How carriers can use digital tools to combat underinsurance

It's easy for those of us who work in the insurance industry to look at stories like this one or this one and shake our heads. Sure, hurricanes as disruptive as Harvey and Irma are still relatively rare. But how can consumers who live in risky areas still be underprepared after seeing this story play out with Hurricane Katrina, Superstorm Sandy, and so many other "stark reminders" of nature's wrath?

Though flood insurance has plenty of issues, not buying it, if you live in a flood zone, is a very risky bet -- because when floods come, they tend to devastate. It's not like skipping out on comprehensive coverage on your car because it's more likely to get in minor fender-benders than catastrophic crashes. But the combination of carriers' risk management appetites, regulatory boondoggles and consumers' unwillingness to confront their risk has left huge holes in coverage.

And it's not the only line of business that's underbought relative to the risk. The life insurance industry has an entire month dedicated to trying to raise the insured rate, especially among middle-class consumers. Sixty percent of renters don't have insurance. And because buying insurance tends to be unpleasant, underinsurance on the policies people do buy is common. Something must be done.

Eddie Seal/Bloomberg

Why have these gaps formed? I have a couple ideas. First and foremost, more value is being put in more risky places. That seems obvious when talking about the gold coast of southeastern Florida, but I can look up in the dry, hot mountains near my home in Utah and see million-dollar properties where once was only rocks and brush -- then look in another direction and see the smoke of a wildfire. Secondly, the property that needs to be insured is changing. Renters may not have always had fine jewelry or other collections, but today they are likely to have expensive computers and other digital devices. Cars are becoming more complex every day -- as is the cost to repair them, with manual locks and windows all but disappearing from even the most budget options, more computerized processes and compressed hood space making home maintenance difficult.

Finally, insurers haven't always kept up with these first two points in their policy language and distribution methods. That's where the industry has an opportunity to make fundamental changes, using digital, to close these gaps. We are already seeing some of that being done in the insurtech industry. For example, Trov allows consumers to see, from start to finish, how their most important items get insured, using a fully digital process. It's a great start, but there is a lot more that can be done using this concept. Flood insurance today is difficult to understand and buy, and the value isn't always apparent. Insurers and regulators need to work together to develop a process that illustrates the urgency to flood-plain residents of all income levels.

Look at what Jumpstart, which is planning to launch this year with a parametric product for earthquake cover, is doing. Its product works along with traditional earthquake cover to meet an immediate need for quake victims: Getting them the cash they need to make it to their larger claim. Its distribution and payout mechanism is sympathetic to what people in a quake situation might have: The clothes on their back and the smartphone in their pocket. It doesn't ask its customers to go rushing for papers in an emergency.

Another example is Hippo Insurance, which very explicitly states that its goal is to insure "modern possessions and modern lifestyles," mentioning home office work and device coverage in its value proposition. It also looks to deploy sensors in homes to be a present risk manager for customers. Meanwhile, my home insurer sent me a paper policy renewal, (no online version), with the wrong address on it. When I frantically called to correct, the agent told me "Good news: This address is actually cheaper by $7!" Not that I really cared by then.

None of this is to say that all incumbent insurers are bad and all insurtechs are good. The truth is somewhere in between: New companies will have growing pains as they scale and their environments become legacy, and established firms will make changes at their own pace. But the imperative has never been more apparent, as Americans are seeing firsthand the potential for their lives to be upended at a moments notice. Carriers need to lead the way in matching their customer experience to their products to their value, working with regulators and consumers to create a new insurance ecosystem. The tools are all there to make sure we don't see huge insurance gaps when the next big storm rolls around.