Insurance in the age of COVID

“Insurers should strongly consider continuously assessing risk and implement proactive strategies to address operational challenges and manage risk for businesses and consumers.”

“Reflecting on the past year, COVID-19 pushed the need for nascent, innovative digital solutions and services to the forefront of standard insurance industry operation. The unpredictable environment that lies ahead indicates consumers and businesses will increasingly rely on and choose insurers offering online resources and tools that can best meet their needs, particularly as digital adoption continues to grow.”

Mark McElroy

EVP And Head Of Insurance Business, TransUnion

(COVID-19’s Impact on the Insurance Industry Will Continue Well into 2021 (transunion.com))

A recent survey in the US of consumers with active insurance policies has highlighted a number of key trends affecting the industry and, as you would expect the headlines are dominated by COVID related topics including;

· profitability warnings – customer’s unable to pay their premiums due to unemployment or financial uncertainty, ‘unused’ premiums requiring refunds in the auto sector or lower revenues in sectors such as travel,

· expectation of greater flexibility – given that most people have had their day to day lives impacted in a practical way there is a growing demand for usage-based insurance such as the use of vehicle telematics and a greater expectation of individualisation from insurers as a result of a blurring between the lines of commercial and domestic space usage.

However other topics, not directly COVID related, were also flagged;

· digitalisation – this process was already well underway but with reduced office-based staff a forced acceleration was inevitable. However, the report noted a cautionary balance to maintain service levels and protect against fraud,

· and finally, as if the above wasn’t gloomy enough, a dramatic growth in the number and scale of disaster related claims with a record number of natural catastrophes experienced during 2020 and 21% of survey respondents impacted.

So, despite the ongoing challenges facing the sector as a direct result of COVID and the restrictions implemented to tackle the pandemic, sight should not be lost of equally pressing issue of climate change and potential impact this will have on the sector.

In the UK the two main results of climate change that will impact the insurance sector are rising temperatures and more extreme weather events.

Temperatures are rising; figures show that average temperature of the earths surface is now 1 degree higher than it was during the pre-industrial period, 17 of the 18 warmest years on record occurred during the 21st century and each of the last three decades has been hotter than the previous. (Climate change explained - GOV.UK (www.gov.uk))

This in turn results in a greater risk of flooding, droughts and heatwaves which can impact on properties and therefore the insurance industry presenting in a growing number and value of flood and subsidence claims.

To put subsidence claims in the UK into to context, in the fifteen years from 1989 to 2004 there was an average of 40,000 claims per annum. The total cost of repairs to the insurance market was around £6.8 billion with an average annual cost of £422 million making it the second largest cause of claims in terms of value.

2018 was classified as an ‘event’ year and saw the biggest surge in subsidence claims since 2003. The third quarter of 2018 saw a 350% increase in the number of claims, according to figures from the ABI, with 10,000 claims totalling £64 million versus 2,500 claims totalling £14 million in the previous 3-month period. In total there were 23,000 successful claims that year compared to an average of 16,000 during the previous 3-year period.

In 2019, there was a total of 19,500 claims: lower than 2018 but still higher than previous years and showing a rising growth trend. At the time of writing a total value for claims was unavailable but the evidence already cited would suggest that the whilst the number of claims continues to rise so does the cost of each claim.

So, what does this signal for 2020, 2021 and future years. As per the cost of 2019 claims the final figures for 2020 are not yet published, however with the wettest February on record, the sunniest spring and a summer heatwave topped off with October breaking rainfall records the trend of rising number and value of claims is set to continue.

The issue of tackling climate change is not one for this platform so what can the insurance sector do to protect itself against the impact of changing climate on the scale and cost of subsidence?

The main cause of subsidence in the UK is shrinkage. This predominantly occurs during dry weather in clay soils which expand and contract with changes in their moisture content. In normal circumstances clay soils will shrink over the dryer summer months and recover during the wetter winter months, however as summers and winters become dryer this is no longer the case.

