data privacy-related class action litigation, resulting from incidents such as wrongful collection and processing of personal data – the share of these claims has tripled in value in two years alone.

See also: Top 10 Challenges for Data Security

"Non-attack" claims increase as privacy litigation ramps up

The rise in "non-attack" data privacy claims is the consequence of developments in technology, the growing commercial value of personal data, and a developing regulatory and legal landscape. For example, unlike the EU’s General Data Protection Regulation (GDPR), privacy regulations in the U.S. are less prescriptive and open to interpretation, while plaintiff lawyers are hungry for potential sources of revenue. This is creating a gray area that is ripe for class action litigation, the report notes.

We are seeing more data privacy breach claims in the U.S. where there is a growing trend for class action litigation against large U.S. and international corporations related to privacy violations, such as around consent and data usage. The cost of some of these claims can be even larger than a ransomware incident, in the hundreds of millions of dollars.

Over the last year, in particular, data breaches have emerged as one of the fastest-growing areas of U.S. class action litigation. Over 1,300 were filed across a wide range of data privacy regulations in 2023, more than double the number filed in 2022 and four times that filed in 2021, according to law firm Duane Morris. 

Multiple class action lawsuits have been launched against organizations across a wide range of industries, including healthcare, social media, and gaming, for using tracking tools such as Meta Pixel to monitor consumer behavior, while entertainment streaming platforms have also been targeted, alleging that they may have violated privacy protection rights. Large data breach events can also evolve into hyper litigation, with one event triggering a slew of class actions. More than 240 lawsuits related to the 2023 MOVEit data breach were consolidated into a single multidistrict ;itigation in October 2023. And with large numbers of claimants, there are incentives for parties on both sides to settle. The top 10 data breach class action settlements last year totaled $516 million, a significant increase over the $350 million recorded in 2022. 

The risk of data breach litigation is also growing in Europe. Heightened awareness of data protection rights, a rise in the availability of third-party litigation funding, and a more consumer-friendly litigation environment could make mass data privacy claims a reality, albeit not on the same scale as in the U.S., the report notes. 

AI to power and prevent future data privacy breaches

The fact that almost every industry is now using artificial intelligence (AI) will have a significant impact on the cyber and privacy risk landscape. AI relies on the collection and processing of vast amounts of data, including personal, health, and biometric information, for training AI models and making predictions or recommendations. But AI tools such as chatbots can create potential privacy, misinformation, and security risks if not properly managed. With so much data being collected and processed, there is a risk that it could fall into the wrong hands, either through hacking or other security breaches. There are also concerns around potential breaches of privacy laws, such as whether organizations have proper consent to process data through AI. 

See also: The Evolving Landscape of Cyber Risk and Insurance

From data exfiltration to data protection

Despite a general trend for increased investment in cyber security in recent years, many data breaches, including some of the largest mass data exfiltration cyber attacks over the past 18 months, are the result of weak cyber security within organizations or their supply chains. 

Such incidents can lead to a large claim involving regulatory fines, notification costs, and third-party litigation, in addition to extortion demands, first-party costs, and business interruption.

Data breach risks are best mitigated through good cyber hygiene, including strong access controls, database segregation, backups, patching, and training. Having better oversight of any cyber weaknesses in their supply chains is an area where many companies need to improve.

To read the full Allianz Cyber Risk Trends Report, please visit: cyber-security-trends-2024.pdf (allianz.com)

The Mediterranean region has been experiencing a severe drought, driven by a complex interplay of meteorological and hydrological factors. Northern Africa has been enduring these conditions for over six years, as have southern Italy, Spain, and Portugal for approximately two years. In Cataluña, in the northeast of Spain, the drought persisted for more than 1,300 consecutive days. 

Precipitation shortfalls 

The Mediterranean climate is characterized by hot, dry summers and mild, wet winters; but, since 2021, winter rainfall has significantly decreased, especially in the Iberian Peninsula and the Maghreb in Northern Africa. The Standardized Precipitation Index (SPI) has consistently shown negative anomalies across southeastern Spain and northern Africa, indicating a substantial lack of rainfall.

In March 2024, reservoirs in Cataluña were at just 15% of their capacity, though some relief came with late April and early May 2024 rainfall, raising levels to nearly 30% capacity.

