New cat models can help prevent underinsuring properties

New catastrophe-modeling capabilities can help insurers avoid the painful consequences of underinsuring properties, according to a panelist at A.M. Best’s Insurance & Technology Conference, e-Fusion, in Boston.
In its report on the conference, A.M. Best cites George Davis, a vice president at catastrophe modeling firm AIR Worldwide Corp., as saying underinsuring means not getting the right price for the policy.
“That can lead to deteriorating customer relations and paying too much for reinsurance,” the A.M. Best report says. “Additionally, the insurer’s catastrophe risk estimates may be inaccurate, leading to capital-management problems.”
According to Davis, vigilance is needed to avoid underinsuring, because the underwriting factors are constantly in flux. For example, A.M. Best notes, it is not enough to track inflation indices, because the cost of building materials and labor, major factors in replacement costs, are subsets of the overall rate of inflation.
Another factor is the increased cost of home remodeling, Davis points out. He said newly upgraded kitchens and bathrooms typically cost anywhere from $10,000 to $50,000, increasing the home’s replacement cost. “Such home improvements are difficult to track unless an insurer makes use of databases that capture timely information about individual properties,” A.M. Best cites Davis as saying.
Davis noted some property insurers are rethinking the claims process, building knowledge-based systems designed for speed, flexibility and management of high volumes of data.
Craig Bedell, director for global insurance at MapInfo Corp Property, told the conference insurers can contain costs and develop disaster plans with location intelligence, giving insurers the ability to make business decisions based on a robust and reliable analysis of geospatial data. Such tools help insurers identify troublesome pockets of risk or, using a real-time weather feed, quickly calculate how many independent adjusters are needed to respond to a catastrophe, Bedell told the conference. This could possibly give insurers a competitive edge, he said.