How can insurers rise to the challenge of climate change?
Climate change is already eclipsing the pandemic as the most disruptive force the industry has ever faced.
Climate change is once again a top-of-mind issue around the world as the regions around the world — most notably the U.K. — suffer from record heat waves. Coming on the heels of historic flooding and “once in a generation” hurricanes that continue to occur almost every year, climate change is having a huge impact on society. Insurers can play a key part in helping manage the effect of climate change by engaging more deeply with customers, policymakers, regulators and the other parts of the ecosystem.
For as unsettling as the COVID-19 pandemic was to the insurance industry, climate change is already eclipsing the pandemic as the most disruptive force the industry has ever faced. Insurers have traditionally been incredibly successful at building risk models that identify and navigate risk incredibly well. These models have been grounded in decades of research and are painstakingly reviewed and tweaked around the various fundamental data points they were built upon. But what happens when these “tried and true” data points are suddenly no longer relevant? Insurers need to adapt in order to stay in the black, and by proxy customers need to as well.
Because of climate change, insurers are having to rewrite the playbook they have set out so that they can remain not just solvent, but stay true to their purpose of providing comprehensive protection. This means going well beyond making the incremental changes to policies that they typically do. For example, insurers are now being forced to draw more narrow distinctions into their policies – like differentiating flood damage done by water logging versus flood damage resulting from molding – so that they can strike the right risk and exposure balance. And while these changes may help insurers’ bottom lines, they also stand to create friction with their customers.
This dynamic has created a very challenging double-edge situation for insurers to have to navigate. With that, here are some best practices and strategies that insurers can use in order to help them stay in the best graces possible with their customers as they make climate change enforced alterations to their operations.
Highlight alternatives and prevention
Insurers can move to get on the right side of climate change related moves by taking proactive steps to help educate consumers on ways to help them prevent premium hikes or even reduce premiums. Thanks to the growth and evolution of data science, customer profiles are now far more tailored than they have ever been. Therefore, insurers need to leverage data and technology to deliver customized experiences and information that is most pertinent for each customer’s situation. For example, if a customer lives in an area that is now increasingly likely to experience hurricanes, send those policy holders information on how they can retrofit their homes to save, instead of hitting them with an unwelcome hike when their policy is set to renew.
Be proactive in highlighting possible coverage gaps
Sweeping shifts under the carpet is not only bad for customer loyalty but fundamentally undermines the goal of the insurance industry to provide the best coverage possible to fit each customer’s needs. If a majority of customers in flood risk regions believe they have full flood coverage, but in actuality only have partial coverage, insurers stand to face significant backlash and reputational damage when a disaster strikes. Insurers need to do everything possible to make sure that customers have an understanding of their current coverage options, the emerging climate related risks they face and what coverage options exist to help them protect against damage related to this event. That way customers can make the best decisions for them and understand why additional coverage may be necessary instead of coping with surprises down the road at the worst possible moment.
Unleash the combined power of data + AI + technology
Technology adoption in insurance has exploded in the last two years and is set to grow to $262 billion by 2026. It is essential that insurers continue to integrate new technologies, alternative data sources and better AI methods to remain on the cutting-edge particularly as the climate crisis deepens, and continue to remain as efficient and responsive to customers’ needs as possible. This includes everything from beefing up data processing infrastructure to help cope with the deluge of data coming from connected devices, to unlocking the potential of assets such as images to help better expedite the claims process or give more comprehensive quotes. The more information insurers have the more information they can pass on to their customers to make them not only feel more valued, but build trust that can help them better understand tricky possibilities such as why premiums may rise and what can be done to mitigate this.
The next few years will be pivotal if the insurance industry has any chance of getting out ahead of the implications of climate change. However, by focusing on these few key tactics (by no means comprehensive), insurers can create an environment that promotes customer loyalty and confidence in the face of the rethinking that is taking place in the space.
Sankar Narayanan is the chief practice officer at Fractal Analytics.