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Location in Insurance Risk Management


Nigel Lester
Sales Director – South East Asia
MapInfo Corporation
Email: [email protected]

Location has long been a critical element to the insurance industry. Understanding where a property is in relation to the risk elements, is a core decision affecting an insurance carrier’s profitability. Since the events of 9-11, the importance of understanding “where” in relation to risk management, has become an even more critical process. Terrorism has become a global concern and a new element in underwriting.

Using location-based technology is a simple solution to a complex, real-world problem for the insurance industry In today’s competitive business environment, location information becomes the foundation of knowledge that can be nothing less than the difference between profitability and disastrous loss. But underwriting is not the only area where location is crucial in insurance. Other departments and applications leverage location information to better market, sell and service customers.

Why Mapping?

It’s all about information.

Insurers depend on geographic and demographic information to assess underwriting risk, handle claims, match coverage, expand markets, serve existing customers and develop new business.

Complicating matters is the sheer volume of data— claims histories, natural and man-made hazards, risk factors, locations, competitive intelligence and much more. Storing, retrieving, interpreting, and applying all of this data in a meaningful way can be a staggering and expensive proposition.

Spatial technology has become an invaluable strategic tool to many leading insurers. Mapping allows insurance professionals to quickly access information, recognize patterns and trends, and drill down into data for detailed analysis and sound decision-making.

Ways Mapping is Used
Here are some examples of how insurance companies are using mapping to run mission-critical applications:

Risk Management

  • Address validation
  • Determining rates, pricing
  • Underwriting decisions
  • Natural disaster models
  • Reinsurance decisions

Claims

  • Tracking location of incidents
  • Determining proximity to resources
  • Allocating adjusters
  • Determining service coverage
  • Integration into existing claims applications

Catastrophe Management

  • Provide acid-test expectancies of real time events
  • Place resources where needed
  • Discover correlations of entire portfolio

Agent Support

  • Prospecting
  • Policy application processing
  • Agent recruitment
  • Determining service coverage

Marketing

  • Finding best customers
  • Cross-selling
  • Mass mailing
  • Campaign management and measurement

Web

  • Agent locator
  • Healthcare service provider locator
  • Agent marketing tool
  • Certified repair locator

Geographic Risk Assessment
According to a PRNewswire report in the US, man-made and natural catastrophes claimed more than 33,000 lives worldwide in 2001, with the direct financial loss from major events more than $115 billion, of which more than $32 billion was borne by the insurance industry. The trend towards higher losses continues given the risk factors of higher population densities and greater concentrations of insured values.

Insurance companies can realize the most immediate benefits in productivity and efficiency in the discipline most driven by complex data—underwriting. With location intelligence solutions, homeowners or commercial underwriters can quickly assess risk for any given address.

Address look-up and geocoding is the essential beginning of the policy lifecycle. It provides instant location validation and correction to ensure “clean” data collection. It also assigns precise geographic coordinates, which are used later in other applications such as underwriting, claims, call-centers and marketing.

For example, one of the United State’s largest insurance and financial services companies recently implemented a risk management solution to help them assess and plan for risk in the future based on catastrophic scenarios. The solution required that they first prepare and clean their policyholder data. Location-based technology allowed them to validate the accuracy of the addresses currently on file for existing policyholders. As expected, they found that many addresses were inaccurate and needed correction or further clarification.

Once the data was cleansed, they added the location of a policyholder’s branch offices to obtain a holistic view of assets. In many cases the insurer was covering an entire company, including branch offices and field assets, but did not know where the branches were located.

Underwriters have found location intelligence solutions of particular benefit in assessing the risk factors associated with natural disasters and weather-related hazards: floods, earthquakes, hurricanes, tornadoes, hail storms, wildfires, and others.

An underwriter might receive a request to assess the risk of insuring a new car dealership and its entire inventory. The dealership is nowhere near a flood zone or fault line, and outside areas of tornado activity.

But location intelligence solutions can reveal that the dealership is directly in the path of frequent hailstorms—a fact made clear by the graphic presentation of the dealership location, overlaid with weather pattern data. In this instance, an investment of several thousand dollars in a location intelligence solution can save literally hundreds of thousands of dollars in hail damage claims.

Also, as new risk factors become evident, such as the mold problem in parts of the U.S., that data can be incorporated into the solution for immediate impact on the underwriting decisions.

Transamerica Flood Hazard Certification, one of the Transamerica Real Estate Information companies, is a leading provider of Flood Hazard Certification (FHC) services in the U.S. The company combines MapInfo location intelligence solutions with its own database of nearly 100 million records to determine whether any given property falls within a Federal Emergency Management Association (FEMA) flood plain—and must carry flood insurance.

