Property & Casualty Insurance: Getting Risk Right

Transcription

1 Property & Casualty Insurance: Getting Risk Right Underwriting and location intelligence. A WHITEPAPER BY CANADIAN UNDERWRITER Sponsored by:

2 Written by Canadian Underwriter Sponsored by DMTI Spatial INTRODUCTION Contents Underwriting is the essence of property and casualty insurance. The ability to accurately assess risk and properly price individual exposures is the difference between profit and loss on insurer balance sheets. Many observers have asked whether underwriting is an art or science. Clearly, it is both. Underwriting requires the skill of human interpretation reinforced with the rigors of data and analytics. The difference today is the speed in which information, particularly location intelligence, can be integrated into the realtime world of underwriter decision making. With the advent of newer, more robust technologies, many of the lower-value production tasks that Introduction...1 Individual Risk Assessment and Pricing...2 Individual Risk Assessment and Pricing...3 Individual Risk Assessment and Pricing...4 Risk Accumulation & Portfolio Management...5 Risk Accumulation & Portfolio Management...6 Segmentation, Marketing & Product Development...7 Segmentation, Marketing & Product Development...8 Conclusion...9 About DMTI Spatial...10 underwriters have dealt with in the past are now 1

3 Today, modern location intelligence solutions are transforming the underwriting process. becoming automated. This frees up time for more strategic initiatives, such as risk assessment, portfolio management, client segmentation and even new product development. Insurance companies have long recognized the importance of locationbased information in underwriting and pricing. Most insurers have used some form of postal code segmentation or even limited geo-coding to map out risks. However, limitations apply to these traditional approaches. The first is that postal code boundaries (or Forward Sortation Area, FSA, boundaries) are too broad and can result in misleading concentrations of risk. The second is It s estimated that 80% of all information has a geographic component. Source: Location Based Marketing Association the inability to quickly determine risks associated with a particular property, such as natural or man-made hazards. The sheer amount of data in terms of maps or software has made integration difficult for underwriters facing tight timelines and business demands. Today, modern location intelligence solutions are transforming the underwriting process. They give front line underwriters the ability to quickly and intuitively understand the exposures associated with one address or an entire portfolio. Geospatial analysis has evolved from a back-office, afterthe-fact function to a leading role in real-time underwriting decisions. This paper is designed to explore the advantages and challenges of Location intelligence solutions give front line underwriters the ability to quickly understand the exposures with one address - or an entire portfolio. adopting a comprehensive approach to location intelligence in the modern underwriting environment. INDIVIDUAL RISK ASSESSMENT AND PRICING True location intelligence solutions should allow underwriters to more accurately assess risk at the individual property level, resulting in higher quality underwriting, more profitable business and cost savings through reduced claims. Proper risk assessment starts at the point of sale. In the case of personal and commercial properties, that involves the validation and cleansing of addresses. Location intelligence solutions allow insurers to quickly validate the accuracy of new addresses or addresses currently on file for existing policyholders. 1 2

4 For example, DMTI Spatial s unique address identifier (UAID ) assigns precise geographic coordinates to every address for Canada with rooftop precision. Address cleaning and geo-coding are the essential beginnings of the policy lifecycle. It is not enough to know the correct address underwriters need real-time access to the risks associated with that particular property. It is imperative for insurance companies to have a complete and accurate picture of the risks that surround the property, such as geographic (rivers, fault lines) or man-made (highways, railroads) features. This will allow them to rate the policy correctly and also to determine whether or not they want to assume the risk. Underwriters can quickly assess multiple risk factors for any given address. Location intelligence solutions, which combine geo-coded address records with databases, provide the most granular and accurate information related to an individual property and its associated exposures. They allow insurers to organize, manage and analyze extremely large datasets to measure exposures by proximity to known hazards. Just as importantly, it allows underwriters to visualize these locations and risks on an intuitive map. In a homeowner insurance underwriting scenario, visualizing property information on a map makes a world of difference, especially as it relates to properties located on the borders of different regions or counties, notes research firm Cognizant in a report: The Next Big Wave Location Intelligence in Insurance. For instance, without a visual perspective, it is impossible for underwriters to avoid inadvertently insuring too many properties within a high-risk zone that may overlap multiple counties or postal code areas. 3

5 With real-time updates, automatic event notification and the ability to reference historical loss events when analyzing new risks, insurers can price with confidence. Primary insurers also need location-based information to develop fair and competitive pricing models. With real-time updates, automatic event notification and the ability to reference historical loss events when analyzing new risks, insurers can price with confidence. Risk-based pricing is a more specific way of assessing typical exposures covered by a comprehensive property policy water, fire and theft. Sometimes called by-peril rating, it is an attempt to more closely match individual exposures with premiums. A critical component of that exercise is understanding the risks associated with specific geographical areas and leveraging that knowledge to fine-tune pricing. Using risk-based pricing, for example, companies will re-examine their book of business to assess how specific perils might affect a personal or commercial client s risk and premium profile by location. These perils could include potential natural disaster events like flooding, earthquake, wildfires, but also extend to crime rates and demographics. 3 Location intelligence solutions should offer underwriters quick and easy access from their desktops to updated geographic and risk data. The key here is integration of data that provides layering of multiple risks on individual properties. A series of map layers can record and reveal the spatial location and distribution of different types of hazards and perils, the location of insured assets and the location of policies, events and claims. Identifying trends in risk exposure becomes far more efficient with fast visual analytics. Location-based data solutions should be available via a web service platform to integrate information into existing underwriting systems for risk and peril-related information. They should also offer access to the widest possible databases for matching and address validation. Insurers can expedite their underwriting process, reduce operational costs and improve their combined ratios by equipping their underwriting teams with the information they need to make profitable decisions in real-time. 4

