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Murkey Water on The PriceWriters Podcast Episode 53
22 Plays28 days ago
This episode explores Murky Water and what it reveals about how environmental risk and social inequality collide. We look at why geography shapes vulnerability, how systems amplify disadvantage, and what this means for insurers who price, select and support risk every day. An important conversation for anyone who needs water or insurance daily.
Recommended
Transcript
Introduction to Price Writer Podcast
00:00:00
Speaker
All right. good old Ready?
00:00:10
Speaker
and welcome to the Price Writer podcast with Katrin Townsend and me, Jeremy Keighley. Join us as we explore and discuss the world in shared flailing books, offering our insights and our recommendations.
Exploring 'Murky Water' and Water Systems
00:00:21
Speaker
This week, we're talking about murky water, challenging and unstable system by Luca Calfatti, Juliet Fromm et al. Yeah. So also by Colin Haslam, Sigdev Jo Carl and Carell Williams and Judy Froud. This book is actually part of a series called the Manchester Capitalism Series and Judy Froud and Carell Williams have edited the entire series, including this book. So that's why there's so many people involved. So this is a book about the water system, which I must admit, I find fascinating.
00:00:55
Speaker
But why did you choose it for an insurance podcast? Well, one, because I was just interested in this book. I wanted to read this book anyway. And as I started reading it, I realized that there were so many similarities between the water system and insurance.
00:01:10
Speaker
Both are public goods that are served by private companies. Both of them have a big legacy aspect to them. So for water, we've got Victorian pipes generally.
00:01:21
Speaker
And insurance has been going on Lombard Street and Graceshirt Street in London since the 1400s. So there's a big legacy aspect to this. And both industries went through a big change in the nineteen eighty s There is an external regulator for both. But on top of that, there's also government and societal pressure to do certain things, to act in certain ways.
00:01:44
Speaker
Both water and insurance are essential for modern life, I would say. Obviously, water is slightly more essential in terms of like, living, but I think insurance is important for living in terms of by being able to buy a house or drive a car or set up
Public Goods: Water and Insurance
00:01:59
Speaker
a certain business. And because of all these similarities in both industries, we seem to regularly circle back around this idea of fairness.
00:02:10
Speaker
And can we make this product cheaper for groups of people who we deem vulnerable? And we seem to of define that differently every time we circle back to this conversation. so they were the similarities I started to notice. And i guess the final thing, which is slightly more practical in a sense, which is flooding.
00:02:29
Speaker
particularly the pluvial floods, which is the rainfall based flooding, is a huge problem for both insurance companies and water companies for very different reasons. But both have a vested interest in preventing it.
00:02:43
Speaker
So there was a lot there that as I had been reading this book, I was thinking, wow, actually there is more read across than i was expecting. hey I see the similarities, but isn't the issue with the water companies more about their very old wood infrastructure, often actually from Victorian times, and that they tend to be natural monopolies, whereas insurance companies are for the most part a competitive market.
00:03:13
Speaker
And we are largely quite quick to... embrace new technology. I actually had this way of gauging in my mind whether I think a new technology is particularly going to transform society or not.
00:03:26
Speaker
So I've worked in a chance for a very long time. This is going to be quite surprising to some people out there. I remember when we first got email, we used to be able to send messages about, but it was by other systems, but we got email in outlet.
00:03:41
Speaker
So the CEO you could literally send everyone a message that was embraced so fast. Like it was like, it was like electricity. Honestly, it went from not having it to using it constantly, immediately.
00:03:55
Speaker
So for me, when people come out with a new technology, I don't want to get too into because I know this is very divisive, but with ChatGPT, the uptake for me was
Investment Needs in Water and Insurance
00:04:05
Speaker
not equal to email. And so if I put it on scale of one to 10, it's below email for me in the usefulness of the technology.
