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The P/C insurance industry is at an inflection point as the rise in climate-related risks and natural catastrophes has severely impacted American insurers.
Just last year, the country saw a record-breaking influx in extreme weather and climate disasters with a combined total of $92.9 billion in damages, according to The NOAA National Centers for Environmental Information’s final update to its 2023 Billion-dollar disaster report.
P/C policyholders are aware of the impact of extreme weather and are looking to their carriers to inform them of weather-related risks. However, this is proving to be challenging as frequency of storms is not only increasing, but severity as well.
P/C companies are simultaneously dealing with changing state and federal regulations as well as significant legacy technology constraints. As a result, P/C carriers must overhaul their business models to better serve customers and sharpen their competitive edge.
Digital solutions will be at the heart of these transformation initiatives, enabling predictive and automated capabilities that will drive operational efficiencies. To be an industry pioneer, leaders must take their digital transformation strategies beyond just modernizing legacy systems. They must utilize connected solutions to help manage the challenges caused by extreme weather. This is why in the coming years, AI-enabled digital twins of residential and commercial properties will be pivotal to the success of P/C insurers.
How Virtual Technology Can Protect Physical Properties
There are several digital solutions that will work in conjunction to help P/C carriers maintain operational resilience when addressing weather-related risks. AI and machine learning models fueled by third-party data sources can produce predictive analytics capabilities that ultimately shape how underwriters and risk engineers assess geographic and climate risks on properties. Cloud migration and data integration implementations are also pivotal in laying a solid digital foundation across the entire enterprise ecosystem.
Most insurers are aware of this and are actively working to enhance their basic tech infrastructure as well as their predictive capabilities, but we have reached a tipping point in the market that now necessitates more advanced, connected technology.
To help P/C insurers predict the risks associated with future weather events, having AI and machine learning models that forecast scenarios will not be enough. They will need to match the pace of technological innovation in the market and tap into connected building assets, like smart sensors, to produce virtual replicas of properties. Similar to telematics tracking devices which auto insurers have popularized to monitor policyholders’ driving habits, smart building sensors – as well as satellites and drones – can help P/C carriers gather enough data to create a digital twin of properties. When insurers enable these digital twins with AI models, they can predict the likelihood and severity of weather damage, advise customers on how to protect their properties, and offer personalized pricing.
These AI-powered digital twins could have a substantial impact on the hard-hit P/C insurance segment, forever altering traditional underwriting as well as risk engineering and assessment functions. There is a potential to not only protect the business’ bottom line, but also protect consumers and their properties by educating them on the weather-related risks in their region and the ways to prevent or prepare for potential damage.
Understanding Insurers’ Leading Issues
Although AI-enabled digital twins do offer P/C carriers and their policyholders some peace of mind thanks to their predictive capabilities, it must be noted that this technology will only go so far in protecting people and their properties. Scaling and deploying digital twins will be a considerable undertaking for many P/C companies. They’re met with a range of barriers delaying their progress, but most notably struggle with technology, regulatory, and business constraints.
- Technology – Many enterprises have outdated, disjointed technology. In fact, on average, insurers’ tech maturity is inversely proportional to the speed of tech growth. They cannot utilize AI and machine learning without considerably more data that is easily accessible, accurate, and secure. They cannot employ smart devices, sensors, or satellites without an interconnected network. What’s more, insurers do not have smart devices at all – or partnerships with residential and commercial smart device providers, such as smart security companies, to feed real-time data into their models.
- Regulatory – Shifting legislation and complexities in differing regulations across states have always plagued P/C insurers. Now, with the surge in AI adoption perturbing legislators, calls for consumer privacy protections, and concerns with security posture across the private sector, carriers will have to adhere to a new set of digitally-driven legislation. This will impact how they implement new technologies – especially solutions like AI-enabled digital twins that will heavily rely on proprietary consumer data. The influx in major weather events will also likely impact state and federal regulation on P/C policies – as many insurers are adjusting their coverage.
- Business – Rolling out advanced digital solutions like AI-enabled digital twins takes time, money, and talent. Insurers must calculate the return on their investments before implementing a digital twin initiative. They must consider if they will supply their own smart devices to customers or partner with vendors. They also must consider which properties will require digital twins – for example, only properties in high-risk areas or only large, commercial properties with pre-existing smart assets.
With the exit of El Niño and the beginning of La Niña, we are seeing firsthand how important AI-enabled digital twins are for P/C carriers and their customers. P/C insurers need to have better line of sight into when weather events are coming, where they’ll hit, and the severity of their impact. They need AI-enabled digital twins to help prepare customers, offer more accurate and transparent plans, and ultimately shift their underwriting and risk assessment capabilities. Implementation will not happen overnight, but it’s essential that companies begin to formulate their plans now.
