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Death by a thousand cuts: Why Lloyd’s underwriters need better data for attritional losses

By Chris Kent  |  November 14, 2019

Identifying and mitigating loss-making business are key challenges among syndicates. With U.S. property accounting for such a substantial portion of the Lloyd’s market, it’s paramount that underwriters not lose out to poor-quality data.

While much of the stress in the market is attributed to major claims emanating from recent catastrophe losses, these are relatively well modelled and priced for. Perhaps more focus needs to be directed at the greater impact attritional losses can have on a syndicate’s combined ratio.

Attritional losses – losses other than those related to major catastrophes or exposures – are one of the areas that Lloyd’s seeks to improve through its strategic profitability review, whereby syndicates are to review their loss-making lines of business and worst-performing portfolios and aim to improve their underwriting results and reduce their attritional loss ratios and expenses.

Not understanding the true nature or quality of the risk being written – for example, not properly factoring in all the property characteristics and rebuild values, or not knowing its relevant exposure to perils (hail, earthquake, etc.) – is one of the aggravating factors for premium leakage and ultimately poor attritional loss ratios.

Syndicates already have access to benchmarking tools through the services Verisk provides to the Lloyd’s market, so they generally can gain a good idea of what the U.S. market is paying for a given property of a certain type and dimension. To truly price effectively, however, underwriters need to be validating that property’s characteristics to see if it exceeds the benchmark or if there’s a deficiency.

Verisk provides an entire suite of products and services to help understand the risk you’re taking on in your book, segment your portfolio and identify the right vulnerabilities for attritional losses for U.S. property.

In the U.S. market, more than 90 per cent of property/casualty carriers are using our core underwriting data sets, whether that be for property characteristics, replacement costs, catastrophe analytics, perils models, policy administration, policy risk life cycle, pricing or exposure management. With the adoption of more advanced analytics and underwriting tools, the U.S. market has been much more selective in the business it writes, and properties with high attritional loss exposure are increasingly making their way into the London market.

Attritional losses for U.S. property

For both residential and commercial properties in the U.S., syndicates at Lloyd’s are potentially losing money to attritional losses if they don’t have accurate or complete data on:

  • Address
  • Construction type
  • Year built
  • Square footage
  • Public Protection Classifications (PPC®)
  • Replacement cost estimates

Syndicates that are lacking data on construction type (wood frame, brick, etc.), square footage and year built – which are all key factors that U.S. insurers use to set price – can place themselves at a disadvantage for this reason.

Further, the PPC – a measurement of the effectiveness of a local fire department to respond to a fire – is considered by many to be the single most important factor for setting fire premiums in the U.S. And yet, this is often not factored into the underwriting process.1

Having invalid or incomplete data – that is, carrying the values of the properties at a lower rate and not accounting for preexisting damage – means syndicates are potentially leaving money on the table.

In 2017, a large portion of syndicates writing residential property in the midwestern states suffered significant attritional losses for this particular year,2 a lot of which can be attributed to hailstorms. Many properties with a high probability for preexisting roof damage would likely not have been quantified during the underwriting process, with syndicates paying for repairs that had not necessarily been caused by what transpired that year.

These are just a few examples that illustrate the still pertinent issue of the market losing money to poor-quality data.

Improving your attritional loss ratios and expenses

Since 2000, Verisk has provided syndicates with products and services for the U.S. property insurance and reinsurance market. Syndicates have access to a number of complementary underwriting and pricing services, including policy wordings, forms, loss costs and circulars.

While there remains great pressure to improve underwriting performance, having poor-quality data on your attritional loss exposures will only exacerbate the problem.

You can gain full visibility of the vulnerabilities on your book of business with comprehensive rebuild values, likelihood of perils and many other factors using Verisk data. Being able to validate the details of a property and all its relevant risk factors is key to mitigating those exposures.

 

  1. https://www.verisk.com/insurance/about/faq/the-public-protection-classification-ppc-program/
  2. Lloyd’s Annual Report 2017

Chris Kent is Director, Business Development, at Verisk. He can be contacted at Chris.Kent@verisk.com.