Four ways generative AI helps insurers manage climate change

Research from the Financial Health Network reveals that a whopping 40% of Americans – 103.4 million people in total – live in 11 high-loss states where natural disasters cause above-average expected annual losses.

With 2023 being the hottest year since records began in 1850 and extreme weather events on the rise, it's evident that more areas could soon face big losses.

Scientists predict that there is a one-in-three chance this year will be even hotter than 2023. So more natural disasters related to extreme weather are inevitable. Consequently, insurers are doubling down on investing in scalable, innovative catastrophe response capabilities. For insurance companies, generative AI (gen AI) could be a real game changer, helping keep customers safe while supporting business growth.

Insurance is about probability and statistics, which align perfectly with the benefits of generative AI. Meanwhile, insurers are under pressure to step up their customer service game amid catastrophic weather events. Gen AI tools can analyze vast amounts of data to nail down risks better and set Goldilocks policy prices that are just right for each policyholder's needs and circumstances.

Take, for instance, how gen AI can use information from customer feedback, claims artifacts, climate change records, local weather patterns, economic conditions, and demographic trends to help insurers decide whether to offer a policy and, if so, how to price it to stay both competitive and profitable.

Generative AI is transforming insurance carriers in multiple ways, such as minimizing claims losses, boosting operational efficiency, creating new revenue avenues, improving customer satisfaction, shaping local policy, fostering insurance inclusivity, and navigating future uncertainties more strategically.

Let's dive into four ways that gen AI is helping insurance carriers amid the challenges of extreme weather.

Reduce claims costs and work more efficiently by assessing weather-related risks

Every year, natural disasters trigger millions of insurance claims. Gen AI plays a crucial role in helping insurance companies understand and manage climate risk in many ways, primarily by analyzing vast amounts of data and accurately identifying weather patterns, which leads to quicker risk modeling and simulations.

One major benefit of this is that insurers can predict and prevent claims before they happen – for example, gen AI can evaluate historical imaging data, climate patterns, and property-specific details to anticipate the potential impact of hurricanes on individual properties in Florida.

With such precise predictions, insurers can avoid paying out large sums for damages, handle claims more quickly, and focus their resources where they're needed most. In the end, this helps them lose less money and work more smoothly.

Generate new revenue streams and enhance customer satisfaction by crafting more accurate insurance policies

Customers count on insurance companies to handle the financial aftermath of natural disasters, covering damages to their property, personal belongings, and even additional living expenses if their home becomes uninhabitable. That's why it's vital for insurers to offer accurate policy quotes right from the get-go.

Gen AI plays a key role by analyzing extensive data pools to identify patterns and predict risks more accurately than traditional underwriting methods. In turn, more accurate policies empower insurers to offer clear and transparent pricing to customers who were previously considered too risky and therefore may not have been candidates for coverage. This clarity in pricing not only opens new protection opportunities for these customers, and new revenue streams for insurers as a result, but it also promotes insurance inclusivity.

Additionally, when policies are accurately tailored to individual needs and risks, customers can better understand their coverage, resulting in fewer disputes and misunderstandings. And precise guidelines enable faster claims processing and resolutions, reducing frustration for customers during stressful situations such as filing claims after a natural disaster.

Ultimately, the clarity and efficiency provided by precise guidelines enabled by gen AI contribute to revenue growth for carriers and greater satisfaction and trust between insurers and their customers.

Shape local policy and promote insurance inclusivity by adjusting insurance availability and rates

As natural disasters become more frequent and severe, insurance companies may respond by raising rates or becoming more selective about issuing new policies. For example, in 2022, insurers like Allstate and State Farm restricted issuing new policies in California or even stopped altogether. This raises humanitarian concerns because it could lead to reduced affordability or accessibility of insurance for individuals in certain regions.

Gen AI gives insurers better insight into assessing climate impact and modeling various climate change scenarios, including their potential consequences. Thus, rather than unnecessarily pulling out of large areas previously deemed too risky, gen AI can help insurers shape local policy to better anticipate regional weather patterns.

Navigate an uncertain future more strategically by proactively reducing risk

In addition to insurance, individuals and communities can take steps to lower their vulnerability to natural disasters. This might involve building resilient structures, establishing disaster preparedness plans, and participating in government programs aimed at reducing disaster risk. One way gen AI can help in this area is by analyzing historical data to help understand and identify weather patterns, offering insights on future risks.

Additionally, gen AI can produce synthetic datasets to augment existing data collections and increase the accuracy and diversity of risk models. "Synthetic data is critical to innovation," says Bipin Chadha, vice president of data science at CSAA Insurance Group. For instance, gen AI can create synthetic images depicting various types of storm damage to refine risk assessment models, empowering insurers to better estimate repair costs and insurance premiums. Using gen AI to proactively reduce risk enables insurers and policyholders to navigate an uncertain future more strategically.

As climate-related disasters continue to shatter new records, insurers and insureds need to prepare better. While insurers face many challenges in navigating rising catastrophe risks, one thing is abundantly clear: proactive disaster preparedness and risk management are vital for everyone – from individuals and communities to insurance companies themselves. Here, gen AI can play a significant role in helping the insurance industry weather any storm that comes our way – no matter how extreme.

By harnessing the power of generative AI technology, insurance companies can supercharge their ability not only to evaluate but also to anticipate and mitigate climate-related risks. This transformative capacity, in turn, improves their decision-making process and ensures the long-term sustainability of their business operations.

This article first appeared in PropertyCasualty360. It was authored by Yasir Andrabi, global head of insurance strategy and growth at Genpact. Connect with him on LinkedIn.