Why is risk exposure data key to good practice in the financial sector?
Things aren’t what they used to be – climate change is increasingly exposing consumers to physical risks and financial harm.
According to Aon’s weather, climate and catastrophe insight report, 2022’s global natural disasters accounted for $313 billion of economic losses, 42% of which were insured losses.
Given that weather-related events have continued to rise in frequency and severity over the past half century, it is paramount that financial services firms prioritise consumer needs and ensure customers are fully informed of how climate-related risks impact the financial products and services offered to them.
Structuring and selling consumer financial products and services to consumers cannot sensibly be done in a risk exposure knowledge vacuum though.
Financial services firms will need granular risk exposure data to identify what risks consumers are exposed to in order for those products to result in good outcomes.
Reviewing and revising financial products and services in accordance with better quality data will benefit companies too; making these amendments will help firms to meet the Financial Conduct Authority’s (FCA) Consumer Duty deadline.
Flood risk and good consumer outcomes
In its 2022 Climate Biennial Exploratory Scenario, the Bank of England promoted the use of high-level granular data to capture the impact of climate-related physical risks on mortgages.
One example given was the use of “flood scores to reflect the likelihood and severity of different types of flood risk events for mortgages at an individual property level”, the outcome of which would determine whether a homeowner could afford their mortgage, rising insurance premiums and potential remediation costs in the aftermath of a flood.
And it should not be assumed that homeowners are aware of the flood risks they may face; nearly two in three UK households at risk of flooding don’t think it will happen to them.
As stated in the FCA’s finalised guidance for the Consumer Duty, it is the responsibility of firms to not ignore the consumers’ lack of knowledge and to ensure their financial products and services don’t cause harm.
Use GeoSmart’s data to help firms and customers manage risk
Following extensive research into the needs of the financial market, GeoSmart’s expert team developed FloodSmart Analytics, a data suite which analyses flood risk at a granular level.
The information produced by this tool can fill the data gap identified by the Bank of England and can help financial firms to meet the FCA’s consumer care requirements, subsequently supporting companies with the outcomes anticipated in the Consumer Duty.
Fulfilment of the commitments can be accomplished by complying with the Consumer Duty’s four outcomes:
- Ensuring all financial services and products meet the needs of target consumers
- Assessing the price and consumer benefit of products and services to ensure a fair balance exists between the two
- Supplying consumers with information at the right time to help them make informed decisions about their financial objectives
- Ensuring consumer needs are met and that consumers are supported throughout their relationship with the firm
Given that most consumers need financial products to acquire or insure their properties, accessing good risk information ensures that all parties understand how much risk is being financed or transferred – and that financial products are doing what the customer expects.
Live demonstrations of FloodSmart Analytics are available and can be requested by making an inquiry to our risk director, Phillip Martin.