The insurance industry cannot fix climate change, but can adapt to face the challenge.
Extreme weather events are a major test of capability and resilience for the insurance industry. As these ‘one-off’ events continue to multiply in frequency and increase in complexity and severity, the inadequacies of current responses and actions are clear. The insurance industry cannot fix climate change, but it can update its approach and model to ensure that no policyholder is left out in the cold.
A 2011 Direct Line survey found around 5 million homeowners in the UK were uninsured at that time - roughly one in five of all homes. They estimated a further 6 million households failed to insure the value of their contents fully, or cover the rebuilding costs in areas where house prices have risen rapidly. Later surveys from the ABI and Shelter support this worrying picture of a lack of coverage in communities across the UK.
The insurance industry urgently needs to re-examine its coverage and distribution models. As vehicle insurance is mandatory, perhaps property insurance could also be mandatory. No business or household should be left without the financial ability to recover from floods or any other disaster.
Those who cannot afford to buy insurance could be covered by a government-backed scheme. Alternatively, communities could take the traditional approach and act together, using a form of Co-Op or Micro Insurance, while taking advantage of modern methods such as crowd funding and sourcing.
‘Flood Re’, a reinsurance vehicle backed by government, is a good starting point. Due to come into force in April 2016, it will not guarantee affordable insurance for everyone but it allows some otherwise uninsurable flood-prone properties a degree of cover.
It is clear that insurance remains a grudge purchase for many. The potential value that insurers bring to their customers is often misunderstood. The press typically focus on the horror stories, rather than reporting on the thousands of successfully settled claims and satisfied policyholders. Insurers could minimise public resentment by creating relevant, flexible products and presenting them in a context that allows policyholders to understand them fully. Consumers often compare products on price, rather than analysing what cover and services they actually need, because they do not fully understand what they are buying.Today’s consumers require far more tailoring and personalisation of products. The industry needs to be more dynamic if it is to provide cover to meet their needs.
Technology can help achieve this. In an era of connected devices, insurers will often understand the risk to a particular property as well as, if not better than, its occupier. This places them in a unique position to offer advice to consumers about how best to avoid risk, which would feed through into any premium paid. Just as utility companies advise on energy efficiency, insurers can add value by moving policyholders towards prevention far earlier in the buying lifecycle.
If the cost of insurance acts as a deterrent for building on flood plains, or reinstating properties without improving defences this ought to be seen as a long-term benefit. In addition, given the likelihood of further extreme weather, the UK would benefit from a single, overarching national crisis management team, similar to the Federal Emergency Management Agency (FEMA) in the USA. A FEMA style agency can speed up decision-making both during a crisis and in the immediate aftermath, including issuing immediate emergency payments to property owners on behalf of insurance companies, which alleviates the anxious wait for funds.
I hope the recent flooding can act as a catalyst for change. In the meantime, clearer communication, education about risk and flexible products aligned to consumer need should encourage more people to ensure they are adequately covered.
Charging fair premiums, focussing on prevention, working and acting together to provide cover for those who cannot afford it, could make 2016 a happier new year for all of us.