While I’m less optimistic than I was a week ago about the speed of a return to normal — a riot in the U.S. Capitol building will do that to a guy, as will a week of record deaths from COVID-19 and growing concerns about the rollout of the vaccine — I remain confident that we’ll get there some time in 2021 and that we all need to be ready for the next normal.
Having read everything I can find about how that next normal will take shape, I commend to your attention this article from McKinsey, which draws on surveys and on evidence from nations that are further along in the recovery from the pandemic than the rest of us. Among the predictions: that 20% of people could work the majority of time away from the office and that we are at the beginning of a new wave of innovative startups — while the risk of failure for established businesses has increased.
The McKinsey Global Institute isn’t saying that 20% WILL spend most of their time away from the office, merely that they could, while remaining just as effective. The McKinsey research arm says the switch to remote work will, in any case, be “a once-in-several-generations change.”
The authors add that a survey finds that business travel in 2021 will be roughly half what it was in 2019 and may never recover to 2019 levels.
Trying to take advantage of the disruption — not just in the work environment, but in shopping behavior, in supply chains, etc. — small-business formation is surging, the article reports. The authors acknowledge that the numbers surprised them. In the 2008-09 financial crisis, small-business formation tumbled, and in other recessions in recent decades it has risen only slightly. But 1.5 million new-businesses applications were filed in the U.S. just in the third quarter of 2020, nearly double the number in the year-earlier quarter. The number of “high-propensity” applications (those considered likely to lead to businesses with payrolls) grew 50% year over year. France, German, Japan and Britain have also seen surges in new businesses, albeit smaller than in the U.S.
The innovators are coming.
They will benefit from what McKinsey sees as a burst of “revenge shopping” once the vaccine kicks in and it’s safe to move around freely again. That burst will mostly occur in services, where demand has been hit so hard, and less so for physical products, which Amazon and others have delivered to our doorsteps in such impressive fashion. The authors cite Australia, which has largely contained the pandemic and where “household spending fueled a faster-than-expected 3.3% growth rate in the third quarter of 2020, and spending on goods and services rose 7.9%.” The authors say leisure travel will rebound quickly even though business travel won’t — in China, domestic travel is almost back to where it was before the pandemic, and what they call “high-end” travel is actually ahead.
The article does warn about what it euphemistically labels “portfolio restructuring.” Basically, that term means: You’d better be getting stronger in these turbulent times or… look out.
A McKinsey survey of 1,500 companies in October found that the top 20% had seen their earnings before interest, taxes, depreciation and amortization increase 5% during the recession, while those not in that top tier had registered a 19% decline. The article argues that those thriving will be able to lock in their advantage by buying weaker rivals.
Private equity is also on the prowl, looking for bargains. Firms are sitting on $1.5 trillion of “dry powder” that is ready to invest, and the authors say that “we don’t think the PE industry is going to keep its powder dry for much longer; there are simply going to be too many new investment opportunities.”
We still have to make it through these next weeks and months; at this point, I’ll be happy just to get to Inauguration Day on the 20th. But the next normal looks reasonably promising — as long as we stay among the innovators or that top tier of incumbents and don’t get numbered among the prey.
P.S. For those of you who’ve stuck with me to this point, here is a bonus, a thought-provoking piece about Brexit from Peter Gumbel, who is the editorial director of the McKinsey Global Institute and who was a longtime colleague of mine at the Wall Street Journal. I met Peter when, as a smart, young Brit with a facility for languages, he became a correspondent for us in Germany in the mid-1980s. I followed his career through other posts in Europe and more than a decade in the U.S. What I didn’t know until his piece ran last week in the New York Times is that Peter’s grandparents had fled Nazi Germany just before the outbreak of World War II. I also learned that, despite pride in his British roots and deep gratitude to the country that took his family in, he was wrestling with his homeland’s choice to withdraw from the Continent and was heading toward a gut-wrenching personal decision. (I won’t spoil his punchline here.) In case you find the piece as moving as I did, here is a link to the book-length ruminations he recently published on the topic, “Citizens of Everywhere: Searching for Identity in the Age of Brexit.”
P.P.S. Here are the six articles I’d like to highlight from the past week:
The insurance industry is experiencing seismic shifts in day-to-day operations stemming from this invisible yet intensely disruptive contagion COVID-19, but early signs of longer-term trends are also starting to emerge. A few short weeks ago, who would have thought that human health/safety and operational resilience would become the top two drivers of digital transformation? This pandemic has redirected our focus right at the base of Maslow’s hierarchy of needs overnight.