00:04:13
Speaker
So this is how gauge technologies. And isn't it that kind of the water companies is not really about that, is it? It's that they are to be breached to kind financially mismanaged and that's not really bit of problem in insurance.
00:04:27
Speaker
Yeah, so I'd frame it that both require a lot of investment. So water companies do have old pipes and they continually need to replace them.
00:04:38
Speaker
Most of the pipes, the book says, have a life of about 80 years. Sewage pipes have a lifetime of 130 years. sorry kind of we're just coming to the end of the Victorian pipes being... can't. Yeah, I know. That's great. So they do need to continually replace them.
00:04:56
Speaker
and that is very expensive and the whole point of the water company is that they have all these assets and so it is very asset intensive but i think in insurance we're not asset intensive but we are capital intensive telling mean so even though we do have competition We don't get a lot of small competition and lots of startups that really challenge. We're not particularly an industry where new entrants can have that big of a change or can get a big foothold in the industry quite as quickly because it's so capital intensive.
Government Intervention in Risk Management
00:05:36
Speaker
Right, in my book about just how incredibly hard it is actually start up
00:05:42
Speaker
in insurance, but how it is relatively easy if you can convince someone you can use that huge amount of capital to start product. So yeah, it's an interesting balance.
00:05:54
Speaker
Whereas you clearly in water, you can't, it's very hard to be a new entrant, isn't it? Yeah, absolutely. And in terms of management, I think the conversation around both water companies and some insurance lines, I'm going of point the finger at flooding and natural catastrophes is...
00:06:18
Speaker
That actually it's not being managed particularly well in that it's not reducing the risk overall. And maybe both the water companies and some particular insurance lines, definitely not all of them, but some particular ones actually should be government run.
00:06:35
Speaker
With flood re-ending in 2039, that's coming up surprisingly quickly. And that's another thing that the two industries have in common. We both work on really big timelines. Like both companies have to have a plan up to 2050.
00:06:49
Speaker
I know even for my village that they've already said that their plan now is that they will create a plan between 2040 and 2045, and then they will execute the said plan in 2045 to 2050. That's a great yes minister, isn't it?
00:07:05
Speaker
butha Yeah. We're planning on producing the plan after we've set up the new planning department. Yeah, so they're planning on producing a plan in almost 20 years time. I could literally have a child, that child could grow up to be an adult.
00:07:22
Speaker
And be involved in writing the plan. Yes, take a job in the orphan family and write the plan. But still, it would be on time. yes So we both work on... Literally grow them yourself.
00:07:33
Speaker
if ah toos With flood re-ending in 2039, something will have to happen. And then it kind of has to happen pretty soon. The decisions at least have to happen soon. We do just have similar conversations in what should be run by the government, what should be run by private companies.
00:07:51
Speaker
they're They're both kind of similar in that regard, at least.
Public Influence and Transparency
00:07:56
Speaker
And obviously with water, not having it is not just a, oh, that's unfair, you know, not cricket.
00:08:04
Speaker
But lack of insurance isn't just financially, that's unfair either. right Insurance is fundamental to people's lives. And I know I go on about this all the time, but without insurance, you can't get a mortgage, right?
00:08:19
Speaker
So you're stuck in your house. You wouldn't be able to move or you wouldn't be able to finance it again. Also, that they'll there'll be less money for cleanup efforts after a flood, which is not only really painful for the area economically, but can also lead to waterborne disease.
00:08:36
Speaker
And if you can't buy car insurance, your choice of job can be really severely limited. A lot of jobs, you need a car. There are a lot of areas that you're really going to be trapped in your house if you don't have a car.
00:08:48
Speaker
And so it's just really interesting navigating this absolute essential product, both as someone who works within an insurer and as a customer ourselves. And I think the water industry has the same thing. Because realistically, without government intervention, do you think that there are any ways that insurers could support communities facing rising climate during water risks?
