This piece is by Jenny Burns, CEO of Magnetic
An insurer can get better at pricing climate risk while its customers find it harder to afford protection. That’s an uncomfortable prospect for an industry whose future depends on businesses being able to buy its products. It should push insurers to think much harder about how they could help customers reduce the risks they face.
Climate change gives insurance an urgent reason to innovate. Businesses are adapting their buildings and changing how they operate, often making investments that will last for decades. They need insurers capable of anticipating what those decisions will mean for their protection. In its August update on climate adaptation and resilience, the FCA warned that rising claims costs and uncertainty could affect insurance availability. It also highlighted opportunities to support resilience through product design. For me, the message is clear. Insurance has an opportunity to become far more valuable to customers, but it needs to rethink where and how it creates that value.
Start with the problem customers need solved
I’m not sure consumers expect quite as much from green insurance as we sometimes think. A few years ago, there was a lot of interest in developing these products, particularly policies for electric cars. I could see why insurers were interested, but I was less sure what customers would get from them.
When we did some research with consumers about electric cars, their biggest worry was the battery running out. It’s an understandable concern, especially if you’ve never owned one before. But it leaves you with a fairly basic problem if you’re developing an insurance product: the thing people are most worried about may be better addressed through charging provision or roadside support.
It’s a good reminder that just because an industry sees an opportunity, it doesn’t mean customers see a problem that needs solving. And that’s where innovation can go wrong.
The same discipline applies in commercial insurance, where climate change is creating a much more complicated set of needs. A construction company adopting different materials or methods needs its insurer to understand what that involves. It may also need help working out how a building will withstand conditions very different from those it was originally designed for.
Starting with those decisions gives innovation a useful direction. It also leaves room for an answer that includes advice or a service alongside cover. Insurers should be willing to test that possibility before deciding another policy is what the customer needs.
Look beyond the next renewal
Insurers are very good at looking at past data and using it to assess the risk in front of them. But as the nature of risk changes, looking backwards is no longer enough. A business investing in a property needs to understand how its exposure could change over the years it expects to use it.
Climate modelling can help inform that view, even though it cannot offer certainty. The challenge is getting those insights into product development early enough to change what
insurers offer. If the main outcome is simply a revised price at renewal, much of the opportunity to help the customer may already have passed.
Consider a business planning to refurbish premises exposed to flooding. An insurer could work with specialist partners to help it assess which adaptations would reduce damage, while there is still scope to change the plans. The business would also need to understand whether those improvements could affect the cover available to it. That would make the insurer useful at a point when the customer can do something about its risk.
Developing that service would mean testing it with businesses. Advice has to be practical enough to act on and any suggested investment has to be realistic for the customer. A small firm may understand the risk perfectly well and still struggle to fund the work.
This is where the industry has a real opportunity to innovate. Not just in how it assesses risk, but in how it helps customers do something about it.
Make prevention part of the offer Legal & General provides a useful example of approaching innovation across a business. In the climate accelerator work we supported, it considered the implications for its products and future investments, as well as its brand. That broad view helped it identify specific areas to explore and test with customers.
Its investment business gives it opportunities that will not apply to every insurer. But what matters here is the willingness to look beyond existing products and bring different parts of the organisation together to explore what’s possible. A service that helps a business adapt could need expertise from outside the team that normally develops its insurance products.
There are limits to what insurers can prevent, and they can’t take responsibility for every adaptation a customer needs. Even so, they have knowledge that could be useful much earlier in a business’s decisions. Making that knowledge easier to act on would give customers a reason to value the relationship between renewals.
The industry needs to be bolder about testing what this could look like. A customer who avoids months of disruption because their insurer helped them prepare has received something worth paying for. That is a strong starting point for the next generation of insurance products and services.
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