Organizations are overhauling operations to ensure the safety of employees and customers while business continuity and contingency plans are being put in place to ensure acceptable service for customers in this new normal. Insurers are focusing on retaining cash reserves while balancing customer retention with rebates, due to sheer uncertainty of the recovery timeline. Eventually, the obstacles presented by COVID-19 are giving way to new growth opportunities.
Based on our conversations with our insurance clients, some of the categorical questions being asked are represented in the table below. This paper addresses these key questions with a view to the “Future of Work” and key elements to consider in each of these stages.
Improving Resilience by Accelerating Digital With a Virtual Workforce
Moving not only in response to the present situation but also in preparation for the “Future of Work” will be the key differentiating factor between the leaders and laggards as the industry arrives at its new normal. The key areas that insurers are examining for current challenges and tomorrow’s opportunities fall into the following categories:
Resilience for Near-Term Business Continuity: Insurers are embracing digital channels and have moved to makeshift, pseudo-digital business models essentially overnight to ensure business continuity. In the medium to long term, this will accelerate the digital transformation agenda as it offers intrinsically contactless business, reducing health risk and improved resilience — in addition to typical transformation targets in growth, delivering customer experience cost-effectively and deploying/testing new products and services at lower costs. As reserves deplete and loss ratios are affected, insurers will soon prioritize these efforts to lower the cost of operations while improving resilience and addressing customer and employee health/safety.
“Distance-Independent” and “Zero Paper” Business Models: In the near term, face-to-face meetings with agents and brokers to discuss policies or with adjusters to file a claim are extremely challenging. Customer journeys need to be modified to enable every step and interaction to happen anywhere and at any time. Paperless claims, data-driven underwriting and fully digital policy maintenance will be critical for longer-term growth and viability.
Resilience in Workforce | Location Independence: We have witnessed a global shutdown in travel, businesses and borders to combat COVID-19. Some experts predict that, while many of these areas may relax these restrictions within a few months, the bans may need to go back in place if there is a resurgence in infections. Consequently underscoring the need to have a workforce – no matter whether these employees are nearshore, offshore or onshore – enabled and equipped to operate from anywhere.
Building Resilience in Operations and Business Models
Organizations are under stress, and so are employees and customers, due to the uncertainty of the recovery timeline. Some are saying the overall economic impact may be far greater than the recession in 2008. Insurers are beginning to realize the importance of digital as a way to enable resilience and are designing it into core operations, technology and the digital workforce while removing reliance on physical locations.
The illustration below depicts how to build resilience into every level of the business, including core operations and technology, the digital workforce and the physical workforce as new business models emerge. Agile, design thinking, cloud enablement and DevOps will also drive quicker iterations to target states; by definition, these will need to be short-run, multi-week/multi-month, not multi-year, initiatives.
Remove paper and physical contact points internally and externally to deliver services. Deploy chat/digital channels for customer self-service.
Achieve location-independence through WFH capabilities and reduce workloads by automating away low- and medium-complexity transactions.
Enable better employee experience through rapidly deployable attended/unattended automation to boost employee productivity, offsetting any short-term, WFH-related productivity loss.
Redeploy physical workforce to drive customer experience on high-complexity product innovation or high-impact planning and growth work.
Encapsulate operations with digital capabilities for continuity and offset loss in productivity.
Reduce people-dependent physical interactions and expensive voice and paper interactions while improving CX.
Redeploy moderate- and high-complexity customer interactions for human agents.
Accelerate self-service through chat and voice for low-touch flow transactions.
Core Technology and Operations Capabilities
Resilience in core operations across essential customer touchpoint functions: claims, policy maintenance, underwriting and new business/onboarding (for new offerings post-recovery).
Capacity to deal with spikes in volumes as markets head to a new equilibrium.
Rapidly enabled remote employee hiring, onboarding, training capabilities and WFH operations monitoring.
For the next three to six months, most companies will be operating to “keep the lights on,” with the focus on delivering essential services and maintaining operations. While this period will be fraught with tactical challenges, it will eventually end; when it does, businesses can look ahead to the future and the opportunities it presents.
We have phased the coming months into stages to prioritize the recovery path and a way forward to the longer-term business model.
Figure 2 – Working through the stages of COVID-19 recovery
Stage 1 | Secure the present: This first phase will be spent protecting core operations and ensuring customer experiences aren’t disrupted across processes as volatility recedes and we head to the new equilibrium.