00:09:14
Speaker
without withdrawing or just repricing so it's out of reach? I think it's quite hard with insurance for the government to intervene because I think even very, very well-meaning governments have crowded insurance industries that are working perfectly well out of markets.
00:09:34
Speaker
So I can think of California and Florida being problem areas which have largely been created by regulation. But i'm not talking about regulation here. I'm talking about without the government intervening in terms of being a partner in owning some of this risk in the same way that we're not just talking about slapping more regulation on water companies.
00:10:01
Speaker
The conversation, I think it's 86% of people in the UK at the moment support water companies coming under national control. What about genuine government intervention in a similar way or a slightly different way to flood rea?
00:10:16
Speaker
Governments absolutely
Impact of Insurance Pricing on Society
00:10:17
Speaker
do have to get involved to form solutions in both water and insurance. But I do think too much regulation or intervention tends to compound issues.
00:10:27
Speaker
What would we want it to look like? book gives five what they call desirata which is basically a wish list of fundamentals which i think apply to insurance as well just on that note though the book is not easy to read i kind of thought it would be a little bit more of like a rallying call to action type thing. It's definitely not. It's written as an academic tome. It feels a little bit like to use lots of long, slightly odd words like deserata.
00:10:59
Speaker
But anyway, the five things on their wishlist are that companies should be technically capable to deliver the product. I think that works well for both insurance and water.
00:11:10
Speaker
Socially and spatially inclusive. So no areas where there is literally no coverage at all. financially accessible and that's slightly different from socially inclusive because you can say well I offer insurance for everyone and that's inclusive but if they actually can't afford it it's not financially accessible environmentally responsible, obviously that works for water companies, particularly with sewage outflows and things.
00:11:39
Speaker
I think it is still holds for insurance. I do think that there are a lot of things that the insurance industry does, particularly what we do with our capital, maybe being a top one, and also kind of risks that we insure. Are there large commercial risks that maybe...
00:11:56
Speaker
aren't environmentally responsible. And finally, that both industries should be democratic. And by that, I don't mean that we should have to vote on everything that the water companies and our insurers do, but in that informed members of the public should have some influence on the system. So that kind of involves two things. One, that the industries are transparent enough that people can inform themselves.
00:12:23
Speaker
You shouldn't have to wonder what goes into your insurers pricing. Okay, don't share the algorithm, but at least share a list of the features that are used, that kind of thing.
00:12:34
Speaker
We shouldn't have to is a genuine thing, go to Reading where they hold the lists of where all of the pipes are, how deep they are, and in what state of disrepair they are.
00:12:45
Speaker
You have to physically go, you can't request them by email, which is madness. So there should be ways that the public can inform themselves. And if they are sufficiently informed, should be able to have some influence on the system, whether that is through pressure bridge or industry groups, or at least be able to talk about it in an open way.
00:13:08
Speaker
When we talk about being financially accessible, in insurance, I think this is slightly different because we still have to ensure that there's some level of risk sharing because otherwise we're not going to incentivize the right behaviors. And think that's actually very similar to water, who obviously want to incentivize people to use less water. So I think it kind of holds on both.
00:13:29
Speaker
We want to create the right kind of behavior. And I think as pricing teams, we have a lot of levers available to us to do that. But have you have you personally ever felt that? Have you ever made a pricing change and felt like or seen evidence that, you know, actually, yes, this will tangibly reduce risk for society?
00:13:51
Speaker
I have, and I would say that nearly all of the changes we make that improve the accuracy of the risk premium part of the models of the prices we charge, actually the end prices that matter, is beneficial for society.
00:14:10
Speaker
However, it often a bit political hot potato. So if I take an example, if somebody's The motor insurance premium is a sales and sales, which is quite expensive for most people.
00:14:23
Speaker
Most of that money represents the cost of compensating other human beings because of that person's driving should they cause an injury or death on the road.
00:14:35
Speaker
So if somebody's premium is a hundred pounds, their imp impact impact on other human beings through injury and death from driving is quite low. If it's a thousand pounds, it's quite high.
