Pinpointing Peril

Determining proximity to peril to understand and evaluate risk is innate to survival. Over time, our means and reasons for doing so have evolved from simple (not dying) to more complex.

In 1854, London physician James Snow plotted outbreaks of cholera on a city map. This was done to prove a theory that cholera was not, as previously believed, spread by “bad air,” but rather by some shared experience local to the outbreak. The careful plotting revealed that, in this case, the issue was the communal water well dug near a cesspool.

The study represented a major event in the history of public health, geography and location-based risk analysis.

Though the term did not exist at the time, Dr. Snow’s work was an early example of “location intelligence.” The combination of business data with geographic context, location intelligence is now all but required in the insurance industry to identify and evaluate property-based risk. Key factors in the industry include the hidden risks of proximity to bodies of water, above- and below-ground fuel tanks or known contaminated sites.

These perils can result in significant future financial impact – something that can often be overlooked when evaluating a property.

Location is one of the most important factors when valuing a home. The Municipal Property Assessment Corporation (MPAC) reports location is one of the five factors that represent 85% of the value – the other four being lot dimension, living area, age of property and quality of construction. Consider that a beautiful and well-built mansion located next to a landfill is valued at 6% to 10% less than the same house located elsewhere. 

Addressing address

From an insurance perspective, in addition to value, associated risk is equally important. A large component of that risk assessment is understanding the proximity of a property to peril. Being able to assess the multitude of factors affecting replacement value and risk accurately (and quickly) is key to providing underwriters with the information they require to make well-informed, timely decisions.

Leveraging location-based data

Before starting to analyze a property to determine value and risk, it is necessary to have correct address information. A component of location intelligence is the leveraging of accurate and comprehensive location-based data. This means ensuring that not only is the address correct, complete and verified, but also that its exact location can be pinpointed and understood within the context of its surroundings.

It is easy to understand the costs associated with insuring a home that does not exist, or that is not as described by the applicant. Location intelligence allows for validating the existence of an address, differentiating addresses that appear to be real from those that, in fact, are real, as confirmed by multiple sources.

Accurate location also helps to verify the accuracy of the property characteristics and to detect fraud. Confirm before it is too late that the policy is actually being taken out on a two-bedroom bungalow and not the condominium building across the street that has a far different value and risk profile.

Potential perils, prospective policies

As an underwriter, it is necessary to be aware of where potential perils are located in relation to current or prospective policies. This plays a large part in determining both the replacement value of a property and the risks associated with it. It allows an underwriter to price policies accordingly, charging premiums that are more reflective of the potential for negative events.

This information also helps when considering the portfolio as a whole. The overall risk exposure should be calculated by taking into consideration the proximity of natural and artificial environmental factors. Use accurate location information to measure accumulation, especially in areas known to be in close proximity to high-risk factors.

For instance, insuring a high concentration of properties on a street that is prone to flooding could become a problem with a fast spring thaw, leading to a lot of wet basements and high payouts for insurance organizations. 

RISK UPON RISK

There are literally hundreds of proximity factors that affect risk. Some of the more common ones include geographic features (water and railroads); land use (industrial sites, airports and landfill); emergency services (fire stations); safety concerns (fuel tanks and transmission lines); as well as crime statistics and a history of claims in the area.

Achieving more accurate premiums

Building a model that incorporates these many factors improves the ability to accurately identify risk at the individual property level, providing a more accurate premium for each customer and generating greater insight as an organization.

One factor receiving a lot of attention of late is risk of flood. While one cannot accurately predict hurricanes or other natural disasters, factors that make flooding more likely can certainly be analyzed. Understanding the proximity of a property to a body of water is important. Combined with knowing the relative change in elevation – Is the water higher or lower than the property? – allows for implementation of flood models that help to determine probability of various nature events having an effect on the specific properties in question.

This information is especially important when one realizes that about 40% of all claims in Canada are water-related.

Environmental perils, however, are not as easy to detect. A policy applicant is unlikely to tell (or know) that the next-door neighbour has a buried oil tank. As such, having environmental peril data built into underwriting systems can provide this insight as each new application is being processed. With the Insurance Bureau of Canada reporting clean-up costs related to oil spills average about $250,000 to $500,000, it is important to have this information before the policy is priced and approved.

Knowing where and when to order an environmental assessment report saves time and money, reduces risk and, most important, offers the ability to give prospective customers answers more quickly.

Bringing together information

Tying together all location-based information is the final step in providing a more accurate risk assessment. Most leading insurers have built a risk score that incorporates a variety of factors associated with the home’s value and the risk in insuring that residence.

How those factors are weighted is the “secret sauce” of the organization, but the common elements usually include the replacement value of the property and dwelling, proximity to the types of the aforementioned perils, neighbourhood trends (like demographics and crime rates), and proximity to existing policies to see how this policy affects accumulation.

With a comprehensive, reliable and automated risk score that takes into account proximity to peril, an insurer can be more confident that it is efficiently and effectively measuring the risk to which its business is exposed.

When faced with a crowded competitive market and rate-savvy consumers, an organization needs to leverage location intelligence in order to maintain its advantage.

Location intelligence can improve process automation, resulting in faster, more accurate risk and valuation assessments. Organizations will be able to provide quicker responses to prospective customers using less manual intervention, which ultimately frees up internal resources for other important work.

Finally, by understanding proximity to peril during the initial underwriting process, an organization has a better understanding of the risk to which it is exposed and can make the appropriate pricing and policy decisions necessary to protect business interests in the long run.