Question 1: What are the actions needed to maximize business continuity, resilience and priorities for the near term?
Digital and analytics will help address scale and volume variability while lowering operating costs, providing overall cost-per-claim improvement and enabling straight-through processing for low-complexity claims. Additionally, rapidly deployable attended automation can take care of many routine, repetitive tasks and drive efficiencies for underwriters and adjusters on their present-day desktops. For instance, this would include policy lookup, claim filing and data aggregation for underwriting and, consequently, free capacity to focus on complex cases requiring human intelligence and understanding.
These digital interventions lead to improved resilience and enable improved customer service, the most important aspect right now for insurers. Companies that fail to retain their current customer base will create post-COVID-19 drain on margins and cash reserves, especially if the recovery period is protracted. The good news is that, with relatively low-cost yet focused investments and interventions, the simpler transactions can rapidly be ramped onto digital channels, with the added benefit of making employees more productive in the WFH environment.
Question 2: What are the best approaches to enable, train and manage a remote workforce along with information security risk?
Remote hiring, onboarding and training with capabilities to coordinate and monitor WFH workforces are fast becoming new capabilities organizations are building out of necessity to react to near-term operational needs.
Clearly, information security is of critical importance. InfoSec controls span three areas across technical (e.g., encryption, multi-factor authentication), administrative (e.g., role-based security and credentials, data minimization/masking, read-only rights) and physical controls (e.g., supervisory and location-centric monitoring). Risk control self-assessments (RCSA) initiatives will need to be modified to ensure effectiveness of technical and administrative controls, while computer vision and initiatives emerge to augment physical controls.
Operational controls, key performance indicators (KPIs) and metrics are rapidly being updated to look at leading indicators to improve reaction time, exercise operational control on WFH workforces and ensure service continuity. Updated run-books, procedure guides and laptop-camera-enabled monitoring are all making their way into the WFH ecosystem.
Question 3: How best to improve cash positions and reserves?
Building a cash reserve and identifying opportunities for freeing cash flow to drive innovation will also become a parallel priority, as the timeline for recovery is unknown today.
L&A providers are preparing for larger claim payouts and potentially longer-duration disabilities, due to flexibility in parameters stemming from the COVID-19 stimulus package. In P&C, auto insurers have already declared refunds on the premium to control the cancellations due to non-payments. The industry anticipates a higher delinquency quotient, which will require ramping up billing and collections function to recapture potentially lost revenue. This will also create an opportunity for machine learning, analytics and automation-enabled tools to drive efficiencies in the collection function.
Apart from traditional approaches, high-impact, near-term digital interventions and no-code rapid deployments will also help free cash flow with relatively short paybacks. Success factors, however, will depend on focusing on multiple benefit areas and the ability to deploy robust solutions quickly where volume volatility exists. Additionally, service and capabilities are going to be more important than ever, particularly those that are low-effort yet data-driven and can accurately and quickly identify the right opportunities for digitization or automation.
Stage 2 | Accelerate the recovery: Once infections slow and countries begin lifting their stay-at-home orders, insurers can move from focusing on basic operational continuity to building more resilient business models. The focus will quickly move to getting back to normalcy.
Question 4: How can the rebound be accelerated, and what are the nuances to consider in near/medium-term business volumes that will fluctuate (i.e. claims), compounded by some of the relief enactments (e.g., CARES Act & FMLA Expansion Act as of March 2020)?
Digital tools previously seen as ways for cutting costs or increasing efficiency are now essential. They offer protection against similar events or regional COVID-19 outbreaks that could disrupt operations by reducing reliance on human labor through automation, analytics and machine learning. Initially, these efforts will focus on new business/onboarding, then underwriting when the time arrives for new policies to be written. Subsequently, they will help free capacity and mitigate operational, compliance and audit risks as regulatory parameters evolve and changes are made to COVID-19 relief acts throughout the recovery cycle.
Control room functions and tight controls on projected volumes will be essential to ensure scale up/down of digital and human labor to meet changing volume. As a result, digital and human workforces will need to be tightly integrated to enable stable operations and deal with volatility as the relief acts and market dynamics cycle through periods of volatility.
Question 5: What are the best approaches to deploy automation and move to a digital operating model?
The global nature of this crisis demonstrates the need for insurers to take a second look at their location strategy, re-tooling and re-engineering their workforce for maximum resilience. It’s not so much about whether employees are onshore or offshore – it’s about being able to sustain operations regardless of external circumstances. Enabling the remote workforce to be augmented through digital capabilities, whether attended or unattended automation, becomes a key consideration, as this will not only ensure consistently higher service quality but also reduce training needs as staff are hired.