00:14:48
Speaker
And I'm afraid to say that pricing that person that driving Probably does mean on mass. So a single person we can't say about on mass, a large group of people who's premiums are in the thousand pound region.
00:15:02
Speaker
They didn't drive. There would be fewer accidents on the ride. And that is a nasty thing to say, but it is the reality of what we do. So in that way, although I don't like in it, that it's the case.
00:15:15
Speaker
And I would put slight reverse side on that, which is to say that I fundamentally think varying prices by sex, I do not like to do it. So I don't like seeing that factor in models.
00:15:30
Speaker
But the reality it is that by forcing gender neutrality, we do make driving unaffordable for some young women, which affects their lifestyle and their safety.
00:15:42
Speaker
And we make it more affordable for young men, which affects injury and death on the road. So in that way, I would say that very fundamentally what we do in pricing is pulling leaders that affects the risk in society as a whole.
00:15:57
Speaker
And even though there are negative aspects to it, generally making the pricing as close as possible to the true underlying risk is generally beneficial for society.
00:16:08
Speaker
Yeah, and I do think there's a kind of delay part of this, isn't it? It's not that we're saying that young people should never drive, but instead of people learning at 17 and driving by themselves when they're 18, for example,
00:16:22
Speaker
Delaying that until their brain is slightly more mature, maybe in the early twenty s that has a big difference. If you look at the curves and who causes accidents. And I know that for example, my grandpa had it the opposite end of the spectrum where he was saying that his insurance premiums were so expensive that he was looking at cutting down or potentially stopping driving. And it did. It changed...
00:16:47
Speaker
His behavior, he was thinking more about, I'll get the bus into town. i won't take short journeys. It's not about confining people to their house forever, but if there are public transport options, it gave him the idea as well that actually...
00:17:03
Speaker
The money that he was saving on his car insurance and running a car and all the rest of it he actually could use it for taxis. And it costs about the same. Actually, that's probably a better thing overall. I mean, I've also had similar things, you know, when there have been specific segments which the risk on them have just been...
00:17:22
Speaker
really gut-wrenching and you just think how on earth do we allow this type of car for example on the roads given the way it's made or the poor visibility in some cars particularly very tall cars or like boxy type cars I think that's a really good point where the cost of the insurance has affected people's choice of car, that is a net benefit for society.
00:17:45
Speaker
And I obviously do not want to make people unable to drive because I appreciate it's very important to them, but we do have to recognize that Particularly car insurance premiums, it's not just a number that we
Fairness in Water Pricing
00:17:57
Speaker
make up. We are measuring the impact on society often of that person driving and asking them to pay for it.
00:18:05
Speaker
So I think that's a very important thing we have to be aware of. Yeah. My sister didn't buy a house because the flood insurance on it was super high. And I think that's a good thing. I mean, obviously with a house, someone else would have just bought it.
00:18:19
Speaker
But I do think that they're the kind of things that does make customers the same way. How much is this really costing me if the insurance is that much? And the more people that make decisions with that in mind, the more that the people who make cars and who build properties are going to start thinking of that too.
00:18:37
Speaker
Now, this book proposes pricing based on household affluence instead of water usage. I know, i know, i know. I just see the pops of you now.
00:18:48
Speaker
It's a big challenge. And look, there are a lot of problems that I see with that. So not least, how frequently the income can change for households? particularly people who aren't salaried and do hours or whatever.
00:19:01
Speaker
How this disadvantages families that have adult children living at home. Household affluence is difficult because you need to calculate some level of affluence per water company area. So the book just suggests using overall national deciles.
00:19:18
Speaker
But... That's not going to work because otherwise Thames water is going to be raking it in while all the other areas are going to be on their knees. So there's that, but I think operationally, how will the water company get this information? They're talking about joining up with a government system, but the government system will only have last year's income. It won't have this full year's income. And is it monthly? is it yet like what there There's so many questions about this, honestly, but...