Prior to using MapInfo’s location intelligence solutions, Transamerica had 15 Geographic Information System (GIS) staffers involved in the tedious task of locating properties on paper or microfiche tax maps. Now, Transamerica is able to process 98% of its 10,000 daily requests in the same day, and nearly 90% within five hours of the request.

In yet another customer example, Benfield needed to provide its client insurance companies with a way to better visualize their risk exposures so they could determine the appropriate amount of reinsurance coverage to purchase to protect their book of business.

Headquartered in London, Benfield is the world’s leading independent reinsurance intermediary and risk advisory business With more than 1,600 employees worldwide, the company provides a range of specialist reinsurance, insurance and risk advisory services to more than 1,000 customers located in more than 100 countries.

Insurance carriers are very concerned with the risk exposure of their policies and Benfield helps these companies determine what reinsurance policies to buy based on their portfolio loss potential. “We use sophisticated event analysis models to determine the catastrophic loss potential for our clients so they can determine the amount of reinsurance to purchase from reinsurance companies to adequately protect their book of business,” said Jason Johannsen, AVP of catastrophe modeling at Benfield.

Once the risk analysis tabulations are completed, Benfield conveys the findings to its insurance carrier customers. Since original reports are printed out in text documents, it is difficult for insurance carriers to clearly “visualize” where they have the greatest exposure. Benfield wanted to communicate and display the results to clients in a way that made its analysis clear.

Benfield selected MapInfo Professional to display the results of its risk analyses and specifically show clients where they had the most exposure. By overlaying the collected risk analysis data on a digital map, Benfield can clearly define high exposure areas and concentrations of risk to its clients. “We use MapInfo to paint a picture that visually displays losses, loss potential and where the greatest risks are located,” said Johannsen.

“It is one of our most powerful presentation and client service tools.” MapInfo Professional helps Benfield quantify loss potential and exposure concentration for insurance carriers by providing a visual representation that maps out exposure loss analysis. Benfield can now easily show a client if it is overexposed in a specific area. “A digital map can clearly illustrate this exposure better than any spreadsheet ever could,” said Johannsen. “A picture is worth a thousand words.” The maps are also useful for a number of Benfield’s international clients, as “maps are understood in any language.” Benfield has been using MapInfo Professional for more than nine years to display the results of its risk analysis. “Using MapInfo has helped our clients better understand their exposures,” said Johannsen. “MapInfo plays a critical role in our client retention and its benefits to our customer service are undeniable.”

Underwriting post 9/11
The entire insurance industry was caught unprepared for 9/11—this is especially true in the case of underwriters.

Many carriers with multiple lines of coverage, made decisions and stored them in their separate and respected line databases. For example, commercial kept separate from personal lines or auto separate from home. Few insurers could look at all their policies in aggregate to visualize the ramifications.

In addition, many carriers relied on outside third party services to provide underwriting answers and they did not have an internal system to evaluate their book of business.

Insurance companies have turned to MapInfo to prepare them for the next terrorist disaster and incorporate it into their daily underwriting process. The first step is to visualize all of their current policies. MapInfo location intelligence solutions allow connection to disparate databases and combine their content into one view. At this stage, coverage limits are reviewed to ensure Probable Maximum Loss (PML) is not exceeded in any given area.

Insurance companies can then look at what policies are located in the same building. Which ones are across the street? Which ones are within a block radius? And so on. Then, once the proximity of policies is realized, they then need the ability to equate policy limit quantities.

The second step is the implementation of terrorist factors into the underwriting process. Mapping technology allows for countless data sources to be layered together: corporate, natural hazards, streets, territories and industry data and business lists. The ability to manage catastrophic risk is tied to managing the density of risk within a particular area. To quantify risk and manage exposure to acceptable levels, insurers and reinsurers must be equipped to ask—and answer—a new set of questions, including those about the location of the business in relation to “target” structures, such as an office tower, stadium, chemical plant or other highly valued or densely populated structures.

In order to manage insurance portfolios accurately, the industry needs to consider the potential risks and how they relate to geography across various lines of business.Location-based technology is necessary to address these new concerns.

Accurately set premiums.
Because addresses can be accurately identified on a map, underwriters can assess risk and set premiums in ways that may otherwise have been difficult. For example, location intelligence solutions can reveal whether one building being underwritten is actually touching another and thus potentially affecting risk. The exact proximity of addresses to fault lines, flood zones, and other hazards can also be seen easily.

Location intelligence solutions can also lead to substantial dollar savings. Prior to using MapInfo’s location intelligence solution, the Florida Farm Bureau Insurance Companies (FFB) were spending $2-$5 per record for rating information from an outside service, costing the company more than $250,000 annually.

With their MapInfo’s location intelligence solution, FFB can batch geocode on demand with the option of using interactive or manual geocoding to match new records and hard-to-find addresses. With relatively low fees for software and data —much of which they already owned—and development costs, FFB is saving money on every look-up.