Snow cover in the Alps and Apennines has also been well below average. Snow cover in Italy, for example, has decreased by 63% compared with the 2011–2022 average, resulting in reduced snowmelt and low river and reservoir levels. Furthermore, in 2023 and early 2024, Mediterranean temperatures were often more than 2°C above average, exacerbating the drought and increasing water demand.

Much-needed rainfall during the summer of 2024 has helped alleviate some of the drought conditions. As a result, since July, much of the region has shifted from a drought alert to a drought warning, reflecting the gradual improvement while underscoring the continuing risks.

See also: Parametric Insurance Can Tackle Climate Risks

Agricultural impacts and economic losses 

Drought has affected everything from municipal water supplies to the integrity of infrastructure. A significant consequence is the availability of water for agriculture. Spain, one of the largest European producers and exporters of fruit and vegetables, has been hit particularly hard. 

The olive, a cornerstone of Mediterranean culture and cuisine, exemplifies the drought’s severity. To meet growing demand, global olive production has tripled since the early 1960s. Spain leads the olive market, contributing 45% to the annual U.S. $15 billion global market; Italy and Greece each contribute around 10%.

However, warmer winters coupled with a prolonged drought have significantly reduced olive yields. In Spain, production fell to half of its usual volume in 2022–2023. 

The loss in olive production for Italian and Spanish growers during the 2022–2023 season was estimated at €4.15 billion (U.S. $4.45 billion). Retail prices for olive oil rose more than 2.5 times, making it one of the most shoplifted items in Spain. 

Recently, the situation has begun to improve, with production nearing the five-year average, indicating that prices are expected to start normalizing. 

While this story highlights losses to olive growers, many other Spanish farmers have suffered drought-related losses as well. With around 40% of Europe’s fruit production concentrated in Spain, concerns about global food security are mounting as the climate warms.

Government response and challenges 

The Spanish government has responded by approving €2.2 billion (U.S. $2.36 billion) in aid for the agricultural sector, including €40.5 million (U.S. $43.5 million) in insurance subsidies; however, most of Spain’s olive farmers will not benefit, as only 4.5% of the country’s olive grove area is insured.

Around 80% of Spain’s olive groves are rain-fed and highly vulnerable to changes in precipitation, with the remainder using irrigation systems. Increasing irrigation might boost olive production, but in recent decades it has caused environmental issues. In areas such as La Loma, Spain, the over-extraction of groundwater for irrigation has depleted aquifers, leading to long-term unsustainability.

See also: Climate and Catastrophe Risk Strategies

Climate change and future drought risk 

Climate change is expected to exacerbate drought in the Mediterranean by causing higher temperatures and shifting precipitation patterns. These changes will lead to faster soil moisture depletion and reduced water retention, affecting water availability for agriculture and other uses. 

WTW’s Global Climate Hazard Indices show that areas already under water stress, such as mid- and northern Cataluña, are likely to experience more frequent droughts (up to 1.5 times) in the next decade even under a "middle of the road" climate scenario. Conditions could worsen if we fail to shift to a lower-carbon economy and instead follow a high-emissions trajectory. For instance, drought frequency could significantly increase in the coming decades, not just to northern Cataluña but also to most of the Spanish Mediterranean coast under a fossil fuel economy. 

Other Mediterranean regions, such as southern France, Italy, and northern Africa, may also see more damaging drought, with frequency increasing on average 1.4 to 1.6 times in most areas by the next decade. 

Addressing drought risks and opportunities 

Companies can benefit from risk screening their portfolio of assets, operations, and supply chain to identify exposure now and under different future climate scenarios. This may lead to deeper dives on the most at-risk sites, to inform decisions about how best to avoid, reduce, or transfer risk. This type of work assists with risk management directly and informs disclosure and reporting on climate-related risks and opportunities, including the Corporate Sustainability Reporting Directive, International Financial Reporting Standards, and the Securities and Exchange Commission climate rule.

Companies are rushing to harness the benefits of generative AI (GenAI) tools such as ChatGPT, Copilot, and DALL-E. While GenAI promises cost savings and efficiency, however, customers still value genuine human connections. Striking a balance between AI-driven interactions and authentic human experiences is vital for earning customer trust and maintaining empathy.

See also: A Reality Check for Generative AI

Despite the excitement around GenAI, customers remain cautious, selectively trusting AI with low-risk tasks like crafting communications, creating meal plans, or generating workout routines. However, when it comes to more complex, high-stakes interactions, customers prioritize privacy and security. A 2023 study by the International Association of Privacy Professionals highlighted these customer concerns:

- 57% believe AI poses a threat to privacy.