00:19:45
Speaker
The main thing that I worry about with this is about people's attitude to water. If the cost of water is disengaged, I mean, the link between cost of water and how much we use, there's no obvious link there.
00:20:00
Speaker
I'd just say actually, I've been of my parents were both anti t the poll tax, but they were also anti the introduction of water meters.
00:20:11
Speaker
So I think it was in nineties, the water meets were introduced. Before that you paid a kind of flat charge. And I think some people still do actually. Not everyone is water meter. I remember them being thoroughly against the idea of how much water we used being connected to how much they pay.
00:20:29
Speaker
And always went to that really strange. It would be like, what if everyone just was charged a flat amount, no matter how much fuel they use. or no matter how much electricity they use or gas.
00:20:42
Speaker
These are always very strange solutions to problems to me. We should charge people a flat amount and disconnect how much they use to how much they pay. That just seems like a recipe for wastage to me, like huge amounts of wastage.
00:20:56
Speaker
I'm going to shock you now that we're not water metered. Ah, there you go. There you go. We're in a terrace and also we have one water mains. Right. So, yeah, I mean, there's a lot of reasons why metering is a problem and I totally get all of that. Just out of interest, you have a lovely lush green lawn.
00:21:15
Speaker
it got a hot tub though. you I don't know whether people who aren't charged per unit are using more. I think most people wouldn't go out of their way necessarily to.
00:21:26
Speaker
But I'm definitely not going to worry about putting a sprinkler on. Even things like using reusable nappies. so you're doing a wash pretty much every day when baby's tiny, tiny. You're not going to think twice about that if you're not metered. That's kind of like moral hazard, I guess, isn't it?
00:21:41
Speaker
But you wouldn't have this issue where it's flood insurance because you can't, make your house flood in a pluvial way So, yeah, do you think that there are insurance perils that that could be charged in a different way, perhaps using just a few rating factors are actually not customer dependent, but area dependent? And I'm thinking, for example, in the book, and I thought this was fascinating, they say that Milton Keynes is not going to flood. And the reason Milton Keynes won't flood is because it actually has two sewer systems.
00:22:17
Speaker
It has one for actual sewage from toilets things and another system that collects the rainfall from road drains and that kind of thing. So it actually means ah that sewage pipe never fills up with rainwater, even in the case of a lot of rainfall, a lot of storms.
00:22:37
Speaker
And the runoff from roads and things can be released fairly safely into rivers and doesn't require any pump action. So actually, Milton Keynes, best place for surface flooding, who knew?
00:22:48
Speaker
but for example, we could use that and maybe some other things to maybe rate flooding or natural catastrophe perils in a way that's not custom independent. What do you think?
00:23:00
Speaker
oh i Do you generally feel that in insurance, the private market produces best results? Is that okay to say?
00:23:13
Speaker
Yeah, I'm just putting out that I found that chapter really challenging. And like said, didn't agree with everything in the chapter. For example, one of the things is that they are suggesting that by 2030, the top decile based on income should be paying £4,600 year their water.
00:23:30
Speaker
thousand pounds a year for their water Okay. What? It's huge. and no And the way they're saying this is what if the lowest three deciles didn't have to pay anything at all? And you know, we're all goingnna have to pay more for the asset investment in the worst companies by 2030. So that's kind of where they're getting some from. The problem for me here, we are getting a bit political on this one. The problem for me here is that I don't really support a taxation system that is based on people's ability to pay.
00:23:58
Speaker
But if I was to go to the supermarket now, how would we feel if the supermarket charged my prices based on my income? And we're like, no, no, you earn over the this. So your bananas cost.
00:24:13
Speaker
So that water bill would be about four times my current water bill. So I'd go to the supermarket and probably a bunch of bananas would cost that eight pounds. So, and it would be like, because you're in whatever income bracket, your bananas cost eight.
