Assessing Catastrophe Risk While Underwriting Doesn’t Require Big Changes

A little data can go a long way to improve risk selection in catastrophe prone areas

For companies writing homeowners insurance in catastrophe prone states, the future of catastrophe risk assessment is now. Today, insurers have the ability to analyze catastrophe risk for individual residential properties at the point of underwriting. This new capability will enable better risk selection and more reliable pricing. Furthermore, for insurers currently estimating replacement costs, only minor changes to existing property data collection processes are necessary.

Agents, inspectors, and customer service representatives already capture the data needed. In many cases, data can even be pre-filled into replacement cost estimators by way of a linked database of public records — records that contain objective, property-specific information about a majority of residential properties in the United States.

Once entered into the replacement cost estimator or policy management system, insurers can use the data to estimate the property’s replacement cost, run a fully probabilistic catastrophe risk analysis, and conduct other underwriting analyses using technology that is customized to suit their workflow. Furthermore, the data becomes part of the property record for the life of the policy.

Property-specific Data Key in Assessing Hurricane Risk

With more than $3 trillion of residential property exposed to hurricanes in the Gulf and East Coast counties, hurricanes are at the top of the minds of many insurers. Yet assessing hurricane risk for individual properties before the policy is written is still uncommon. The availability of new technology easily remedies this situation.

The primary property-specific information needed to analyze the hurricane loss potential of an individual residential property includes address, construction method, year built, building type (occupancy type), and replacement value. In many cases, this data is already collected by insurers for replacement cost estimation and, in some cases, for detailed portfolio catastrophe analysis.

Information on just these primary property characteristics will provide a reliable estimate of loss potential. However, five additional and easy-to-capture pieces of information will further refine individual risk hurricane analyses.

Roof shape, roof cover, window protection, glass type, and pool enclosures can have a significant impact on results. Depending on the individual feature present, potential losses can rise by as much as 5 percent or more, or decrease by more than 10 percent. In combination, results can differ by as much as 25 percent compared with results of an analysis where this data is not included.

The property data used in individual risk catastrophe analyses can make the difference in issue/decline decisions, geographic insured value limits, and other risk management decisions.

Roof Shape

As a driving factor in how the roof will react to hurricane force winds, roof shape has a significant influence on an individual residential property’s catastrophe risk.

Variations in complexity also makes roof shape an important factor in determining the replacement cost of a structure. Of the most common roof shapes, a shed roof is one of the more vulnerable, while a hip roof is among the most wind-resistant and will reduce the expected loss.

Roof Cover

When exposed to sustained hurricane force winds, the roof cover can be one of the first things on a home to fail. Once the roof cover begins to fail, damage can progress to the roof deck and beyond, possibly leading to more significant structural damage. Light metal panels are the most vulnerable roof cover, while securely anchored clay tiles and slate will reduce the expected loss.

Window Protection

Window protection, particularly engineered hurricane shutters, play an important role in mitigating the impact of hurricane force winds and flying debris. Even if there is no structural damage to a property, significant damage can be done to contents and interior finishes when a window is shattered. Any window protection, whether engineered or not, will reduce the expect loss and should be included in any analysis if the data is available.

Glass Type

Absent hurricane shutters, window glass is the last line of defense for one of the more vulnerable characteristics of a property. There are several different types of window glass used in residential construction. Laminated glass is the most resistant, while annealed glass is more vulnerable.

Pool Enclosures

AIR’s analysis of claims data shows that 15 percent to 20 percent of Florida’s residential insured losses caused by the 2004 and 2005 hurricanes were a result of damage to pool enclosures. Properties with pool enclosures experience a 35 percent increase in claims compared to properties without.

Impact on the Portfolio

In analyzing one Florida insurer’s portfolio of properties in Miami-Dade and Broward counties, AIR determined that about half the properties had hip roofs. This fact alone reduced the average annual loss, or AAL, of the portfolio by more than 4 percent when compared with an analysis where roof shape was coded as unknown. This is a significant difference considering that the counties analyzed represent some of the highest catastrophe risk in the country and the analysis only looked at a single property characteristic in isolation.

Capturing more detailed information about properties — whether residential or commercial — and assessing their catastrophe risk at the point of underwriting has many benefits beyond more reliable pricing and better risk selection. As better risks are added to an insurer’s portfolio, the overall risk profile will improve.

This will put insurers in a better position to negotiate with reinsurers looking for reliable assessments of catastrophe risk and insurance-to-value. It also gives those insurers more insight into their exposure concentrations, providing the data they need to identify locations that allow for profitable growth without increasing risk, or locations where they might want to reduce exposure.

Topics Catastrophe Carriers Underwriting Hurricane Property