Wondering Aloud - Planning for a Subsidence Golden Jubilee - Tony Boobier
In an idle moment, you may care to wonder on how subsidence insurance will feature as a key component of the insurer of the future. By ‘future’, we only need to think about 10 years hence, by which time some readers will have retired, and some junior adjusters of today will have become captains of industry.
Before embarking on this journey, we have to make at least one assumption – that insurers are still providing subsidence cover and that it is roughly in the same format as today, other than that the excess or deductable will surely have been doubled.
One thing we can be certain of is that ground movement will continue to occur, but will movement patterns be distorted as a result of severely hot summers and flash rainstorms. It’s unlikely that buildings will become more resilient but perhaps every building ever likely to subside will have done so by then, and insurers will therefore have a much clearer idea as to where the risks are. With insurers basing their rating on probability rather than inevitability, will those homeowners at risk find themselves in the same situation as homeowners at risk of flooding, where other than for ABI and government dialogue, properties at risk of flood would be uninsurable.
Of course, heat and warmth are ideal ingredients for tree growth, and as tree maintenance programmes are affected by budget cuts, there will be continued pressure on tree owners to take action to prevent any nuisance occurring. Perhaps in 10 years, supply chain management in subsidence will extend as much to loss prevention than to damage repair. But of course the question will remain – who pays?
Will we have a better understanding of the interaction between trees and building as we enter the 2020’s? It’s known to be a complex area, with multiple criteria – distance, height, crown size, type, ground conditions, foundation depth. Unless data is collected from today, in a structured way, it’s unlikely that we will be any wiser in being able to predict damage with certainty. But insurance has never been about certainty, but about probability. Risk is no more than a mathematical calculation of vulnerability relative to hazard. Whilst we think we know that the hazard of damage occurring will increase, equally to get a full picture we need to ask ourselves whether buildings will become more or less vulnerable.
At its most basic level, subsidence management is no more than the controlling of those two factors – reducing the hazard, and lessening the vulnerability. We reduce the hazard by tree management, or the controlling of other causes of damage as far as practically possible. Equally, the vulnerability of damage to buildings is lessened by underpinning or other similar methods of strengthening. Any other function within the subsidence management process is, arguably ‘non-core’ – notwithstanding that it may still be enormously important e.g. the provision of alternative accommodation.
Where else might the industry see changes? Perhaps a fundamental change may occur as a by-product of the current Solvency II requirements being imposed by European Regulators (although to some degree these new requirements are already partly embedded in UK insurance courtesy of FSA and ICAS). Many industry experts now recognise that Solvency II which started as a compliance issue has now moved on, and is morphing into a key driver of strategic change within insurers. By this we mean that, rather than insurers setting their strategy and then working out how much working capital they need to run their business, the process may be one of insurers deciding how much working capital they can afford, and then forming their strategy on the basis of affordability.
What this means is that insurers will take a hard look at the amount of capital they require by line of business, or perhaps by peril, and then decide whether they want to provide cover as a matter of strategic intent. The application of this is relatively clear in the decision as to whether to enter a new geography i.e. Latin America, or to create a new insurance product, but it becomes more complex in the area of well-established perils such as flooding or subsidence. Perhaps a series of major weather incidents, as a result of climate change maybe, might bring greater focus to these important issues. By 2020, insurers may lay awake at night worried not about subsidence risk (i.e. the risk of damage occurring) but more because of economic risk to their business as a consequence of hotter summers on claims results.
And what of the customer? How will buying behaviour change in the next 10 years? One only needs to look back a decade to recognise the rate of progress. Today’s customer is as likely to buy insurance from a high street retailer – a bank or supermarket – as they are to buy direct from the insurer. And of course the emergence of so-called aggregators which allow on-line quoting and automatic issuing of policies is increasingly becoming dominant, a situation which will surely grow as the ‘silver surfer’ generation increase in numbers and internet access becomes increasingly cheaper and accessible. Insurance is likely to become increasingly commoditised, and this will have a natural effect on subsidence claims handing. Automation and transparency will become increasingly dominant in the subsidence industry, and there are likely to be few ‘hiding places’ for inadequate performance.
Commodity inevitably brings greater focus on the topic of price, and this links directly to the sensitive area of cost of services. Were the supplier base perfectly elastic, in the economic meaning of the expression, then the cost of providing subsidence services will continue to be driven down in real terms. On the other hand, there is concern about the reduction of skill and competence from the subsidence industry, and perhaps by 2020 there may be a real shortage of skilled practitioners who will at long last recognise their value. Costs could go up, not down – and with it there could be a stampede by other professions towards the gold rush of subsidence, a bit like in the 1970’s. Who will be there ensuring technical competence of subsidence expertise? The work being done today by the CILA in reviewing the examination programme may be setting down the foundations for that future position.
With subsidence cover first being introduced in 1971, by 2020 the subsidence industry will be preparing for its Golden Jubilee. Some people – although not many – will have entered the subsidence industry at its beginning and will be preparing to leave, pension arrangements permitting, by the time of the 50th anniversary. For those, and many others, it will have been an extraordinary professional journey. And throughout that period, the ‘golden thread’ of the CILA will inevitably be seen to have weaved its way through good and less-good times for the subsidence industry, providing leadership and consistency.
Tony Boobier, FCILA
