Not all tech is InsurTech

Not all forms of technology that insurers intersect with are InsurTech. Nor do all of them focus on the subject matter of insurability. Yet many may be beneficiaries of their investments, thereby entailing transition risk.

For instance, there is a clear recognition of the need to address effective climate-tech solutions, due to serious funding constraints in the existing venture capital model. The possible solutions could include blended finance, green bonds and impact investment. 

Likewise, an interface may have varying degrees of environmental, social and governance (ESG) implications.

So, how is technology influencing climate change and how is climate change impacting tech? Likewise, how does insurance traverse these terrains? 

Here are some related stories recently receiving the attention of the US business press.

Automotive automation

“Automation is frequently painted as the enemy of labour; the reality can be more complicated,” writes Brooke Sutherland for Bloomberg. US factories installed nearly 40,000 robots in 2022, up from the year earlier, according to the International Federation of Robotics (IFR). Even before 2022 additions, 274 robots were installed for every 10,000 manufacturing workers in the US, up from 176 in 2015, IFR data shows.

But there is little evidence that the region is experiencing outsized growth in robot installations relative to the rest of the world, says Sutherland. The automotive sector accounted for 47% growth in 2022. However, factories have also been on a human-hiring spree. 

To quote Annamaria Melegh from the UNGA Science Summit, we must be aware of “the perils of unchecked growth and the abandonment of ethics as innovators seek to scale their creations for profit”.

Mitigation over adaptation

Tim McDonnell of Semafor shares why climate change mitigation startups get all the love from investors, at the expense of climate change adaptation companies. 

On average, 97% of global climate-tech venture capital investment annually (about $50bn in 2022) goes towards startups whose products or services supposedly reduce greenhouse gas emissions, predominantly in the electric mobility and renewable energy sectors, according to PwC. Just 1% goes to ventures that focus on adaptation – technologies to mitigate or respond to natural disasters and other climate impacts. The remaining 2% is for carbon accounting and other climate-related data management businesses.

“There is a bias against resilience because most folks in climate circles want to ‘solve’ climate change rather than manage it. Focusing on resilience for some is an admission of defeat. But let’s get real. We are losing the war on climate change. So, if you are an investor or an entrepreneur, you should look at that as an opportunity; resilience is a market that is only going to keep growing for the foreseeable future,” says Jim Kapsis, founder of the Ad Hoc Group, a climate-tech consulting firm.

Aerial imaging: breach of data privacy

As the insurance industry increasingly turns to digital technology for underwriting decisions, some homeowners are having policies revoked based on aerial images taken of their property, writes Melinda Huspen in Digital Insurance.

One homeowner received a non-renewal notice from the CSAA based on images taken of his backyard, showing multiple broken-down vehicles and other clutter, according to reporting from ABC 7 News in California. When he called to dispute the claim, CSAA initially told him that a “drone” took aerial photos of his property. However, CSAA has since retracted that statement.

Also worth mentioning are the warnings posted at wildfire-prone national parks in the northwest, meant for private drone users who may accidentally hinder firefighting operations and injure the firemen battling a blaze.

Wildfire risk models questioned

Michael Shashoua of Digital Insurance explains how the California Department of Insurance (CDI), the state’s regulator, is being lobbied by carriers to allow increases in premiums, in the wake of State Farm and Allstate deciding to stop writing new property and casualty coverage for homeowners. The state’s consumer protection laws forbid carriers from using catastrophe models to determine the risk of wildfire, and therefore how that can factor into premium rates. 

As this push and pull between the CDI and major carriers plays out, says Shashoua, consumer advocates are spotlighting concerns about how the carriers use technology to build wildfire risk models, source data on the risks and feed that data into models. Some propose a public risk model, saying that would be more transparent. It is not as simple as just banning the use of AI, but regulators will need to require insurers to explain their risk models in a manner that most people can understand and evaluate, the consumer advocates say. 

The second part of the regulation equation is the type of data being used and how it's being collected. Property intelligence technology has become a big source of data relevant to wildfire risk modelling. The data can be about the characteristics of a property itself or the areas surrounding that property, and what risks the characteristics of those areas present for the property. 

In AI we trust? 

While insurance commissioners have posted AI guidelines, Penny Crossman of Digital Insurance asks: do they go far enough? 

More insurers are placing these climate risk underwriting decisions in the hands of AI. The problem there may be that AI can easily propagate biases and discrimination. The National Association of Insurance Commissioners (NAIC) recently issued a bulletin with recommendations for insurers about their use of AI. The NAIC already requires insurers to comply with its Property and Casualty Model Rating Law, which mandates that property and casualty insurance rates are not excessive, inadequate or unfairly discriminatory.

How insurers’ AI models adhere to that law or don't, particularly when underwriting home risks due to climate change, could affect what state regulators or Congress do in response to carriers dropping or stopping home insurance coverage. As carriers drop home coverage, regulators are watching, Crossman reminds us.

Are workers’ compensation underwriters watching?

Fewer than 1% of all workers who leave a job in a carbon-intensive industry (which includes coal, mining, oil and natural gas) appear to transition to a low-carbon industry job (such as those associated with the production of renewable energy like solar and wind or the production of EVs), according to working paper from the National Bureau of Economic Research. 

In other words, the vast majority of workers in dirty jobs switch to another dirty job in the wake of a rapidly warming world, warns Michelle Cheng in qz.com.

Threats to the digital economy

Data centres, which have become integral to the global economy, depend on water to keep from overheating, writes Michael Copley of NPR. About 20% of data centres in the US already rely on watersheds that are under moderate to high stress from drought and other factors, according to a paper co-authored last year by Arman Shehabi, a research scientist at Lawrence Berkeley National Laboratory. 

Yet relatively few companies have been willing to talk about the issue publicly because of the still-limited attention it gets. Sustainalytics, which assesses risks related to ESG issues, recently said it looked at 122 companies that operate data centres and found just 16% had disclosed information about their plans for managing water-related risks.

“The reason there's not a lot of transparency, simply put, [is] I think most companies don't have a good story here,” says Kyle Myers, a vice-president at CyrusOne, a data centre company. 

The challenge comes down to a basic tradeoff companies face in trying to keep data centres cool, believes Myers. They can either consume less water or use more electricity. Or they can use less energy and consume more water.

“Water is super cheap,” Myers says. “So, people make the financial decision that it makes sense to consume water.’’

Insurers ought to be mindful of the various implications of the tech interface. For instance, they should not be choosing between mitigation, adaptation or resilience. In the short term, opting for one over another may result in a favourable return on investment. However, there can be a downside. Any resulting imbalance will have a bearing on the effectiveness of coping with conflicting demands in their portfolio. 

Likewise, growing tech capture – thereby potential abdication of decision-making – may put insurers in an adversarial situation vis-à-vis key stakeholders, as well as regulators and policyholders.

It is good risk management to not only understand how things work but also why they may not – and the potential consequences. Not all tech that insurers use ought to be InsurTech, however, growing ESG demands, the resulting responsibilities and all forms of interface demand heightened stewardship from insurers. Be that as insurers, risk managers or investors.

This article is also published on The Journal. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.