Question 6: How best to address productivity loss?
A primary focus is on achieving location independence through WFH capabilities and reducing workloads by automating away low- and medium-complexity transactions. This includes enabling better employee experience through rapidly deployable attended/unattended automation to boost employee productivity and offset any short-term, WFH-related productivity loss.
Stage 3 | Plan for the future:Shifting from human-centered to digital processes can help companies be prepared for future surprises like the COVID-19 crisis. The key lesson learned is how we think about future models with resilience and flexibility designed in for future sudden shifts in the market.
Question 7: What are the key considerations to design for the future?
Machine learning and intelligent automation will be more important than ever in a post-coronavirus world for both employees and customers; these capabilities will provide customized experiences for a segment of one, tailored to that worker’s or consumer’s preferences.
As the next normal settles in and is run for a sustained period, new challenges will emerge and will need to be addressed, especially for workforces in developing countries. One way to address this is to organize work into micro-teams (or pods) and ensure a hub-and-spoke model exists from function leaders through to individual staff. The intention is to drive collaboration and self-directed work reallocation at the micro-team level, when unforeseen circumstances affect a team member.
Question 8: What considerations are most important to build in flexibility for future business models as products/services and demographics shift?
The best way to explain this is to reimagine the future model the same way the larger internet natives have to build their platform business; essentially, to build a layered, or “iPhone,” view to redesigning for the future with:
(a) Foundational capabilities (i.e., physical hardware) across operations, paper/document ingestion, operational capabilities and supporting functions with staffing/WFH.
(b) Functional layer (i.e., operating system or iOS) to include digital capabilities and flexibility for new products/volumes across new business/underwriting, claims, policy maintenance and finance/compliance/audit functions, which are common and reusable to different products and lines of business (LOB).
(c) Product- and LOB-specific capabilities (i.e., apps on the iPhone) across core and specific new products enabled end to end through digital channels and automation capabilities. The goal is to flexibly and inexpensively add, delete and modify new products, such as credit insurance products, short-run coverage for specific regional risks products, parameter changes to categories of policies etc.
Stage 4 | Future-proof and shift business models:The problems insurers faced before COVID-19 may exist once the virus is no longer a pressing concern, but interventions of today should be thought through with the longer-term transformation in mind.
Question 9: Key attributes to consider in future proofing post-COVID-19 business models.
Organizations will look to redesign their business models to be more resilient against competitors now as well as pandemics or emerging regional risks.
This will give rise to “death of distance” or “physical contactless” business models, with ways of operating that can be done from any location. This includes offering products, services and delivery through fully digital channels. This will include providing straight-through underwriting for simple policies, and enabling customers to video conference with an agent for more complex or high-touch services.
Insurtechs, fintechs and other digital natives will exert competitive pressure on legacy insurance companies. Conversely, post-pandemic liquidity and access to private equity and venture capital will create interesting acquisition opportunities for insurers. Focused acquisitions may help leapfrog innovation in customer interaction and operational and distribution areas, but the key will be in the appropriate integration of these acquired capabilities at scale.
Conclusion: Digital as Key Enabler of Contactless, Distance-Independent and Resilient Business Models
COVID-19 has shown how situations can radically disrupt operations overnight. However, it’s also shown that people are equipped to adapt quickly and overcome global business challenges.
Insurers have a significant opportunity to thrive by building in resilience, rapidly deploying contactless business models, lowering reliance on physical locations and leveraging WFH capabilities. All of this needs to be executed with speed, agility and decisive action to assess, align and adapt quickly to the new reality.
Digital, automation, machine learning and analytics will enable future business models and have now become essential ingredients to long-term success, with a renewed focus on health/safety and resilience as well as customer experience and efficiency. However, the right digital capabilities must be applied to produce well-defined and achievable outcomes and are as important in “accelerating the recovery” as they are to designing the “business models of the future.”
When the mayor tells you, “if you’re going to stay here, write your name and Social Security number on your arm with a sharpie pen,” it’s time to get out of there. But, whether residents stay or leave, physical structures don’t have that luxury. So, we are about to see round one of an enormous claims process because of Hurricane Harvey.
