The long term success, profitability and – indeed – survival of insurance companies requires that they get the underwriting process right. If risk assessments are inaccurate and policies are underpriced, a major catastrophe or natural disaster could turn them into costly mistakes. Conversely, inaccurate risk assessments that lead to a company setting their premiums too high could cost them business to their competitors.
This is especially harmful to insurers in the case of underpriced policies and natural disasters. And a lot of that has to do with the nature of a natural disaster. Simply said, they tend not to impact just one property, but rather an entire region or geographic area. Should an insurer underwrite multiple underpriced policies in a region that is hit by a hurricane, wildfire, earthquake or a rare (albeit terrifying) weasel volcano, they can be left exposed to huge losses.
This is an increasingly dangerous proposition for insurance companies for one very big reason – natural disasters have been bigger and scarier in the past few years than we’ve ever seen them before. What was previously considered a “100 year storm” is now happening three times in one hurricane season – such as when Hurricanes Harvey, Irma and Maria pummeled Houston, Florida and Puerto Rico, respectively. And “500 year storms” are starting to happen every year. Regardless of the cause – whether it’s climate change or something else – natural disasters are undeniably increasing in frequency, scope and fury.
If natural disasters are truly becoming more frequent and violent, and if the underwriting process is so essential to a company’s success, you would think that insurance companies would be doing anything they can to ensure they have the data necessary to do their risk assessments accurately. But that’s not necessarily the case. New location intelligence solutions have entered the market and become increasingly affordable and accessible for insurers, but adoption lags.
There is any number of reasons why insurance companies have been slow or reticent to adopt these technologies. They range from confusion about the location intelligence market, to lack of the staff necessary for learning, managing and utilizing these technologies, to reliance and comfort with legacy systems. But one reason for slow adoption that we’ve seen in multiple recent market studies is particularly unsettling – insurance companies just don’t have an understanding of how bad their data is, or how much location intelligence can help.
This knowledge gap is something that Mike Hofert, the Managing Director of Insurance Solutions at Pitney Bowes, and Charles Decrucq, the Assistant Vice President of Property Exposure and Catastrophe Management at Global Indemnity Group, will be addressing head-on at this year’s, upcoming Cat Risk Management 2018 Conference in Orlando, FL. The duo will be teaming up to present, “The Power of Precision,” about the role that location intelligence can play in enabling more accurate cat modeling and underwriting.
And that role is a pretty huge one.
Most insurance companies today can get a good idea and understanding of a property’s location within a larger geographic area. But their knowledge really ends there – at the mailbox or driveway of that property. They can’t see deeper or get closer to that property to understand where the building and structures that they’re ensuring are physically located on that property. That may not seem like a big deal, but it really is.
Take states with large rural areas – such as Florida or the Carolinas – as an example. If someone owns a large piece of land in a rural area, their home or other structures could be located virtually anywhere on that land. And chances are, some parts of that land will be at higher risk than others for things like flooding. If a house was placed on the lowest point, or near a creek, or in the one small part of the property that happens to be in a flood plain, then it’s essential for the insurance provider to know about it – the risk there is different than it is at any other place on that property.
It may seem like only a small number or percentage of properties and policies would be impacted by a lack of insight like this. And that would be correct. But that small percentage of properties could have a huge bottom line impact for an insurance company.
A recent study looked at and re-priced 6.7 million policies using location intelligence vs standard insurance data. Only 4 percent of those were underpriced and 2 percent were overpriced. However, those that were priced incorrectly were off by an average of almost 20 percent. That 6 percent of mispriced policies represented $150 million in premium leakage every year. A little bit more insight could have put $150 million back into the pockets of insurers.
The fact is, a better understanding of structure location can make all of the difference when assessing risk, underwriting policies and setting premiums. If you’d like to learn more about the role that location intelligence can play in this crucially important insurance task, be sure to attend the, “The Power of Precision,” discussion at the upcoming Cat Risk Management 2018 Conference with Mike and Charles. And if you’re in attendance, be sure to stop by the Pitney Bowes booth for additional insights.