The property insurance sector is at a critical juncture as it grapples with the increasing challenges of climate risk and its impact on risk assessment models. Leaders from ZestyAI, a pioneer in harnessing artificial intelligence for property risk analytics, including Attila Toth (Co-Founder and CEO), Kumar Dhuvur (Co-Founder and Head of Product), and Sebastian Kasza (Manager of Business Strategy), recently sat down with McKinsey & Company. During the interview, they shed light on the game-changing potential of AI in enabling property insurers to manage and adapt to climate risks, which are becoming more unpredictable and financially devastating.
This article delves into the key insights from their conversation, examining how AI-powered solutions are revolutionizing risk assessment models, facilitating compliance with evolving regulations, and shaping the future of property insurance in an era marked by climate uncertainty.
Understanding Climate Risk at the Property Level
The property and casualty (P&C) insurance industry is undergoing a profound transformation driven by the rising challenge of climate risk. Wildfires, hail, floods, and other catastrophes are eroding the insurability of communities, leaving insurers with a pressing need to adapt their underwriting models.
Artificial intelligence solves this problem, and new risk products are already helping carriers adapt. According to Kumar Dhuvur, "The carriers that adopt AI first will definitely see a massive benefit. As other carriers cede market share, the forward-thinkers will be able to protect that market share and garner a share of the profits by leveraging models that manage risk better." This highlights the crucial role AI plays in risk management and preserving market competitiveness. By adopting AI-powered solutions, insurers can develop risk-splitting approaches that help them set better rates and improve risk segmentation.
"The carriers that adopt AI first will see a massive benefit.”
Reducing Risk and Enhancing Resilience with AI
To effectively reduce risk, insurers must not only identify areas of vulnerability but also incentivize homeowners to take mitigation measures. AI-powered models like Z-FIRE™, ZestyAI’s wildfire risk model, offer property-specific risk scores that can adapt to reflect the impact of mitigation efforts undertaken by property owners. These measures include brush clearance, creating defensible spaces, and utilizing fire-resistant building materials. As homeowners enhance their properties’ safety, they defend their investments and improve the terms of their insurance.
The first steps towards implementing these changes have already occurred. In response to new California regulations, 12 different property-level mitigation features are available through ZestyAI’s CA Compliance Pre-Fill product. When insurers have mitigation information and are prepared to offer associated discounts, it opens up a dialogue between insurers and insured parties, fostering a shared commitment to risk reduction.
Navigating Regulatory Challenges
In addition to dealing with a changing climate risk environment, insurers need to navigate an evolving regulatory landscape. For example, recent changes in California by the Department of Insurance included requirements for discounts on wildfire mitigation efforts and restrictions on how insurers can provide them. These changes are not simple to implement. Attila Toth described the experience, "The California Department of Insurance is one of the leading regulators in the country, and we have gotten the first AI model approved as part of a rate filing. And it was a three-year process."
Nonetheless, by embracing AI tools, insurers can effectively comply with these measures and gain a competitive advantage over their peers. This is because AI-powered solutions provide property-specific estimates and possess an unrivaled explanatory ability to describe the relevant factors. AI-powered solutions also enable insurers to identify less risky properties that have implemented mitigation measures, paving the way for more resilient coverage in areas once considered high-risk.
Embracing the Future of Property Insurance
While AI adoption in the property insurance industry is still in its early stages, the value delivered is undeniable. Forward-thinking insurers recognize that integrating AI into underwriting and rating processes is essential for minimizing losses and delivering value. However, challenges such as outdated IT infrastructure and regulatory hurdles can slow the implementation of these new approaches. Regulatory bodies must adapt to support the implementation of AI models, and insurers must establish new partnerships to take advantage of this new technology. As the industry moves forward, the final vision is to utilize AI to create more forward-looking risk assessments, thus ensuring a resilient and sustainable future for property insurance.
ZestyAI offers insurers and real estate companies access to precise intelligence about every property in North America. The company uses AI, including computer vision, to build a digital twin for every building across the country, encompassing 200 billion property insights accounting for all details that could impact a property’s value and associated risks, including the potential impact of natural disasters. Visit zesty.ai for more information.