Disaster mitigation and restoration services are critical after property damage, but how you manage these services may have an impact on the outcome of your claim. Though there are many capable firms that specialize in property damage clean-up and restoration, there are some that will make mistakes, and others may even take advantage of the situation. When it comes to recovering the cost of mitigation and restoration services for an insurance claim, any mishaps can create big problems that may leave you stuck with the bill.
In the best of situations, you’d vet your emergency team before a loss. You cannot be too prepared. Recovery service providers should be identified and interviewed. Make sure the company you choose will be able to handle your potential issues. Involve your insurer during vetting. There are “approved” vendors that insurance companies recommend; however, just because they are “approved” does not mean there will not problems. Notify the insurance company of who you plan to use.
With Harvey, the losses are already upon us, but here are some techniques you can still use to prevent problems:
Clarify and document scope of work – Be clear on scope of work with the recovery firm, and make the adjuster part of that conversation. Often, emergency response does not follow the normal protocols of a typical project. There likely won’t be time for detailed estimates, so try to get the adjuster to approve work in real time to avoid second guessing.
Take a hands-on approach – Your property may still be underwater, but, once access is granted, you must be hands-on. No one should have access to your facility without the presence of a company representative. Assign a property supervisor to the affected site to keep track of who is there and what they are doing. It’s your property and your responsibility. The bigger the loss, the more people coming in and going out, so it is vital to have a company representative onsite to observe and answer questions.
Audit contractor charges before approving – The first weeks after a loss are chaotic. It’s important for policyholders to put controls in place to monitor activity and to verify that work has been completed to specifications and according to the terms of the agreement. Reimbursable insurance expenses should be separated and audited prior to payment for proper detail and accuracy. This needs to be done efficiently in real time. If you don’t have the resources, this step can be completed by your claim preparation accountants i.e. forensic accountants. Having forensic accountants on your team, along with your technical experts, can let you process this information in the context of insurance recovery. Don’t assume your forensic accountants will automatically audit invoices. Identifying errors or, worse, fraud is critical to avoid delays in payment or project completion.
Address issues immediately – When the first invoice arrives, insurance companies may act surprised and even deny coverage, especially if the steps above have not been followed. Make sure to get the parties together to discuss the issues. Don’t procrastinate and don’t assume. It is important to be active with any potential discrepancies. The policyholder is responsible if there are unresolved differences. If the adjuster disagrees with the work performed and the invoices are paid, it may be difficult to recover all your expenses. The immediate aftermath of a disaster is stressful and hectic. Preparation and communication can help you weather the storm and minimize unwanted surprises when you’re looking for claim payment.
Once disaster strikes, the first priorities are always safety and preservation of property, but there are priorities to consider ahead of a loss to avoid unexpected surprises. Disaster mitigation and restoration is a critical service after property damage, and how you manage it may affect the outcome of your claim. Though there are many capable firms that specialize in property damage clean-up and restoration, there are some that will make mistakes, and others may even take advantage of the situation. When it comes to recovering the cost of mitigation and restoration services for an insurance claim, any mishaps can create big problems that may leave you stuck with the bill.
Here are five techniques to prevent potential problems before they arise:
Vet your emergency response team prior to loss — Preparation is the key in any endeavor, and with property damage claims you cannot be too prepared. Recovery service providers should be identified and interviewed. Make sure the company you choose will be able to handle your potential issues. Involve your insurer during vetting. There are “approved” vendors that insurance companies recommend; however, just because they are “approved” does not mean there will not problems. Notify the insurance company of who you plan to use, as well.
Clarify and document scope of work — Be clear on scope of work with the recovery firm and make the adjuster part of that conversation. Often, emergency response does not follow the normal protocols of a typical project. There likely won’t be time for detailed estimates, so try to get the adjuster to approve work in real-time to avoid second guessing.
Take a hands-on approach — Your property may still be underwater, but once access is granted you must be hands-on. No one should have access to your facility without the presence of a company representative. Assign a property supervisor to the affected site to keep track of who is there and what they are doing. It’s your property and your responsibility. The bigger the loss, the more people there will be coming in and going out, so it is vital to have a company representative onsite to observe and answer questions.
Audit contractor charges before approving — The first weeks after a loss are chaotic. It’s important for policyholders to put controls in place to monitor activity and to verify that work has been completed to specifications and according to the terms of the agreement. Reimbursable insurance expenses should be separated and audited prior to payment for proper detail and accuracy. This needs to be done efficiently in real-time. If you don’t have the resources, this step can be completed by your claim preparation accountants, i.e. forensic accountants. Having forensic accountants on your team, along with your technical experts, can let you process this information in the context of insurance recovery. Don’t assume your forensic accountants will automatically audit invoices. Identifying errors or, worse, fraud is critical to avoid delays in payment or project completion.
