Does Personalised Insurance help Climate Change Resilience?

Events such as the Los Angeles wildfires and the Ahr Valley floods signal the ever growing impact of climate change on insurance exposures. And the sector is concerned about its capacity to cover such things, if for no other reason than the past no longer looks like a good predictor of the future.

At the same time, the sector is changing in two significant ways. The first and more immediate one is the use of data and analytics to deliver ever more granularised underwriting. This can now be done down to the level of individual properties and increasingly, the construction of each property. The second and more mid to long term change is the move of the sector towards loss prevention rather than loss payment.

Both of these changes are works in progress, being more ahead here, taking more time there. The different private insurance markets across the Americans, Europe, Africa and Asia will be responding in their own particular ways, reflecting their culture, priorities and exposures. To borrow a phrase from the US healthcare reforms of the late 2000s, this creates ‘laboratories of democracy’, each trying out ideas, seeing what traction they achieve and promulgating the best results.

Help or Hinderance?

Let’s bring those two big trends together – climate change and personalised underwriting. There’s an argument that climate change resilience is helped by an insurance market that sends out lots of pricing signals about the loss exposures faced by different types of properties in lots of different locations. If anything gets in the way of those signals (so the argument goes), then losses from climate change influenced events will grow. That’s because people don’t respond to the actual risk they are facing by taking prevention or mitigation measures.

A counter argument to this then comes into play. An unconstrained pricing environment can result in lots of people becoming uninsurable, even those with no history of claims. And a good proportion of such people will be those unable for socio-economic reasons to take those prevention or mitigation steps.

For example, low income families cannot afford the mitigation steps or are in homes over which they have no such control. And long established villages cannot simply be relocated to… well,  where? The result is a wave of micro-emotional and micro-financial crises, in households and communities. I’ve seen this first hand : to use more than a bit of British understatement, they’re not nice.

Such families and communities are important stakeholders to those aforementioned ‘laboratories of democracy’. And if you look at trends in the thinking of policy makers (more here), they’re a voice being increasingly taken into account.

Balancing Act

We have here then the classic sustainability balancing act, between social concerns and environmental concerns. And from such situations, solutions can arise. Flood Re was one such solution for flood underwriting in the UK. And I’ve written about the potential for some form of common pool resource to offer a more universal solution.

A few months before the LA wildfires, a US law professor, Daniel Schwarcz, put a very interesting pre-publication paper into the public domain, entitled “Obamacare for homeowners insurance: fixing America’s broken insurance markets in a time of climate change’. For non-US readers, Obamacare was a reform programme introduced across the USA in the late 2000s for private health care insurance. Schwarcz builds a good case for something similar being possible for homeowners insurance. You can read and download the paper here.

There are undoubtedly tensions building up around a) having a sustainable insurance market, b) responding to climate change, and c) responding to the social impacts that are happening. We need more and more ideas coming forward for resolving those tensions as best as possible. The sector, civic society and policy makers need to build some form of ‘UN of ideas’ so that insurance can be structured and positioned to deliver win-win ways forward.

Support or Conflict?

Let’s get back to my opening points, about personalisation and climate change. Do they support each other or are they in conflict? Taken to its logical conclusion against a background of climate change impacts, personalisation will drive insurance off a cliff. It will result in one part of society not buying insurance because their personal situation signals little to no risk, and another group becoming uninsurable. This senior banking executive summed up the problem rather neatly in this 2021 speech.

A properly functioning insurance market needs to be part of society’s response to climate change. One whose fundamental trend seems destined to take it off a cliff is of no value to society. That basic logic will influence political minds, just as a form of it did in the UK around flood insurance.

So, yes, personalisation in insurance and climate change are in conflict. And yes, it is not binary – bits of both are needed. Pricing signals to influence loss prevention and mitigation are needed, just as some form of solidarity in the face of these climate impacts is needed. That’s at the core of Daniel Schwarcz’s paper.

A UN of Ideas

I return then to a paper I wrote two years ago on fairness and digital insurance. Some form of forum (my ‘UN of ideas’) needs to be shaped and set up to negotiate and deliver the framework for getting insurance’s response right. How far off is this? This is best weighed up by bringing in a key part of that aforementioned paper two years ago.

It is this. The Nobel Prize winning political scientist Elinor Ostrom identified six conditions that needed to be satisfied in order to design and adopt new organisational arrangements for solving collective-action problems. I’ve adapted them for our insurance and climate change discussion here…

1. Most insurers in the system need to share a common judgement that they will be harmed if they do not work together to deliver a solution;

2. Most insurers in the system expect to be affected in similar ways if they do not work together to deliver a solution;

3. Most insurers value being part of a solution;

4. Insurers in the system face manageable information, transformation and enforcement costs;

5. Most insurers share generalised norms of reciprocity that can be used to build the initial ‘social capital’

 6. Those participating in the solution are relatively small and stable.

So where does the insurance sector stand in 2025, in relation to the climate change impacts being experienced? I think they are close to meeting all of these six conditions.

Yet two more things are needed. The vital ingredients.