Product Innovation: The Key to Climate Resilience for the Insurance Sector

Francis Bouchard, Contributing Editor for The Epicenter and Managing Director of Climate for Marsh McLennan, sat down recently for an interview with IBHS CEO, Roy Wright. The following piece captures the highlights from their discussion.

A California native, Roy Wright acknowledges that ensuring a resilient recovery after the Los Angeles fires in Altadena and the Palisades is as much a personal crusade as a professional one. “As these large-scale devastating events pick up in frequency, no one will be further than two or three degrees from being personally affected by these climate-related disasters. I’m no different.”

Wright, who’s been the CEO of the Insurance Institute for Business & Home Safety (IBHS) since 2018, leads a team of 90 researchers, engineers, lawyers, communicators, and construction workers who conduct the testing that underpins the standards for FORTIFIED Homes, Wildfire Prepared Homes, and the Wildfire Prepared Neighborhood Standard.

Wright has delivered 30 speeches about the path to greater resilience this year alone, not to mention testifying before Congress half a dozen times since joining IBHS. And today, through a thoughtful balance of folksy wisdom and hard engineering knowledge, he is emerging as one of the preeminent voices in the insurance sector on climate-related issues.

As the insurance industry’s risk reduction champion, Wright offers an intriguing contrarian perspective about the future of insurance in the age of climate change. In the face of more frequent and destructive climate disasters, Wright believes that it will be product innovation, not risk reduction, that will define insurers’ long-term legacy.

The Need For Insurance Innovation

When asked how the insurance sector is going to lead through the climate crisis, Wright’s answer was surprising, considering his role as the insurance industry’s leader in risk reduction: “product innovation.”

By product, Wright is referring to the combination of sublimits, deductibles, Managing General Agents (MGA) niche coverages, technologies, new affinity distribution platforms, the appetite for Insurance-Linked Securities, and risk profiling tools that allow insurers to identify and manage these increasing climate exposures.

Such product innovations could include setting lower exposure limits for wildfire or higher deductibles for hurricane coverage. The point Wright stressed, though, is the need to allow insurers the ability to offer terms and conditions that meet both their needs and those of their policyholders.

“At yesterday’s price point,” Wright explains, “consumers didn’t really need to deal with the complexities of insurance. But as those complexities come home to roost, consumers will need to open their aperture and get better informed, while insurers need to get more flexible in their offerings.”

At the same time, “heightened consumer awareness about insurance will force insurers to innovate in the communications space as well,” Wright predicts, adding that “agent education will become a critical competitive factor considering the outlandishly important role they play in engaging customers.”

In short, today’s climate necessity is the mother of tomorrow’s insurance invention.

Alabama FORTIFIED: An Example of Resilience-based Proposition Design

In 2019, Alabama passed House Bill 283, requiring insurance companies to offer homeowners the option to purchase a FORTIFIED Roof for their existing roofs, an upgrade to a high-wind resistant standard with better materials and installation. A program of IBHS, a FORTIFIED roof can reduce damage by limiting the potential water intrusion by as much as 95%.

According to Wright, the Alabama FORTIFIED Roof program is an example of how resilience programs can underpin proposition design. Rather than adjusting traditional coverage terms, insurers can restructure their entire value proposition around resilience.

What started in 2011 as a grant program—Strengthen Alabama Homes, which offers grants up to $10,000 to fortify a roof up to IBHS standards—has become an example of resilience-focused proposition design, demonstrating how aligning incentives, stakeholders, and product features can create new market value and drive adoption of risk-reducing behaviors.

After Hurricane Sally in 2020, the two coastal counties widely implementing the program—Baldwin and Mobile—showed remarkable results: the homes built to the FORTIFIED standard were 70% less likely to need to file a claim, and claim size fell 22% for those that did have to file. Moreover, homeowners have recognized the value of building to the FORTIFIED standard and are choosing to invest in the FORTIFIED upgrades themselves; today, less than 20% of retrofits are now funded by the state. Meanwhile, home builders and roofing contractors are responding to the growing demand.

Other states are paying attention. North Carolina and Louisiana have also established successful grant programs, and others, including inland states like Oklahoma, Kentucky, and Minnesota, are establishing similar programs. In California, IBHS recently certified KB Home’s Dixon Trail community as its first Wildfire Prepared Neighborhood designation, extending IBHS for the first time beyond the individual home and into community-level drivers of risk.

And yet, the number of certified homes in the U.S. that meets one of the IBHS standards is still less than 100,000, or just 0.11% of all U.S. homes.

To Wright, this suggests a need for greater prioritization. “One of the biggest hurdles in the resilience space,” Wright explains, “is the notion that resilience is a nice thing to do tactically rather than as a strategic priority.” “That’s why,” he adds, “the biggest opportunity we face is to actually bake resilience into the insurance product.”

Four Keys to Industry Leadership

When asked what success might look like for the insurance sector in 2030, Wright starts again with his view that long-term climate resilience is a shared responsibility. “The insurance industry and insurance consumers could both be on the winning side here if they achieved four things.

“First, consumers must have a deeper understanding of their risks and risk management options. Knowledge is always the great equalizer, and here it is imperative that we rebalance the asymmetry of information.

“Second, insurers must develop the flexible products needed to provide meaningful coverage and nudge people to take actions to reduce their risks. Like the product liability crisis of the 1980s, the industry needs to work with regulators to create entirely new approaches to making catastrophe risk more accessible.

“Third, insurers must recognize the resilience actions their consumers and communities take. This isn’t about discounts. It’s about understanding the risk and monetizing the reward for lower exposures.

“And fourth, insurers and others must provide seamless financing to facilitate resilience-enhancing actions. Some of that will be product-driven, but we also need to start engaging other sources of capital to catalyze investments in risk reduction.”

Reinventing the Industry

It’s clear Roy Wright is on a mission to protect homes, lives, and livelihoods. It’s also clear that the insurance industry’s ongoing support for IBHS is increasingly important as various stakeholders—from homeowners to governors—seek an answer to the question: “What is an insurable home?”

But the fact that IBHS certifications have not yet penetrated many exposed markets suggests there’s still a lot of work to do if insurers hope to overcome communities’ historical tendency to favor the taxes generated by building new developments over the costs to avoid rebuilding. “A scaled-up offensive force to engage on building codes or enabling legislation on critical resilience matters would certainly help.”

Whether the industry ramps up its efforts to push for greater resilience or not, Roy is tireless in his commitment to the mission: “This is the most important work I or the industry could ever do. We’re saving lives. We’re saving livelihoods. And we’re saving the ability for the insurance sector to continue serving its customers.”