00:24:30
Speaker
And it's like, people are like, no, that's bonkers. But then they're okay with it when it comes to the water system. And I know, I just think it's the same thing, just in a different
Climate Change and Rising Costs
00:24:39
Speaker
place. Yeah. If we want a society that's got fairness when it comes to like paid home income levels, I can support some adjustments there. I think that's fair.
00:24:51
Speaker
But I think when it comes to actually what you buy being means tested on what you pay is a bit strange. It certainly is challenging to think about basically an entirely new paradigm, not charging based on usage, but charging on something totally different. And I would say that actually, apparently in the Republic of Ireland and Northern Ireland, they don't charge for water usage. They just charge it for tax. So...
00:25:17
Speaker
It is out there and it should be a challenge to people in pricing as well. What are the assumptions that we think this this has to be how it's done? As you mentioned, prices going to have to rise for water because the book is really clear that climate change is going to dramatically change the landscape for water provision in the UK, as it will for insurance.
00:25:38
Speaker
And in the UK, we have now surpassed 1.5 degrees of warming. um Which is, wow I know, it felt like it was only yesterday that we were talking about, we should really stop that. And now we've missed it.
00:25:50
Speaker
But do you think that that has really sunk in for insurers yet? Are you seeing people doing things differently or is the insurance industry generally doing anything differently to allow for the new volatility and extreme events that are not just coming, but are already here?
00:26:12
Speaker
I would say that we are on the whole well aware of the issue and that we are raising prices and having to deal with more extreme weather events.
00:26:25
Speaker
But ultimately we do not have the lever to do very much about fixing the problem. So I know that people look insurance companies and see these big, huge companies that have a lot of money and are going to be picking up the cost for a lot of these issues, but they don't really have the leaders on the power to actually do something about these issues.
00:26:50
Speaker
Do you see insurers doing anything in their pricing to allow for the additional frequency or extremity or volatility of these events? I think prices are going steadily up because of these issues, definitely. And I think that will continue to happen and it will lead to unaffordability and uninsurable properties.
00:27:14
Speaker
And that will appear to be caused by insurance companies charging higher prices because it is. But the underlying issue is that the world changed and the risk got different and that house is now in a location where it's uninsurable.
00:27:30
Speaker
It's like we were saying right the start. So insurance is a societal good because it makes it possible for people to buy house share with other people the risk of a fire, a storm, a flood and so But if someone's got a house where the probability of a flood is just so extremely high that it's not really fair for the rest of society to pay for that house, that is not a good place to be.
00:27:58
Speaker
But the cause of that is not the insurance, which is there to actually provide the protection. The cause of that is frankly a failure in government policy over decades. to deal with the one of the largest manifest problems that face our species that we have known about since I was a boy.
00:28:18
Speaker
Since before I was born, we have known about this problem. There has been summits, plans have been put forward. People have perhaps done work towards this and repeatedly governments have failed.
00:28:31
Speaker
And worse still governments have tried to do things like say, if only people would do more recycling and it's a good thing. But it's not going to solve the problem. It requires concerted effort at government levels. And it's very frustrating because the cost now in the future, the UK's government's produced records that say the cost of this in the future it's way more than the cost of dealing with it now.
00:28:55
Speaker
ah we just want to kick the problem down the road. and put it on future generations, which actually is not only future generations, it's going be us. So we're going to be dealing with this problem in our lifetimes because of failure of governments from the past couple of decades.
00:29:12
Speaker
Wow, that was so boxy. Yeah. And that's true for the water companies as insurers. All right.
Conclusion and Promotion
00:29:19
Speaker
We will end that there. Thank you for joining us. And we look forward to seeing you next time.
00:29:36
Speaker
Price Fighters transforms pricing professionals into the most respected leaders in insurance. Find out more about our capability audits by visiting pricefighters.com.