Insurers promoting resilience can save lives, properties
Calls for personal and societal investment in catastrophe loss control, adaptation and resilience too often fall on deaf ears.
My mother raised me with the notion that it’s better to be safe than sorry. While the insurance industry may live by that risk management credo, it doesn’t appear to be the prevailing attitude among millions of policyholders when it comes to protecting properties against hurricanes, floods and wildfires.
Playing a ‘negative lottery’
One speaker at the Insurance Information Institute’s 2019 Joint Industry Forum complained that the default option for too many individuals and communities is to play a “negative lottery,” figuring the odds of being devastated by a disaster are too low to worry about — or at least not high enough to change where they live or to lay out significant investments to fortify properties.
That attitude needs to change if we’re to avoid becoming locked in an endless cycle of building, destruction, and rebuilding, at an enormous cost in lost lives, homes, and businesses.
It isn’t surprising that loss control and resilience were spotlight issues at the forum, following a 2018 fourth quarter marred by billions of dollars in disaster claims. The discussion focused on what can be done to keep massive catastrophe losses from becoming the rule rather than the exception. A large part of the exposure has to do with shifts in weather patterns, resulting in increased frequency and severity of events. That’s why multiple speakers cited climate change as perhaps the biggest challenge facing insurers for the foreseeable future.
Solutions over complaints
However, those assembled for the industry’s annual family reunion didn’t waste their breath arguing whether more proactive measures are required to alleviate what most scientists consider to be the problem’s likely source — carbon emissions. Rather than fiddling with such contentious points while large sections of the country are literally burning to the ground, insurers and loss prevention experts kept hammering away at what society can and should be addressing in the short term, regardless of what or who may be to blame for climate change—how properties and communities can better withstand the impact of natural disasters.
Speakers hailed insurers as financial first-responders following catastrophes, coming to the rescue of individuals and the overall economy by helping people, businesses, and communities get back on their feet — the very definition of resilience. But they also emphasized that much more can be done to promote and achieve adaptation. If we can’t or won’t take steps to change the weather, they noted, we at least need to bolster everything in its path, so lives are saved, and damage kept to a minimum.
That’s not to suggest that insurers haven’t already taken a substantial leadership role in mitigation. The Insurance Institute for Business and Home Safety, for example, has conducted research for years into how to make properties more resistant to the elements. If only we could realize the industry-funded group’s vision statement: “We envision a world where the durability of homes and commercial buildings is a core societal value — greatly reducing the financial loss, community disruption, and human toll that often result from natural and man-made disasters.” Individual carriers have contributed to this body of loss-control work with their own experimental laboratories.
Too often, however, calls for personal and societal investment in loss control, adaptation, and resilience have fallen on deaf ears, or have been bogged down in disputes over cost or political viability. Some at the forum suggested that insurers help jump start this debate and move the idea forward by focusing on incremental steps. For example, they might offer more premium incentives for retrofitting properties. One insurer noted that having shingles blown off in a hurricane might be a $7,000 loss, but unless the roof underneath is sealed against water leakage, the result could be a $100,000 claim. Seeing an immediate, tangible benefit — a premium reduction that adds up over the years — could make the decision to invest in loss control a lot easier.
Creative problem-solving
The potential for public-private partnerships was also raised numerous times, because while the industry has a lot to contribute in terms of experience, expertise, and incentive pricing power, insurers are not likely to change the present mindset by themselves. The public part of the partnership might involve low-interest loans or grants to bolster homes and businesses, thereby improving the risk profile of a property or an entire community.
Speakers from the InsurTech world talked about tapping “benevolent” artificial intelligence (AI), fueled by advanced analytics, resulting in what they called “holistic resilience.” With AI, insurers can assess the impact of various disaster scenarios as well as how certain mitigation efforts might prevent losses, applied either individually or in various combinations, then advise policyholders and community leaders about how they should proceed.
Ramping up and better publicizing mitigation efforts might even have a secondary benefit by improving the industry’s image, some at the forum suggested. Taking a more active, visible role to secure a policyholder’s personal safety or protect their property, rather than waiting until after a disaster to demonstrate value by handing over a claims payment, could make a big difference in how consumers view insurers. That image boost may never materialize — one speaker suggested that if insurers wanted to be popular they should have gone into the teddy bear business. But if such efforts help minimize catastrophe damage, the results of their handiwork would be clear in saving lives and billions of dollars.
Building a more resilient nation is not a pipe dream. In fact, the U.S. appears to be quite behind the curve when it comes to proactive mitigation efforts. Consider what’s already been accomplished in the Netherlands, which is no stranger to flood risk since so much of the country is below sea level: It almost never floods thanks to some major infrastructure investments.
The lesson here is what my mother drilled into me — that it’s better to be safe than sorry. She also taught me to hope for the best but prepare for the worst. Moms in general are prototypical risk managers — always alert to potential threats, quick to act to protect their loved ones. Perhaps it’s time we paid closer heed to mom’s warnings.
Sam J. Friedman (samfriedman@deloitte.com) is insurance research leader with Deloitte’s Center for Financial Services in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn.
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