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Insurers play a key role in sending risk signals, sometimes in a form other than price. These risk experts need to lead by reframing the “insurance crisis” as the “insurability crisis,” and leveraging a time-tested safety standard approach to align a complex ecosystem of competing interests.
By Francis Bouchard, Epicenter contributing editor
As Newton taught us, inertia is a powerful truth: something in motion—or not in motion—will retain its speed and trajectory absent an external force. While intended for application to the natural sciences, the law works just as well for the social sciences like human behavior, change management, and organizational efficiency. Turns out it’s universal.
The insurance industry has served as that “external force” many times (think fire escapes, seat belts, and countless industrial safety measures), but two instances in particular are deeply relevant today. Both were instances where safety standards were used to alter the trajectory of massive consumer markets, and both were led by system-thinking engineers with obsessions for mitigating risk.
The first example is system-thinking engineer William Henry Merrill, a young MIT-trained electrical engineer sent by insurers to assess the risk profile of electricity at the Chicago World’s Fair in 1893. Those were the early days of commercializing Nikola Tesla’s A/C power experiments, with Westinghouse and a nascent General Electric tussling to see who could put this exotic new technology to practical use. Merrill’s assessment was no surprise: left unchecked, electricity could become an insidious new fire risk, a message well-understood just 22 years after the Great Chicago Fire.
The second example is systems-thinking engineer William Haddon Jr, another MIT-trained expert known as the father of modern injury epidemiology. His conceptual framework—called the Haddon Matrix—instilled a scientific approach to understanding how injuries occurred and how to keep them from happening again. Lyndon B. Johnson, U.S. President from 1963-1969, appointed Haddon to run the National Traffic Safety Agency and then the National Highway Safety Bureau, where Haddon developed the first Federal Motor Vehicles Safety Standards.
What these two systems-thinking engineers had in common though was more than a deep understanding of risk. Both understood how insurers’ keystone weight-bearing role in managing complex societal exposures rendered them uniquely qualified to send risk signals to those who had to hear them. Even more importantly, they also understood that sometimes those signals had to take some other form than price.
Both Merrill and Haddon transformed these insights into institutions that upended the trajectory of major industrial sectors and had profound impacts on the world we live in today.
In Merrill’s case, he convinced insurance industry leaders to view electricity not just as an underwriting factor but as a public good that required deeply researched safety standards. The result: Underwriters Laboratory, now called UL Solutions, which today is the largest safety standard organization in the world, generating $3 billion of annual revenues.
For Haddon, it was impressing upon insurers that their stake in reducing auto accident injuries and deaths was too great to rely on existing sub-scale (and sub-par) safety organizations. Industry leaders agreed and evolved a technical research body focused on automobile claims into the Insurance Institute for Highway Safety (IIHS), which is now the de facto global standard setter for automobile safety.
The reason the insurance industry succeeded in shaping these two economic sectors was simple: they are the ones in the modern economy that manage these types of risks. They are the experts. Who else could credibly set those standards? No one.
This is precisely why these risk experts need to lead again, this time by reframing the “insurance crisis” as the “insurability crisis” and once again using a safety standard approach to align a complex ecosystem of competing interests. The Institute for Business & Home Safety (IBHS) is well down this path, and is already recognized as a global leader in understanding the physics of extreme weather’s impact on the built environment.
IBHS programs like FORTIFIED and Wildfire Prepared provide homeowners, builders, and developers with science-based solutions for homes that are able to withstand risks like hurricanes, high winds, hail, and wildfire. But homes built or retrofitted to these standards, while growing in number, are not (yet) commonplace outside certain pockets of the country and consumers are not (yet) demanding the IBHS safety standards like they do with the UL or IIHS standards. To achieve that system-wide embrace the industry will need to partner with players across the housing ecosystem and invest more heavily in the tools and platforms that can scale consumer demand.
But the urgency is here now. And it is critical that the entire resilience ecosystem understand that “insurability” is a shared responsibility, consisting of hundreds of independent decisions, even if insurers are the final arbiters. As our two Williams from MIT showed us, the most effective way to define safety—in this case climate resilience—is as the common purpose that aligns interests on every step of the “insurability” journey, starting with architectural design, land use planning, building codes, and construction.
This kind of system-level alignment works for almost 4 billion electrical appliances and 300 million cars in the U.S. It can work for the 82 million U.S. homes as well.
Francis Bouchard is a seasoned insurance public affairs professional who has been a strong voice for industry climate action for over a decade. He currently serves on several resilience focused non-profit Boards and Advisory Councils, and has joined The Epicenter community as a contributing voice on insurance and resilience. Stay tuned for more insurance-anchored content to come.
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