- 53% think AI makes it harder to protect personal information.

- 81% worry about how their data will be used.

- 69% don’t trust companies to use AI responsibly.

While businesses explore AI for efficiency, customer-focused companies are addressing these concerns by being transparent about data usage and providing customers with control over their data. Offering human interaction channels alongside AI solutions helps maintain consistent and trustworthy experiences.

Customers Desire Authentic Empathy

In 2023, a peer-to-peer emotional support service faced backlash for using ChatGPT to communicate with users who expected human empathy in a vulnerable and challenging situation. While GenAI can deliver empathetic-sounding responses, customers were disappointed by the lack of authentic human connection, particularly in an emotionally challenging journey.

This incident underscores the importance of aligning empathy with customer expectations. For emotionally charged moments, such as dealing with insurance claims after the loss of a home or loved one, customers often seek real human support. As Danny Allred, leader of the conversational AI strategy at Nationwide says: 

“Companies need to consider how the transparent artificial empathy is transformed into authentic empathy with a person. This is where they will see real value in leveraging Gen AI at scale while still retaining the human element.”

By balancing GenAI’s scale with human intervention, companies can offer genuine empathy where it matters most.

See also: Balancing Technology and Empathy in Claims

Focusing on the Customer

To meet customer expectations, companies should assess key customer journeys and feedback to determine where human touch is needed and where AI can be beneficial. These interactions typically fall into two categories: consultative and transactional.

Consultative interactions require guidance, empathy, or emotional support. Here, human connections are essential, and AI should enhance, not replace, these interactions. For example, AI can support employees in providing empathetic service during claims or new product purchases.

Transactional interactions prioritize speed and efficiency, such as bill payments or routine policy changes. AI can automate these tasks, improving convenience for customers.

Recognizing the difference between consultative and transactional experiences allows companies to design more effective digital interactions. However, these distinctions aren’t always clear-cut. A transactional interaction may shift to a consultative one if the customer encounters issues, requiring empathy and human intervention. 

Customer journey orchestration technologies can help businesses identify these shifts in real-time, allowing them to intervene with empathy and prevent negative experiences. 

By ensuring that customer needs drive engagement strategies, companies can build trust and loyalty. Involving customer experience teams in AI strategy decisions ensures that AI is used to enhance customer well-being, ultimately helping them thrive.

Paul Carroll

I read a piece in the New York Times recently by Nicholas Kristof about how heat affects people in more ways than we realize. People fall off ladders much more often in hot weather. They make more mental errors. Kids learn less when they’re hot. 

And, of course, the world is continually getting hotter. 

So I was really interested to hear your presentation at the inaugural meeting of CIRCAD about your work investigating how insurers might develop coverages that protect against the problems heat causes. Could you tell me a bit about the genesis of your work?

Jordan Clark

My PhD focused on extreme heat. I did a lot of work with high school football players, for instance, to understand how they can better use heat stress information to safeguard their health. That kind of transformed into forecasting extreme heat. At Duke, over the past year and a half, we’ve had some engagements related to climate, insurance, and finance, and there are a lot of unanswered but pressing questions related to heat. 

It’s a tough peril to define and insure even though it’s affecting almost every part of society. We think about what heat does to contribute to hurricanes, convective storms, drought and wildfire, but the direct effects of extreme heat are largely under- or unmeasured. 

One of our goals is to influence public policy, and that can’t happen if the impacts aren’t understood and quantified.

Paul Carroll

You talked a fair amount about how heat contributes to injuries on the job and to people missing work. Could you talk a bit about what you’re thinking?

Jordan Clark

Let’s say a company is constructing a building. At the moment, it could buy insurance for heavy rain or flooding that would delay the project, but it can’t buy a policy that covers extreme heat that either diminishes workers’ productivity or makes it too dangerous for them to show up at all—something that is happening in Houston as we speak. 

Can we figure out a way to cover the workers for their lost wages? And can we cover the construction company itself for the costs of the delays? 

Heat is tricky. Maybe workers can work but only at 40% of their normal productivity, because they have to get out of the sun and take frequent water breaks.

Paul Carroll

Business interruption is another issue you raised.

