Tag Archives: homeowners insurance

Working with Insurtech to modernize home insurance

Part of working with “Insurtech” companies is understanding and accepting that actuaries are moving beyond their traditional roles. Insurtech companies aren’t asking us to come in and perform traditional actuarial work. There are no set formulas in the Insurtech space. Instead, actuaries must take a forward-thinking approach. We must learn how to use traditional tools in a new, creative way to produce better business solutions.

Milliman recently worked with Hippo Insurance, a revolutionary California-based startup providing home insurance for modern households. We helped Hippo understand how traditional insurance works, which has enabled them to fundamentally challenge the status quo using new systems, technology, and business practices.

Insurance contracts are often delivered through old-fashioned processes and contain a great deal of outdated coverage and legalese. What Insurtech companies like Hippo are doing is completely modernizing the sales process, and the underlying coverage being purchased. They’re also helping policyholders understand how to better protect their property by installing cutting edge smart home devices that monitor and detect damage before it occurs.

Milliman enjoys working with these innovators, and is capable of helping traditional insurance companies bridge the gap, too. They can rely on us to be familiar with new technology-based approaches to produce modern products for customers.

The following video features Hippo’s leadership team and its modern approach to homeowners insurance.

Geographic information systems can help insurers price flood risk

Insurers have been cautious about reentering the homeowners flood insurance market, which is due to high risks related to floods. In his Best Review’s article “High water mark,” Milliman’s Matt Chamberlain discusses the reasons behind the industry’s trepidation. He also provides perspective on how geographic information systems (GIS) can help insurers develop granular rating plans. Here is an excerpt:

There are several reasons why flood has been considered an uninsurable risk. First, flood is a localized peril; a distance of a few hundred feet, or less, can make a large difference in risk. This produces an information asymmetry, because the insured has a clear understanding of the local topography, while the insurer does not. The insured knows how far the house is from water, and whether it is on the top of a hill or if it is in a depression.

Insurers, on the other hand, typically use large rating territories for homeowners insurance, in some cases larger than a county. If these territories were to be used for flood insurance, it would create the potential for adverse selection. Insureds that were at highest risk of a flood would be most likely to want the coverage, and if insurance companies do not have a means of distinguishing higher-risk from lower-risk policies, anti-selection would result….

Geographic Information Systems, when coupled with the new flood catastrophe models to provide a very granular rating plan, may help insurance companies overcome these risks. Territories can be based on “hydrological units,” or watersheds, so that areas that water is not likely to flow between are not grouped together. Within a territory, appropriate rating factors are distance-to-coast (relating to storm surge risk), distance-to-river/stream (relating to river flood risk), and elevation (because all else being equal, there is lower flood risk at higher elevations).

Using all of these rating factors produces a rating plan that is able to distinguish different levels of risk even among points that are near each other. This produces true risk-based pricing that is likely to be sustainable in the long run. The top map at right shows this approach and compares it to the traditional method of rating flood insurance used by the NFIP, shown at bottom.

The video below presents an example of how GIS can improve pricing strategy.

Another “Sharknado” could take the insurance industry by storm

Carbone-WilliamAccording to forecasts by the basic-cable network SyFy, a storm similar to the sharknado that hit Los Angeles last year is making its way toward the New York area. While AIR Worldwide estimated the losses from last year’s event at $100 billion, estimates for the impact on New York would heavily depend on the storm’s path. Let’s take a look at what impact the anticipated storm could have on the tristate area’s insurance market.

Is my property covered?
New York area homeowners should know that, much like the Los Angeles area residents, their policies will cover damage from windstorms, including tornados and hurricanes, subject to a windstorm deductible. These deductibles vary by policy and, more importantly, by region. Insureds in Tornado Alley will likely be subject to more significant windstorm restrictions, often needing a policy extension to ensure adequate coverage, while New Yorkers are more likely to have manageable windstorm deductibles since they are not as prone to these losses. The impact of windstorm deductibles on both an insured’s wallet and the insurer’s bottom line can be significant, depending on how a given storm is classified. In 2012, the use of executive orders and press releases to waive hurricane deductibles after Superstorm Sandy shifted a portion of the claim costs from the insureds to the insurer.

Fortunately for New York area residents, flying debris caused by windstorms is generally covered by homeowners policies. Similarly, comprehensive auto coverage would also cover physical damage that is due to debris from a windstorm. In this paragraph, “debris” can be read to mean “flying sharks.”  These coverages are important as a significant portion of the loss caused by tornadoes is due to flying debris damaging property that narrowly missed a direct hit, but was close enough to suffer the consequences.

