“And the men who hold high places,
must be the ones who start,
to mold a new reality,
closer to the heart, closer to the heart”
Contrary to public perception, the interests of policyholders and insurers aren’t always in conflict. In fact, it is important to both parties to actively participate in the reduction of losses by either prevention or mitigation of loss. But these actions have costs. Who should pay for these costs when both parties benefit?
Consider the fortification of a property to prevent wind-related losses from tornado or hurricane. No doubt, this is a worthwhile investment that could prevent damage, loss and injury to a property owner. It is also expensive.
If a property owner finances these mitigative efforts, this will benefit the insurance company. Generally, it is expected these expenses would be offset by premium reduction on insurance due to lowered risk. But, it may not be financially feasible for a property owner, especially a homeowner to absorb the upfront investment, even if financed, for an undisclosed premium discount over time. The property owner is likely unaware of how to compute their return on investment (lower losses and reduced premiums), and in that fog of uncertainty, will probably not act to reduce risk at all.
On the flip side, insurers have the financial ability and the experience to be able to assist their current or future policyholders in financing these risk reduction activities. But, they are discouraged to do so in light that the insurer faces the risk that a policyholder could move to another carrier long before the insurer is able to recoup its investment in the property. So, under that fog of customer uncertainty, it is financially prudent for the insurer to not actively invest in proven risk mitigative efforts.
That leaves all of us at an impasse. The insurable loss interests between insurer and insured are completely aligned (neither wants loss), but conflict arises from the financing of these outcomes. Can we creatively overcome this conflict to reach a common goal of risk mitigation which is a win/win for insurer and policyholder (and society)? Can a new business model be developed that solidifies the partnership between these parties and paves a better way for insurance to be transacted? I have written before about potential new business models where we will see insurance being embedded into product and where product (such as risk mitigation) is embedded into insurance. And recently, I was pointed to an article where this experiment is happening in real-time (hat tip to Paul VanderMarck for posting this article on LinkedIn)
Mystronghome.net is an organization that combines a homeowners insurance policy and a new fortified roof. Fortified roofs are much safer than traditional roofs and are expected to drastically reduce wind losses from a hurricane once in place. MyStrongHome provides the contracting to retrofit the fortified roof and uses the savings on the insurance premiums to fund the construction financing. Once the construction loan has been paid off, all future insurance savings (and the increased market value of the home) all belong to the homeowner! This is the first I have seen that have financially tied risk mitigation with insurance along with the effective economic incentives to align everyone’s interests. What makes this really interesting is that it scales nicely. Here are a list of potential perils in which this new model would make a welcoming impact:
– seismic retrofits (90% of California homeowners do not have any earthquake coverage)
– roof and attic vent retrofits to prevent wildfire
– shutter, glass, door, garage door, and wall retrofits against hurricane and tornado wind damage
– and, building lift against floods
These are just some of the potential ways insurers and policyholders can partner together to reduce each other’s exposure to loss. And the list does not just have to pertain to property, is there a way to help companies with dangerous operations protect their workers, or ways to reduce liability of product, premises, and vehicles? Can we finance and retrofit older homes with knob and tube wiring to modern wiring and provide the insurance savings as the funding mechanism? Can we finance and install automatic water shut-off instruments in all homes and prevent internal water damage from burst pipes or broken washing machine hoses (62% of all water damage in a property are do to plumbing failures)?
Prevention as a Service (PaaS) or Mitigation as a Service (MaaS) is a logical direction for insurers to move towards. Insurers have the experience & financing prowess to get it done. Now they just need to be creative in product development as MyStrongHome has. I am likely just scratching the surface in how insurers could creatively finance products and embed insurance into them.
Hats off to the MyStrongHome team for getting us moving forward!