Jordan Clark

Some small businesses and some municipalities have expressed concern about what can happen to foot traffic during extreme heat. They’re wondering if the reduction in sales is insurable. How would that work?

Paul Carroll

You also talked about open air workers in India who are getting some coverage for heat.

Jordan Clark

The idea is that, if someone has a food truck, for example, they could insure themselves for possible lost time. The India example isn’t directly applicable to the U.S. because that was kind of done through an NGO [non-governmental organization] and workers union. We would miss a lot of workers in the U.S. if we just did this through a union. 

There were also some interesting challenges there. The women who are part of the program had days when the insurance kicked in because the temperature exceeded a certain level, but the money didn’t arrive immediately, and they needed money that day or the next, so they actually went and performed some other labor outside. The insurance didn’t prevent them from exposing themselves to danger. They just got double the normal money. 

So timeliness of payment is something we have to work on. That maybe gets us into forecasting extreme heat, rather than just reacting to it after it happens. I think there’s potential there. 

Paul Carroll

I assume forecasting could also help better prepare for the extreme heat.

Jordan Clark

Right. People can sometimes get their health insurance premiums lowered if they show that they exercise regularly, and I can see construction companies having premiums reduced if they buy tents, buy fans, and so on. 

Paul Carroll

When I think about heat, I mostly think of what it does to people, but you talked about a number of ways that heat affects property insurance, too.

Jordan Clark

There is increased wear and tear on siding and roofing materials and HVAC units due to extreme heat and fluctuations. That issue starts to get into what the insurance industry is already covering, but insurers, relying on historical data, may not be accounting fully for what increasing heat is doing to undermine the integrity of structures and equipment. Homes, for instance, may be more likely to suffer wind damage than underwriters understand.

This past summer, there were drawbridges in the New York City area where authorities had to bring out a powerful sander because parts had expanded so much that the bridges couldn’t close. Amtrak had to suspend service at times because the rails just got too hot. Heat increases wear and tear on bridges and other infrastructure at the county and municipal level. Heat can cause big problems for the electric grid.

Paul Carroll

You also talked about how extreme heat can compound other problems.

Jordan Clark

Heat is an exacerbating factor on every peril. If a hurricane knocks out the power grid, then all kinds of people lose air conditioning and are vulnerable to heat. 

We’re already in dangerous territory anyway because of the rising heat. In manufacturing or warehouse settings, even in the South, they tend not to be air-conditioned. They just use big fans, and when temperatures get high enough the fans lose their ability to cool people sufficiently. Something like 50,000 schools in the U.S. don’t have air-conditioning. Those problems aren’t insurable, but thinking about the cost of upgrading to deal with temperature is mind-boggling. 

Paul Carroll

So you’re saying the first thing to do is to quantify the heat risk, the second is to determine if it’s insurable, and the third is to explore what coverage might look like. This is new territory. How far along are some of the early efforts?

Jordan Clark

We’re mostly looking at the data and having conversations. But we’ve been increasingly engaging with certain sectors, such as construction and some municipal and county governmental organizations. And we have a pilot project going with an electric utility that pays it if temperatures reach a certain level, to cover the expected cost of shutting off power and having to compensate its customers. We’ll mostly be talking about small pilot projects for the next year or two.

Paul Carroll

I figured this was early days. I’ll be fascinated to see where you go from here.

Thanks, Jordan.

The math on the aftermath of Hurricane Helene is the starkest I've ever seen. 

Accuweather says the total economic losses from Helene could be $225 billion to $250 billion. CoreLogic calculates that insurance could cover $10.5 billion to $17.5 billion, which includes as much as $6.5 billion from the National Flood Insurance Program. 

Those numbers leave an awfully big gap. Even if you take the low estimate for losses and high estimate for insurance, you're still left with more than $200 billion in uninsured losses. I'll say that again: The property owners and communities that were hit by Helene could be on their own for more than $200 billion.

And we have an even bigger storm, Hurricane Milton, headed right at the Gulf coast of central Florida and expected to make landfall Wednesday night. Milton will be the biggest storm to hit the heavily populated area in more than a century. 

If history is any guide, we'll muddle through. Homeowners will turn to their insurance, find that they likely don't carry the sort of flood insurance that would cover the damage Helene caused, and turn to the politicians. The politicians will posture -- especially given that we're lurching toward the end of the long presidential election season -- and eventually come up with a potful of money that will cover a large percentage of the damage. 

