Advances in catastrophe models and new state insurance regulations have opened the door for an affordable, risk-based private insurance market in Florida. This reading list highlights articles focusing on various issues and implications related to the market. The articles feature Milliman consultants Nancy Watkins and Matt Chamberlain, whose knowledge and experience is helping insurers to understand and price flood risk more precisely.
• Forbes: “The private flood insurance market is stirring after more than 50 years of dormancy”
The reemergence of private flood insurance has piqued the interest of carriers seeking to enter the market. Some catastrophe (CAT) modeling companies are creating flood models to help insurers price policies. Here’s an excerpt:
Nancy Watkins, a principal consulting actuary for Milliman, likened the current level of interest from insurers to enter the private flood insurance market to popcorn.
“We are at that stage where you can hear the space between pops. You can hear one kernel at a time,” she said. “What I think is going to happen is, in one to two years, there’s going to be a lot more going on.”
• Bradenton Herald: “Important for homeowners to compare flood insurance options”
Florida homeowners must consider the issues related to the National Flood Insurance Program (NFIP) and private flood policies. Private insurers can use predictive modeling technology to determine a home’s distinct flood risk.
• Tampa Bay Times: “Remember the flood insurance scare of 2013? It’s creeping back into Tampa Bay and Florida”
Real estate and insurance experts comment on the possible effects that high flood insurance rates may have on homeowners. Insurers express interest in the granular modeling of flood-prone territories.
• Tampa Bay Business Journal: “Why some Tampa Bay property insurers are offering flood coverage and others are not” (subscription required)
Insurers need to weight the risks and rewards associated with the underwriting of flood insurance. A few carriers have already decided to participate in Florida’s private flood insurance market.
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.
Predictive analytics enable organizations to identify their most profitable and expensive customer groups. These tools analyze business data and processes to help executives make informed decisions. The following videos highlight Milliman’s predictive analytics solutions.
Predictive analytics: Uncovering value in the data
• Milliman consultants Nancy Watkins, Matt Chamberlain, Peggy Brinkmann, and Sheri Scott consider how insurance companies can use predictive analytics to enhance their pricing and underwriting practices.
Hurricanes and analytics: A 21st-century approach to pricing
• Matt Chamberlain discusses how geographic information systems (GIS) can be used to price hurricane risk. To learn more about how geocoding can lead to more accurate pricing, read this article.
Improving claim analytics through text mining
• In this video, Phil Borba explains how text mining can reveal valuable information hidden in the narratives of auto insurance claims that could lead to improved underwriting practices.
Read these two articles to learn more about claims analytics:
– Predictive analytics, text mining, and drug-impaired driving in automobile accidents
– Distracted driving: Text-mining accident descriptions
Milliman Datalytics-Defense: A new approach to understanding defense costs
• Milliman Datalytics-Defense analyzes data related to litigation costs to help businesses develop more effective claims defense strategies. Milliman actuary Chad Karls offers perspective in this video.
For more information about Milliman’s predictive analytics solutions, click here.
Catastrophic events can threaten the profits of property insurers. Changes in catastrophe models have boosted estimated losses, leading to ratings pressures and higher reinsurance rates.
In this short film, Milliman’s Matt Chamberlain discusses how geographic information systems can be leveraged to reduce loss ratios related to hurricane risk.
To learn more about Milliman’s predictive analytics solutions, click here.
Predictive analytics enables companies to identify their best- and worst-performing customer groups by helping them enhance their decision-making processes.
In this short film, Milliman consultants Nancy Watkins, Matt Chamberlain, Peggy Brinkmann, and Sheri Scott discuss how predictive analytics can uncover value in new and expanding data sets. They also discuss how insurance companies can use the technology to improve their pricing and underwriting practices as well as increase profitability.
Sinkholes in Florida have threatened the balance sheets of insurance companies, and have endangered their profitability and even their solvency—as one firm experienced. Although several bills have been passed to address the exposure that insurers face, the sinkhole crisis continues.
In his new article “Sinkhole peril: Reducing exposure and managing risk,” Matt Chamberlain discusses how insurance companies can manage the risk associated with sinkholes.
Here is an excerpt:
Excluding sinkhole coverage and offering it as a buyback with a 10% mandatory sinkhole deductible after an inspection is one of the most important tools that insurers currently have. However, the dramatic example of adverse selection that occurred in recent years in Pasco and Hernando counties should serve as a reminder of the importance of risk differentiation. Adverse selection occurs because policyholders or competitors have more information about an insured risk. Insurers can reduce this risk by adopting granular rating plans that align the premium charged as closely as possible with the expected loss.
Because insurers based their calculations on territories designed for wind risk—consisting of a coastal and inland region—they failed to adequately differentiate risk within these counties based on underlying geology, changes in underground aquifers, and claim patterns. Further, since sinkhole claims are relatively uncommon, albeit very severe, companies often lack credible data, which encourages them to utilize territories that are not homogenous.
SB408 has diminished the sense of crisis in the industry and creates an opportunity for insurers to get ahead of the risks they face. Companies are now able to charge a separate premium for the sinkhole peril and they should begin utilizing territories that better reflect the variation in the underlying risk from that peril. Doing so, coupled with other important risk management strategies, will decrease the likelihood that they will have the sort of unfavorable experience that has been so damaging to the industry in recent years.
In a previous article, Matt discussed the benefits of utilizing geocoding models to rate hurricane coverage on a granular level in Florida. To read that article, click here.