6 RISK ACCUMULATION AND PORTFOLIO MANAGEMENT Accumulation or concentration of risk is an ongoing concern for insurance companies. An accumulation of risk occurs when a portfolio of business contains a concentration of risks that might give rise to exceptionally large losses from a single event. Such an accumulation might occur by location (property insurance) or occupation (employers liability insurance), for example. Insurance underwriters require real-time visibility into their policy Insurance underwriters require real-time visibility into their policy accumulations, perils risk data and claims history across their book of business. accumulations, perils risk data and claims history across their book of business. With an aggregated view of risk (perils and accumulations), underwriters can better manage their overall exposure across their entire portfolio. While the risk for a single property may be acceptable, knowing where all existing policyholders are at the same time will be critical in determining whether an insurer is willing to assume this additional risk or if the exposure is too high. If there are two major events in a given year, would a carrier s exposure be too high? What about loss reserving? Would the insurer move into higher retention layers or reinsurance? Would the insurer be able to pay out on all the claims? Location technology enables carriers to efficiently map their risk exposure across their product portfolio and share this information within the organization instantly. Insurers can accurately report on the accumulation of risk by geographic area, minimize overexposure within their portfolio by precisely pricing and rating premiums and calculate the Probable Maximum Loss (PML) in a specified area based on given perils. If underwriters can view their book of business with easy-to-use visualization tools, they can understand concentration of risk and exposure to perils that matter the most, such as flooding, earthquakes and wildfire. 5

7 GIS systems or location intelligence solutions provide valuable data at the point of underwriting at a portfolio level. For the property underwriter, the solution provides maps highlighting other insured properties in the area. Depending on the appetite for new risk given the aggregate risk for the area, the underwriter can then decide to proceed or not. Making this decision without the support of spatial data would be (almost) impossible. ~ Catherine Stagg-Macey. Understanding the Value of Location Intelligence Solutions Making the Business Case for the Insurance Sector. Location intelligence solutions should offer an accumulation and perils management tool to analyze various risk levels against individual addresses, street levels and postal codes to produce hazard ratings. This means underwriters can make decisions using up to-date data, such as flood or earthquake risk, contaminated land or proximity to potential risk sites, such as gas or propane storage facilities. Using location intelligence software, underwriters can examine a specific area or catastrophe zone that s historically prone to floods, hurricanes, earthquakes, wildfires on a digital map to see how much business is concentrated within, say, a 25-mile buffer zone. This gives them a clear picture of the potential risk, notes Cognizant in its report. A risk can be pre-screened by the underwriter by simply plotting it on the map-enabled dashboard. This ability to measure portfolio risk also has implications for reinsurance. With a clearer understanding of their true risk and a wider view of their exposure, insurers are in a better position to negotiate reinsurance terms and ceded limits. Insurers control their exposure through risk transfer. Accumulation control, portfolio analysis and catastrophe modeling are integral parts of the underwriting and risk management process through which insurers can identify accurate reinsurance capacity and which risk can be ceded or retained. The ability to analyze and visualize their portfolio exposures and losses at a granular level can help primary companies make more informed reinsurance purchase decisions. 6

8 By assessing risk at the property level, insurers have the ability to underwrite business they may have previously declined, based on an inaccurate assessment of the risk location. With modern location intelligence solutions, insurers have a broader view of their organization to: Assess significant exposures in their portfolio; Identify new business within their PML projections; Determine where they should or should not write new business; Highlight key risks, such as flood or earthquake, requiring further assessment; Pinpoint primary retention layers and negotiate reinsurance terms. SEGMENTATION, MARKETING AND PRODUCT DEVELOPMENT A powerful result of location intelligence technology for underwriters is segmentation. Instead of looking at risks on a blanket basis, they have new tools to slice individual exposures by specific rooftop locations. In the example of a flood-prone region, insurers can identify which specific properties are at risk, instead of relying on broad postal code or FSA boundaries. By assessing risk at the property level, insurers have the ability to 5 underwrite business they may have previously declined, based on an inaccurate assessment of the risk location. With a better understanding of geographical risk (peril and accumulations) insurers can be more aggressive with rates in low-risk areas. Underwriters can identify under-exposed areas and target those areas with marketing efforts and competitive premium. Using a location intelligence capability, the insurer can hone in on a given region s hot and cold spots Improved accuracy of marketing can also contribute to generating income, Catherine Stagg-Macey observes in the Celent report. Sales and marketing activity are often performed on a blanket basis. Campaigns are typically aimed at a broad audience, with only a moderate conversion rate from prospect to customer. Focusing on new prospects in areas new business could be taken on without affecting accumulated risk is a better use of limited marketing dollars. 7