But I say it's time for a grownup conversation about where responsibility lies -- how much with homeowners, how much with insurers, and how much with each layer of government. 

We've meandered our way into a mess. And if Helene and Milton can't focus our attention long enough to address it, then I can't imagine what will. 

The basic role of the insurance industry is clear: We cover the claims we've been paid in advance to cover. We can't be expected to bear all the other losses, no matter how rich people may think the industry is. 

But there is an advisory role that I think insurers can play, at least during the recovery from Helene and Milton. As Veronika Torarp, a partner at PwC, says in the interview I did with her for this month's ITL Focus on Resilience and Sustainability, insurers are the ones that know best what precisely caused the damage and what interviews would have reduced or prevented the damage. So they can advise property owners on how to build more defensively so they do better in the next storm -- perhaps by installing steel roofs that can withstand hail. Insurers, she says, could even get involved with the Army Corps of Engineers, which has a massive budget and will be doing considerable work in the areas hit by Helene, to offer thoughts on how to rebuild roads and bridges in ways that best protect people and property. 

Insurers can also, of course, encourage people and businesses to buy more of the sort of coverage that will reimburse them for damage in the next storm, and, if history is any guide, customers will be more receptive to that idea for at least months, perhaps even a year or two. But big gaps in coverage will persist. They always have.

Some people will even leave the areas hit by hurricanes and find safer harbor elsewhere. The Wall Street Journal published a story Monday under the headline, "The Great Florida Migration Is Coming Undone." The article says hurricanes and other extreme weather are contributing factors. But I suspect that movement away from risky areas will be slow. Other than, perhaps, people whose homes have been destroyed, folks don't just leave their homes behind.  

With the role of insurers limited and with individuals unlikely to respond fast enough and robustly enough, that leaves government. 

I know, I know, hoping to fix the federal government is a fool's game, especially with today's hyperpartisan environment throughout the U.S. But I'll at least lay out what I think the two core questions are and suggest a way that the insurance industry might be able to provide a nudge in the right direction.

The first question is whether the federal government should play any role in covering, say, those $200 billion in uninsured losses from Helene. Historically, the answer has always been yes, but it's been a tortured yes. Republicans in Congress, in particular, get stuck between conservative principles (meaning they vote against additional spending, including for disaster relief) and the need to advocate for their constituents (demanding disaster relief when they are affected). 

For instance, as a congressman, Ron DeSantis voted against disaster aid for New York and New Jersey following Superstorm Sandy but has asked for federal aid for Florida as the state's governor after hurricanes and will surely request aid in the aftermath of Helene and Milton. Kentucky Sen. Rand Paul has been adamant about not writing a blank check for disaster relief but has supported aid to Kentucky following tornadoes and will surely be involved in seeking help following the damage that Helene caused. 

The conservative policy blueprint Project 2025 calls for major cuts to the Federal Emergency Management Agency (FEMA) and the elimination of the National Flood Insurance Program, but no right-minded politician would call for such measures now, in the face of so much need across the Southeast. That'd be a great way to lose a presidential election.

So we're probably stuck with today's tortured yes. Democrats in Congress will align with Republicans from affected areas and pass aid bills. But there will be lots of grumbling, And that grumbling will surely get more serious if the relief package for Heleme and Milton soars into the hundreds of billions instead of the usual billions or tens of billions.

That brings me to the second question, where the insurance industry can play a role and where what is likely to be a mammoth aid package could maybe even have an effect. 

The question is: What level of government should be responsible? Historically, the states have taken some responsibility but have pretty quickly turned to the feds. Even a rich state like California has asked for federal help on some massive wildfires. 

In some ways, the question is almost philosophical. Are we all in this climate change mess together, or should we take individual responsibility? Are those of us who live in California responsible for dealing with our wildfires, landslides, and earthquakes ourselves, or should Minnesotans, say, have to contribute to some grand aid fund that helps us, on the theory that they'll have their turn in the barrel some day? 

I'm not saying we should tell those hit by Helene, "We warned you you should buy insurance. Good luck with those $200 billion in uninsured losses. Maybe given your governor a call."

But I do think that pushing responsibility for disasters down from the federal level would help -- and insurers could facilitate conversations along those lines. Assigning responsibility at the state or even community level would get the people in danger to face the danger and understand that they have to do something about it, whether that's hardening their properties against storms, floods, and fires or whether that's buying insurance to cover the cost of repairs and recovery. 