Trees and shrubs need a large amount of water to survive with a mature, deciduous tree requiring up to 80,000 litres a year. In drought conditions moisture removal to a depth of 6 metres can occur and a tree’s root system may extend well beyond the usual 5 times the radius of the tree’s canopy.

To put this into an insurance context; during the period 1989 to 2004 of the average 16,000 successful claims per annum around 12,000 related to trees.

As is the case in all aspects of life if we can’t change then we should adapt i.e. the more we know about the potential risk the better prepared we can be. We are blessed in the UK to have an abundance of high quality, affordable mapping resources and soil type is no exception. The UK Soil Observatory (UKSO) is a collaboration of institutions providing and delivering information about the diverse soil types of the UK. The UKSO map viewer is free and easy to use and has some of the most accurate soil data for the UK available (UK Soil Observatory - British Geological Survey (bgs.ac.uk).

So how about trees? Is there a similar resource? You would expect the answer to be yes however whilst the UK has hundreds of millions of trees they have been in the past poorly mapped, particularly in urban areas, with no national standard for those that may have been spatially recorded. That is up until now!

The Bluesky National Tree Map (NTM) is a digital map layer and database accurately depicting and recording the location and extent of trees. The maximum and average heights of the crown and the size of the crown of each tree are calculated automatically using robust algorithms applied to a range of highly accurate geographic data, including aerial photography, colour infrared and digital surface models. A team of editors, trained in accurate photo-interpretation, examine the resulting data to ensure consistency and quality control.

NTM is delivered in formats suitable for use in desktop Geographical Information Systems (GIS), web mapping applications and Computer Aided Design (CAD) packages. The fact that NTM comprises both 2D location and 3D height measurements means it can be viewed and interrogated in both 2D and 3D GIS and CAD software and as NTM is in essence a database it can also be provided in all common database, text or spreadsheet formats.

The data itself comes with three layers, one showing the actual outline of the tree canopy as an irregular vector polygon. This has then been idealised as a circle with the same area, which can be used for illustrative purposes, and the final layer is a simple point file which displays a point at the position of the highest point of the tree. All three layers are attributed with several metrics relating to the tree, including maximum & average height as well as the area of canopy coverage.

There is a broad scope of applications for this data with new uses regularly being discovered, but what is very apparent is that knowledge of the location and size of individual trees provides additional benefits to practitioners working in many market sectors including insurance. Whilst trees are beautiful, enhance the landscape, bring an element of tranquillity to a busy city centre, they can often also present significant challenges as has already been discussed.

Three of the largest homes insurers in the UK as well as the largest insurance marketplace in the world and two premium data integrators specialising in the insurance sector are already using the NTM data to assist in areas such as policy creation and claim management. However, the application of the data could extend much further as has been demonstrated with other types of geographic data in this sector for example the LiDAR created property level flood map of Britain used by Norwich Union to understand risk and inform premiums nearly 20 years ago! (UK: Norwich Union's revolutionary flood map begins roll-out - Aviva plc)

At the time this was seen as revolutionary with one headline touting the use of ‘missile technology’ to create the flood maps which begs the question what else could NTM data be used for? Obviously, tree data could be used to inform risk of and therefore premiums for subsidence as well as damage to properties from debris or falling trees during storm events but how about using it for health insurance?

It is well documented that trees benefit health; their canopies act as physical filters trapping dust and absorbing pollutants (although research although indicates that they may also have a negative impact of air quality by trapping and storing harmful pollutants as well), they provide shade from solar radiation and they reduce noise.

Trees and green spaces can also lower blood pressure, slow the heart rate and reduce stress levels. Trees also benefit the environment not only by absorbing and storing carbon dioxide but also reducing wind speeds, cooling the air as they lose moisture and reflect heat, and preventing flooding and soil erosion. Trees also have a positive economic impact with house prices up to 18% higher with proximity to mature trees and businesses benefiting from happier and healthier workforces.

So, isn’t it time you knew more about the location and scale of the UK’s tree stock and explored what it could do for your business?

Contact David Hillier at david.hillier@bluesky-world.com