Who pays the bills for shark attacks?
Health insurance policies cover attacks by animals, so New Yorkers can rest easy knowing their stitches will be covered. However, the tourist population should ensure that they have adequate visitors’ health insurance, as other countries’ universal healthcare policies do not apply here. Similarly, U.S. residents should check their health insurance policies before traveling abroad. Many health insurance policies operate differently for travelers abroad, and knowing what is covered in the case of a shark attack, or other medical emergency, could have a major financial impact.

For anyone keeping sharks as pets, you would be liable if a twister lifted your shark from your property and it were to bite a neighbor. Luckily your homeowners policy would cover this liability, assuming your specific shark was not an excluded breed. Many providers will deny coverage or alter policies for dog breeds considered “dangerous,” while other insurers will review dogs on a case-by-case basis. It can be assumed the same review would go into sharks kept as pets, so you may be covered for both your hammerhead and Labradoodle but not for your great white or Doberman.

Any new considerations
After seeing how the Los Angeles event ended, there are other possible implications in the New York insurance market that may come into play. It would be wise to review the intended uses on all recently purchased chainsaws, as many product warranty policies do not cover unintended uses, such as extraction from a shark torso. Additionally, the soft aviation market may need to harden a bit if helicopter pilots plan to help end a sharknado in the area. Last year’s storms ended when homemade bombs made out of kerosene containers were thrown from a helicopter into the twister, with the explosions equalizing the pressure. Without reviewing the underwriting, these types of flights are likely riskier than those anticipated in the standard policy.

With great white sightings on the rise in Cape Cod and a relatively rare Boston area tornado this week, a sharknado in the region appears possible. Luckily, it seems that most potential sources of loss for the average resident would be covered. Policy deductibles and exclusions may increase the final cost to insureds, but they likely won’t be footing the whole bill. It helps to know that the impact of a potential sharknado won’t take too big of a bite out of your wallet.

Will Carbone - Sharknado Picture

Will Carbone conducting research for this blog.

Cinco de Mayo, the “sub-lime” crisis … and your homeowners policy

Carbone-WilliamMany Cinco de Mayo revelers will be affected by the great lime crisis of 2014. As lime prices climb, restaurants and bars have passed the costs on to customers ordering margaritas, fish tacos, or simply a lime wedge in their cerveza. Others have taken to using lemons as a substitute for limes in recipes, although we haven’t seen the key lemon pie yet. The increased prices are driven by the laws of supply and demand. While demand has increased quite significantly in recent years, the dramatic increase in price this year is due to a shortage in the supply. Poor weather in Mexico’s lime-growing regions and crop disease have severely reduced the supply, and cartel activity has exacerbated the situation (97% of U.S. limes are grown in Mexico). This situation is unprecedented, but the market dynamics driving it are common to the insurance world.

What is the connection between limes and insurers? Extreme weather events, such as Hurricane Katrina, Superstorm Sandy, and this week’s tornados across the southern United States, are a well-known challenge for insurers. As communities recover in the aftermath of a storm, the focus often moves to the rebuilding process—and the related cost. It’s easy to watch the price tag on building supplies, namely lumber and concrete, to see the effects of increased demand. The cost of labor is harder to monitor, and is often a bigger influence on the overall costs of the rebuilding process. Much like restaurants passing on the increased price of limes to their customers, these additional costs are often passed on to the insured.

Insurers incorporate anticipated price spikes into the price of homeowners policies. Catastrophe modeling has become standard across the industry, and these models include loads for the surging price of building materials and labor in high-demand situations. This enables insurers to set appropriate prices over an entire book and helps to keep them solvent. From the point of view of the insured, the increased costs to rebuild after a covered natural disaster may or may not be covered, depending on the policy. Most insureds have policies that cover a set dollar limit, which is usually the replacement cost or an extended replacement cost to cover inflation from the time the policy was written. The payout in these scenarios can often come up short, as out-of-date policies do not cover today’s prices or skyrocketing costs. These issues can be avoided with a guaranteed replacement cost policy, which covers the full cost of rebuilding, but these policies are more expensive and harder to obtain. In the absence of one, rebuilding homeowners may be seeing the same unexpectedly high tab that anyone ordering the ceviche will face this spring.

As the frequency of catastrophic weather events has grown, individual homeowners need to ensure that their coverage is current and that it will optimally cover them in the event of a loss, even if it is not possible to cover surging prices. After all, the last thing the victims of a natural disaster need is the added stress of finding out that their homeowners policy was a lemon.