States could be the enforcer here. They could assess the risks to communities and require that they purchase a sort of stop-loss insurance that would kick in if disaster strikes. The state would have incentive to get the assessments right and have communities be able to pay, because the state would be the backstop for the community up to a certain level of cost, before federal aid would kick in. (This article in the New Republic gets into this hybrid idea in some detail.)

My suggestion raises a zillion questions, including the obvious one about discrepancies between homeowners in a community. If I'm in the valley and you're on the hill, shouldn't I pay more toward the community flood insurance? 

But I'm tired of the status quo. It isn't working. We should use the attention that Helene and Milton will get to start the conversations that can make disaster recovery work better for everyone.

Cheers,

Paul

P.S. The community-based insurance idea was developed at the climate conference that I promised last week I would get into this week. I just couldn't do the conference justice while still addressing the issues that Helene and Milton raised in my mind. I'll tell you about the conference next week. Honest.  

Europe is struggling with extreme weather. In Central Europe, floods are causing devastation. Their intensity is almost unheard of for this time of year. Across Poland, Austria, Romania, Hungary, and Czechia, the authorities have been forced to draft in volunteers and even members of the armed forces to help strengthen flood defenses. Already, the floods have taken the lives of 23 people. In Portugal, meanwhile, wildfires rage. Seven are dead, homes have been flattened, and swaths of land have been burned. These events share a cause: the climate crisis.

See also: Climate and Catastrophe Risk Strategies

The events in Europe are a tragic reminder of why, with Climate Week NYC just completed, and COP29 within sight, it’s no longer acceptable to respond to climate change with commitments to act. The last few years have furnished us with plenty of pledges and promises, agreements and assurances. But not enough has changed. So although a place exists for statements about what will be done, our attention must now be on what is being done. Action is the order of the day. At the country, company, and individual levels, we need to talk less and do more. 

No one sector can solve the problem by itself, but each can play its part – and set an example for others. Insurance is doing this. As a sector that plays an important social role, insurance must. It has long mitigated the financial impact of events such as illness, accidents, and disasters, undergirding economic activity by allowing people and businesses to take calculated risks and providing long-term security to organizations and individuals so they can plan ahead. 

Faced with one of the greatest challenges to long-term societal stability, insurance has turned to cutting-edge technology, thanks to which providers can now, with an enormous degree of accuracy and at breathtaking speed, monitor and to some extent mitigate climate events. Climate intelligence firms are using artificial intelligence and geoanalytics to transform raw satellite imagery into usable information. That means, in practice, processing the pictures taken by public and private satellites orbiting the planet and then visualizing them. Insurers are forming partnerships with firms like these and incorporating their technology into platforms. Because of this, they can shift from responding to disasters to predicting and preventing them. It’s a fundamental change: Insurance, traditionally, focused on helping people recover after an event; it can now help prevent those events from happening.

See also: How AI Can Help Insurers on Climate

The response side shouldn’t be overlooked, however. Technology is transforming that, too. With Earth observation (E.O.) data – satellite data made usable by technology companies – insurers can precisely monitor the extent of a flood, wildfire, or other disaster as well as the damage it has caused. That streamlines the claims process and reduces the emotional toll on all involved. Even as it shifts its focus from response to prevention, insurance hasn’t neglected the importance of rebuilding after disasters, or of the reality that some disasters can’t be prevented. It’s become better at responding, too.

But the focus of insurers remains prevention, and that’s because, as the Dutch philosopher Erasmus put it, "prevention is better than cure." Through the use of geospatial data from E.O. technology, insurers can now help clients around the world mitigate risk. Agents can explain why properties are at risk and how to reduce those risks. Clients are given access to a virtual pharmacy – a kind of large medicine cabinet, containing software and services, supplied by third parties, that can reduce their risk of harm. They can visualize data on fires, floods, and other natural hazards in close to real time. They can even be warned via a push notification if a natural disaster is imminent or likely so they can protect themselves, their families and their assets.

A sea change is underway, propelled by the reality of the climate and other overlapping crises, the availability of state-of-the-art environmental intelligence technology, and the boldness and readiness of insurers to walk forward into the future. The gravity of the challenges we face as a planet notwithstanding, it’s an exciting time to be working in the insurance sector. Because at a time of global volatility, insurers are stepping up, rising to the full height that their social role demands.