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Making informed underwriting decisions

By Peter Fice

Since the UK was battered by storms at the start of this year, resulting in power cuts and flooding to thousands of properties, it is a stark reminder to the insurance industry of the importance of informed underwriting and risk selection. 

Too general an approach and an insurer risks significant losses, either through taking on risk too cheaply; by losing out on lower risk business through being uncompetitive; or by having too much capacity in one area. Such a generalist approach can push up reinsurance costs, putting further pressure on an insurer's profitability.

Pinpointing risk

To help price risk more accurately, the insurance industry has been able to take advantage of increasingly sophisticated technology to help make more informed underwriting decisions. For example at QBE our underwriters use RMS and Mapflow to gain a better understanding of the geographical risk associated with a property. This enables them to view the probability of losses from a variety of different events, for instance coastal or surface water flooding, for each individual property rather than by postcode. Having this granularity of data is a significant step forward. As there can be as many as 100 properties sharing the same postcode, the risk profile, and therefore the premium, of each of these properties can potentially be very different. It is to all stakeholders’ benefit to get this right, insurers have full sight of the reality of their exposures and clients pay appropriate premiums relative to the specifics of their property and not their neighbour’s 10 doors down at the bottom of a hill.

Managing exposure

As well as accurately pricing business it's also essential to manage risk concentration. Having a property portfolio that is well spread geographically means an insurer won't be over-exposed in the event of a major loss. For example, at QBE we regularly review our exposure to ensure we manage capacity in any one specific location. In addition, as a storm or high tides can span a wide area, we use tools such as RMS to model different events and understand the potential losses across our portfolio. We're also fortunate that our business has grown nationally to spread risk. Some insurers started out as regional operations or have distributed products on a localised basis and they often retain concentrations of business in these areas.

Access to other technology means that when a weather event is about to hit, it is possible to predict its path and make an assessment of the potential loss. This means insurers can identify policyholders that might be affected and provide support and assistance whilst this has greater impact for domestic property it can be an advantage for commercial property owners too. For our part, QBE is exploring how the various social media channels may be utilised to keep our policyholders informed.

Providing solutions

While the amount of data available to insurers means it is possible to avoid high risk properties, the insurance industry has a moral responsibility to ensure the owners of these properties are also able to access insurance. There are several options such as increasing the premium or deductible, or to share the loss with the property owner. With some properties the risk could be spread across a number of insurers to help manage their exposures. Additionally, where a property is identified as high risk we might send out a surveyor to provide advice on reducing this risk. This can help to improve a property's risk profile and manage the cost of insurance. By taking an informed approach to underwriting property risk, an insurer can protect their own business but also provide its customers with cover that is appropriately priced and meets their needs.