Address issues immediately — When the first invoice arrives, insurance companies may act surprised and even deny coverage, especially if the steps above have not been followed. Make sure to get the parties together to discuss the issues. Don’t procrastinate and don’t assume. It is important to be proactive with any potential discrepancies. The policyholder is responsible if there are unresolved differences. If the adjuster disagrees with the work performed and the invoices are paid, it may be difficult to recover all your expenses.
The immediate aftermath of a disaster is stressful and hectic. Preparation and communication can help you weather the storm and minimize unwanted surprises when you’re looking for claim payment. Having an experienced and independent forensic accounting team will reduce the stress, the workload and reimbursement issues. Per the tagline for one of the largest restoration firms, in the end you want it to be “Like it never even happened.”
With our past few posts on ITL, we have been exploring how insurers can continue to bring more private capacity to U.S. flood (Note: Everything we talk about for U.S. flood is also relevant for Canada flood). We have explored here how technology, data and analytics exist to handle flood in an adequately sophisticated manner, and we have described here the market opportunity that exists. Now, it’s worth a look to explore how a flood program could be introduced, starting from scratch through cherry-picking mischaracterized risks and then to a full, mass-market solution.
What’s a FIRM? It’s not what you think
First, let’s take a quick look at how National Flood Insurance Program (NFIP) rates are determined: the Flood Insurance Rate Maps, or FIRMs. For the NFIP, FIRMs solve two core problems – identifying which properties must have flood insurance and how much to charge for it. The first function is for banks, giving them an easy answer for whether a property to be lent against requires flood insurance – this is what the Special Flood Hazard Area (SFHA) is for. Anything within the SFHA is deemed to be in a 100-year flood zone (basically, A and V zones), and requires flood insurance for a mortgage. The second function sets the pricing and conditions for the NFIP to sell the actual policies. The complexity of solving these two problems should not be underestimated for a country of this size. But it must be remembered that a FIRM is a marketing device and not a risk model.
Considering that FIRMs are a marketing device built on a huge scale, it makes perfect sense that some generalizations needed to be made on the delineation of the various flood zones. The banks needed a general guideline to know when flood insurance was needed, and the NFIP needed rates to be distributed in a way that could result in a broad enough risk pool to generate enough premium to be solvent. While the SFHA has served the banks well enough over the years, the rating of properties has not been so successful. There are plenty of reasons the NFIP is deep in debt (see page 6 of this report); suffice it to say that the rates set by FIRMs do not result in a solvent NFIP.
The fact that the FIRMs are a flawed rating device based on geographical generalizations means there are cherries to be picked. By applying location-based flood risk analytics to properties in the SFHA, a carrier can begin to find where the NFIP has overrated the risk. Using risk assessments based on geospatial analysis (such as measurements to water) and their own data (such as NFIP claims history), a carrier can undercut the NFIP on specific properties where the risk fits their own appetite. Note to cherry-pickers: Ensure you account for the height above ground of the building, because you won’t need elevation certificates for this type of underwriting. So far, cherry-picking has been focused on the SFHA for a couple reasons – homeowners need to have coverage, and the NFIP rates are the highest. There is no reason, though, that cherry picking can’t be done effectively in X zones and beyond.
The same data and analytics used for cherry-picking can be used more broadly to create a mass-market solution. By adjusting the dials on the flood risk analytics – and flood risk analytics really should be configurable – you can calibrate to calculate the flood risk at low-risk locations. In other words, flood risk can be parsed into however many bins are needed to underwrite flood risk on any property in the country. With the risk segmented, rates can be defined that can (and should) be applied as a standard peril on all homeowner policies. Flood risk can be underwritten like fire risk.
Insurers have traditionally been confident underwriting fire risk. But consider this: While fire is based on construction type, distance to fire hydrants and distance to fire station, flood risk can be assessed with parameters that can be measured with similar confidence but with greater correlation to a potential loss.
Flood will be the new fire
Insurers have been satisfied to leave flood risk to the Feds, and that was prudent for generations. But technology has evolved, and enterprising carriers can now craft an underwriting strategy to put flood risk on their books. Fire was once considered too high-risk to underwrite consistently, but as confidence grew on how to manage the risk it became a staple product of property insurers. Now, insurers are dipping their toes into flood risk. As others follow, confidence will grow, and flood will become the new fire.