November 14, 2005 by Canadian Underwriter
The quality and completeness of most insurers’ commercial policy data is insufficient for a detailed and accurate assessment of their catastrophe risk, according to a recent analysis of insurers’ exposure data by risk modeling company AIR Worldwide Corporation (AIR).
“Nine out of 10 commercial properties analyzed had replacement values significantly less than the amount estimated by our construction specialists,” said Karen Clark, president and CEO of AIR. “The variability in the quality of data among companies was also significant, with insurers’ average replacement values ranging from 20% to 80% of values derived using a standard engineering-based cost estimation process.”
In a press release, AIR says it examined four data elements critical for accurate catastrophe loss estimates: replacement value, construction, occupancy, and location. AIR’s analysis reviewed exposure data from companies representing more than 50% of the total U.S. property market.
An accurate replacement value which is the full cost to replace the building in the event of a total loss is essential for an accurate catastrophe loss estimate, says AIR. But the company’s analysis exposed large discrepancies between insurers’ replacement values and replacement values derived using a standard engineering-based cost estimation process.
AIR says for many commercial policies it analyzed, replacement values were equal to coverage limits. “Some companies are using the coverage limit as a proxy for the replacement value,” AIR concludes. “This will tend to underestimate catastrophe risk, particularly for policies covering only a share of the property.”
Construction and occupancy information are also important for accurate catastrophe loss estimates. AIR found a large variation among companies in the degree of completeness of their construction and occupancy information, with the majority of companies lacking construction and/or occupancy information for more than a third of their policies.
AIR’s analysis found significant progress in the quality of location information for commercial policies. For example, a high percentage of commercial policies were identified by street addresses. However, many multi-location policies contained only a single address typically the headquarters or billing address which is not sufficient for an accurate catastrophe loss analysis, the company says.