9 The location of a customer greatly enhances the quality and efficiency of profiling, sales forecasting, segmentation and prospecting. By embedding location preferences into customer interactions, underwriters also become better at providing the right level of service through the right channel, at the right time for the right product at the right price. Insurers can create niche or customized insurance products based on the instant and direct feedback from consumers that location data provides. In fact, some insurance experts contend that the sales and marketing roles for underwriters will become more relevant in the near future. It is not difficult to envision how underwriters can leverage their access to information and big picture views of desirable customer types to contribute significant value to the sales process. For example, the perspective of skilled underwriters could improve the quality of lead identification and qualification processes, in that underwriters are well positioned to understand the specific characteristics that mark a good lead. The same insights are useful in shaping promotional campaigns and playbooks for cross-selling, up-selling and account retention programs. In other words, underwriters have expertise that can be applied across the continuum throughout the sales and account servicing life cycle. ~ Gail McGiffin. The Future of Underwriting A Transformation of Talent and Technology. EY, 2014 Underwriting expertise, combined with location intelligence tools, can also play a critical role in new product development. A better understanding of individual risk profiles, specific perils and portfolio management will result in quicker time to market for new insurance solutions that meet specialized customer needs. A solid example is the introduction of overland flood insurance in Canada. In May 2015, Aviva Canada launched overland water protection for property owners and tenants in Alberta and Ontario, with roll-out to other provinces throughout the year. The Co-operators announced a similar flood coverage endorsement for Alberta homeowners in May. These new products may seem counter-intuitive, given the major risk that flood damage poses to insurers across Canada. Water damage now accounts for nearly half of the amounts paid for home insurance claims in Canada, well ahead of damage caused by fire and theft, according to Insurance Bureau of Canada. Insurers pay out more than $1 billion in claims each year for water damage. In 2014, water damage claims accounted for 44% of dollars paid out on all Aviva Canada property damage claims. The flood in southern Alberta in 2013 was the costliest insured event in Canadian history. Yet insurance companies have been able to use features such as updated flood hazard maps, precise location intelligence technology and elevation and hydrology tables to accurately assess risk and develop innovative coverage solutions. The opportunities are rife for progressive insurers that can tap into new forms of data and risk assessment to meet consumer needs. 8

10 In addition to risk analysis, location intelligence solutions can help insurers in areas ranging from customer segmentation to sales and product development. Whether it is a marketing campaign that targets underexposed areas, a segmentation study that identifies demographic patterns or a research initiative that launches new and niche products, the combination of location and data is an extremely powerful asset for insurance companies. CONCLUSION Location-based technology has become an invaluable strategic tool to many leading insurers. Precise mapping and geocoding allow underwriters to quickly access information, recognize patterns and drill down into data for detailed analysis and sound decision-making. The real danger for those carriers not adopting location intelligence is adverse selection the writing of poor risks without accurate or detailed information. Understanding where a property is in relation to risk elements is a key decision affecting an insurance carrier s profitability. Using location intelligence is a simple solution to a complex, real-world problem for the insurance industry. Insurers depend on geographic and demographic information to assess underwriting risk, develop appropriate pricing models, match coverage, expand markets, serve existing customers and develop new or niche business. Insurance carriers can achieve the greatest benefit in productivity and efficiency in the discipline most driven by complex data - underwriting. The role of the underwriter is changing. There is far more information today at his or her disposal. This puts the challenge of sifting through this data squarely on the shoulders of modern underwriters to make the right choices when it comes to risk, exposure and opportunity. This can be a blessing or a curse either improved productivity or information overload. What underwriters need today is quick access to relevant information and answers. They require all their different tools to be integrated, with information moving through different systems in a way that maximizes efficiency and drives business insight. Solutions should simplify the underwriter s workflow by bringing all their critical risk data into one view increasing the speed and accuracy of underwriting, while automating routine decisions. An example of this simplified workflow for location intelligence: an underwriter enters a pre-validated location on a map platform and this returns the level of risk associated with that property. The solution displays the risk rating at that location for each type of risk available. It then calculates the accumulated exposure to risk for a specified area, and informs the underwriter when a pre-defined level has been reached. To oversee individual risk selection, portfolio management and sales/marketing, underwriters need robust and agile location intelligence tools. They must be platform-based solutions that offer easy access to information, comprehensive data selection and the tools to better understand their risks. These tools are available today in leading location intelligence platforms. For the modern underwriter, the future is now. 9

11 To learn more about how DMTI Spatial can help your business, please contact us at ABOUT DMTI SPATIAL DMTI Spatial, a member of the Neopost group, is the Canadian market leader in location based information and data quality. DMTI Spatial s award-winning solutions and high-precision data is relied upon by Global 2000 companies including top Canadian financial institutions, telecommunications companies and government agencies. We help businesses grow through actionable insights uncovered by leveraging location to bring together and analyze a growing world of data. We make breakthrough products that change the way people use location. Learn more at