Maximize premium dollars by pinpointing addresses.
Knowing the exact location of an address often leads to a need to set premiums higher. In the case cited above, FFB experienced a 900% net return on investment in the first ten months of running their location intelligence solution. By verifying policy rates, FFB found that one third of their premiums decreased, while two thirds increased. FFB’s ability to verify rates is also helping them retain more customers through policy renewal, reduce fines and criticism from regulatory agencies, and to eliminate the tedious manual validation process.

Maximize exposure, minimize risk
In evaluating risk exposure, some insurance carriers will set caps for given counties or regions to minimize potential catastrophic claims. For example, a carrier may decide to underwrite only a certain dollar volume of business in a county near the coastline. But in doing this, the carrier may be ignoring the fact that a large part of the same county is far enough away from the coast that it isn’t actually in a high-risk area.

Location intelligence solutions can show the exact location of any address with regard to coastlines, fault lines, flood zones, and other potential hazards. In many cases, a carrier can use maps to significantly increase its business in areas once thought capped.

Settle disputes regarding the exact location of a property
When a dispute arises over the exact location of a property, particularly with regard to risk factors, insurance companies can use MapInfo solutions as authoritative geo-verification resources.

Because the information is digital, precise, and presented visually, property owners, mortgage companies, and others involved in disputes can readily agree on locations and come to prompt decisions.

Solutions for Claims and Catastrophe Response
Mapping visualization in the claims call-center has many benefits to the carrier as well as the insured.

A primary benefit to the insurance company is the ability to quickly discern resources closest to the claimant.

As an example, an auto insurer can locate certified repair shops closest to the insured and direct them to the most cost-beneficial location.

MapInfo provides the ability to add mapping to any claims handling application. Most claims processing applications do not offer a mapping option. MapInfo is able to integrate with software makers such as Siebel®, Oracle® or The Innovation Group®.

Mapping solutions can be particularly beneficial when an insurance company must respond to a catastrophe. MapInfo can be used to help establish temporary claims offices in the field and locate them in areas that will serve the most policyholders most efficiently. Maps can be generated that help adjusters identify the policyholders hardest hit by the disaster and prioritize meeting their needs. In some cases, insurers have even generated street-level maps of disaster areas to help adjusters find the locations of buildings that had collapsed, blown away or become damaged beyond recognition.

Location Intelligence Solutions for Marketing and Strategic Planning
In addition to all of the ways mapping solutions can streamline operations, save money, boost productivity, and expedite the flow of information, location intelligence solutions can also help insurance companies develop new products, bring them to market and plan for the future.

Profiling an existing customer base
With a customer profile for a specific product, the company can then use location intelligence solutions to overlay demographic data such as age, occupation, household income, and more onto maps in order to find other areas with a similar demographic profile. Or, to target and cross-sell existing policyholders the company’s other products.

Generating demographic reports for key geographies
When an insurance company is looking to grow, what’s the best way to assess the potential of new geographic areas? With location intelligence solutions, carriers can accurately locate regions with high sales potential by overlaying demographic data.

By also incorporating information about the presence of competitors in these areas, insurance providers can identify and prioritize the areas with the highest potential—and allocate resources accordingly.

Locating potential customers for commercial lines
As the science of risk management develops, insurance professionals are becoming more adept at creating coverage specifically to serve the needs of commercial niche markets. Location intelligence solutions can help insurers determine when and where to introduce niche products by identifying potential customers and matching them with sales channels.

Assessing and adjusting agent penetration
How do you know when you have too many—or too few—agents in a given geographic territory? Location intelligence solutions can provide the answer in a format that’s easy to understand and interpret. With location intelligence solutions, gaps and significant overlaps in agent penetration become visual; you can actually see territories in a way you can’t in a table or list of data.

Maps are also excellent for illustrating sales patterns; the knowledge gained from maps can be used to create and direct motivational programs, refocus sales into more productive areas, or restructure an entire sales organization.

Gauging competitive penetration
Property and Casualty markets in general are more competitive than they’ve ever been and carriers must be aware of challenges from competitors. Location intelligence solutions allow insurance companies to visualize the competition’s penetration into key geographic and demographic markets and make the necessary adjustments. For example, minimizing sales efforts and resources in areas with strong competition—or making a stronger push into areas in which the competition is vulnerable.

Helping agents in the field
Maps can be as valuable to agents in the field as they are to insurance carriers. Salespeople can easily use maps to show customers how risk factors could impact their businesses, where their employees live, and more. Maps can help agents prospect for new customers for commercial lines and identify demographic characteristics to push sales of individual lines. With low-priced software that’s easy to learn and use, MapInfo solutions are easy and inexpensive to deploy throughout a sales organization.