Two kinds of knowledge; what we know, and what we know how to find

The number and severity of natural disasters continue to rise, with more flooding, hailstorms, wildfires, tornadoes and hurricanes on the horizon. Research from Munich Re estimates that hurricanes and floods could total $120bn in insurance losses in 2022, which clearly impacts the livelihood of those in the areas affected, and consequently also, insurers. It is at times of crisis when customers need their insurer the most. How insurers help customers prepare for and react to these momentous events is going to become a true measure of the value they provide in their customers’ lives, across both personal and corporate lines.

Over the course of the next few blogs, I want to explore something that I find myself talking to insurers about a lot now; how the insurance industry needs to transform itself from being seen as transaction-focused, reactive to the settlement of risk and loss, to the role of a trusted partner that is focused on the mitigation of risk and loss.

I will cover how traditional risk investigation must change from isolated analysis to a holistic model, and how insurers should be applying this approach to occupy a more proactive support position for their customers in mitigating risk and loss. I will also talk about the role that technology, along with enriched data, plays in this transformation, and the wider impact this can have on society as a whole.

Let’s get started with the first part: Traditional and holistic risk evaluation. 

Traditional risk analysis

In the past, insurers looked at each individual policy risk on its own merits and priced that in isolation at the time of underwriting. Traditional risk analysis misses other data points about the insurer’s own portfolio due to this approach, which is especially important when an underwriter is looking to insure against natural disasters and catastrophes. This is because in traditional risk analysis, underwriters have blinkers placed on them by legacy systems – they can only see information relating to the underwriting decision right in front of them. What is missing is the portfolio-wide view that would show them how many other insurance policies they provide in that area, and thus what their total risk exposure to a flood or wildfire might be. With blinkers on, it may look like a sound, low-risk decision, but when you realise you insure three-quarters of the properties in a specific area, suddenly your risk-appetite may change. 

Aggregation of risk is something that insurers have been looking at for years, but it is primarily a backward-looking exercise to see the concentration of risk after it has already been underwritten. At this point it is too late, as the insurer is already on the hook for any losses that occur. A better and more holistic approach is needed. 

How is risk analysis changing with holistic risk evaluation?

A holistic insurance model is the way forward for the industry and allows insurers to move into the digital age. Accenture has found that 67 percent of insurers are looking to prioritise investments in underwriting platforms over the next three years, and 71 percent are looking to add predictive analytics to their backend technology. This will enable them to understand risk in a whole new way by leveraging AI, analytics, and third-party data. It allows insurers to look at multiple variables in the location they are assessing. 

Such enhanced capability allows insurers to apply a process of holistic risk evaluation, able to look at their entire portfolio in a non-siloed way. This method of assessment provides enriched data, with key risk information seamlessly highlighted to the underwriter. Having the full picture, the insurer can shift to proactively define, monitor, and modify a wider strategy that goes beyond basic concentration of risk to include reinsurance strategy, allow higher concentration of risk, and accommodate portfolio-level pricing strategies by coverage, geography, limits, and excess levels, for example. This enables the underwriter to have greater insight into how an individual risk plays into the wider strategy and its impact on the whole portfolio.

The technological developments

Technological advancement means that insurers have gone from having a system of record to being able to leverage a cloud-based and AI-enabled system of insight; more importantly a system of action. This means that they can integrate third-party data much more easily, build analytic models that serve up key insights for the underwriter, and produce a far better understanding of risk during the underwriting process. Equally, models can be leveraged to drive operational excellence by automating the underwriting for some of the more commoditised offerings. This frees up underwriters to look at more complex and profitable business. 

Technology, and especially data, has changed and is allowing insurers to look at risk in a whole new way. Insurers are now recognising the value of this approach and the impact it can have both on the success of their business and the lives of their customers. In some areas it is not just providing more information for the underwriter but also actively challenging some of the traditional thinking around underwriting. 

We can see this in how geospatial data is breaking the ‘traditional model’ of using post code as the key data point for territory-based pricing. In this, two properties could be in the same post code area but have completely different risk profiles because of their specific location in that post code. For example, property A could be near a body of water with a high flooding risk or near woodlands with a high wildfire risk, whereas property B could be at the other end of the post code in an urbanised area with negligible risk. In the traditional territory approach these two properties would be rated and priced as if they have the same level of risk. Geospatial data and technology are highlighting where change is necessary and possible. 

Keep an eye out for my next blog, in which I will discuss how the use of technology and data enables a proactive approach that plays out in real life, illustrating the benefit it can deliver to the insurer-customer relationship. It will also explore how insurers are uniquely positioned to drive impactful change and value for society in key areas like sustainability.