By Joy Rohde
When an extreme weather event strikes, insurers find themselves in its path regardless of their location. The toll of the recent spate of weather catastrophes has been high and, with predictions for more to come, has emphasized carriers’ need for actionable intelligence to succeed in weathering the storm while helping to make their customers whole again.
In 2011, global catastrophes caused a record $380 billion in losses, eclipsing the previous high of $220 billion from 2005. The most memorable events were also the costliest, including large-scale catastrophes such as the Japanese earthquake and tsunami, the New Zealand earthquake, and the flooding in Thailand.
While those megadisasters occurred on foreign soil, U.S. insurers did not escape the impact of natural disasters. The fourth costliest catastrophe of 2011 was not one single event but a series of more than 330 severe storms and tornadoes that hit Joplin, Missouri, and other regions in the plains states over a week in late April. Hurricane Irene, the fifth costliest disaster of 2011, followed a few months later.
This year promises to be costly as well. With tornadoes in the central states in April, hailstorms in Dallas in May, derechos in the mid-Atlantic in July, wildfires across the West, and recently, Hurricane Isaac, significant losses are already accruing.
Insight When You Need It
Recognizing that natural perils such as thunderstorms, tornadoes, and hail are either increasing in frequency and severity or migrating from locations in which they most commonly occur, carriers and reinsurers realize the need to understand weather trends. Recent advances in sophisticated weather and claim analytics present an enormous opportunity to leverage more efficient and effective tools for forecasting severe weather events and handling the losses caused by them.
Before a tropical system strikes, officials usually have several days to prepare. But although straight-line winds, heavy hail, and thunderstorms can be just as destructive as some hurricanes, the location and severity of such events cannot accurately be forecasted with as much lead time. To expedite claims efficiently, claims professionals need to have accurate, granular weather data as soon as possible.
The fact that the greatest opportunity to gain or lose customer loyalty occurs during a claim underscores the importance of such data. Policyholders spend little time interacting with their insurer until they need to — and that’s when the customer’s perceptions of value are formed. In recent years, carriers have focused significant effort and expense on retooling their claims operations to become more responsive, accurate, and efficient — investing in new technologies including claims systems, interactive call centers, tracking and scheduling systems, mobile applications, and other tools. These efforts to modernize have paid off, as evidenced by steadily increasing customer satisfaction levels during the claims process.
But customer loyalty is not the only factor driving the need to accelerate the claims process. Loss ratios have soared in the continued soft market, and carriers typically spend 3 to 5 percent of every premium dollar on adjustment expense. The sooner a response team can be deployed, the less claims leakage will be incurred. There is no substitute for “feet on the street” in accurately assessing damage through photographs and measurements, but the more claims work that can be done from the desk — such as estimating the number, location, and severity of claims — the quicker the process can be brought to a close. Expediting the claims process simultaneously decreases costs and increases customer loyalty
Forewarned Is Forearmed
Advance knowledge of location-specific weather can act as a trigger to pre-position staff, prepare resources, and accurately map the areas in which to deploy adjusters, minimizing manual efforts and saving time and expense. Furthermore, by clearly delineating the area of impact and the severity of the storm, anomalous loss patterns can be more distinctly identified by both size and location. Claims that fall outside the range of probability may be the result of a prior storm or even fraud.
The costs associated with erroneous claims should not be underestimated. Without understanding the prior hail history at a property, carriers may underwrite properties where damage has already occurred, but no claim is placed until the adjuster comes knocking after the next storm. And fraud cases related to hail damage do not usually happen as isolated events. In certain cases, carriers have paid out millions in roof claims before recognizing that the neighborhoods in which the claims were filed were not hit by hail on the date of loss registered. When carriers are able to identify those outliers, costs can plummet.
But what kinds of tools are insurers and adjusters seeking in order to address more frequent and severe weather events? In searching for technologies that can increase responsiveness, improve accuracy, and reduce costs, three important factors must be considered:
1. Weather and environmental data must be of significantly high resolution and delivered in near real time to be useful in predicting loss.
To gauge the magnitude of loss, it’s important to understand not only which properties were affected by weather events but also the severity and duration of those events. Interactive high-resolution maps with detailed shape mapping of hail size and location can provide much greater insight into potential damages.
2. Radar is not enough anymore. For the most accurate estimation of damages, weather data must aggregate information about multiple perils and leverage multiple platforms.
Damages from lightning, hail, wind, and tornado frequently occur simultaneously, and these perils can have regional synergistic effects. One-inch hail may cause minimal damage to roofs in one area; but combined with high wind shear, the severity of damages can increase and the mapping of that damage may be directionally skewed. Wildfires are much less easily contained in the presence of 60 mph winds. Multiple platforms — from computer models to intelligence-grade satellite processing — are now available to assist in depicting a more complete picture.
3. A customized view of weather as it relates to the carrier’s book of business or the adjuster’s assignments is critical in expediting claims.
By overlaying policy-in-force data onto high-resolution weather analytics tools, carriers can more quickly estimate loss reserves, factoring the likelihood and severity of an event with the property values and deductibles of the policy. Furthermore, overlaying claims can give carriers insight into the timing of claims — how quickly they are coming in and how long the cycle is expected to take. Leveraging near-real-time weather data can give an insurer an edge in deploying the right adjusting resources to the right problems quickly and accurately.
Weather mapping can also enhance the usefulness of valuation tools, such as those used by appraisers and contractors. Understanding the hail history of an address or the likelihood and severity of a recent event can give an adjuster an edge in rapidly and accurately assessing property damage. Piggybacking on existing tools and processes can keep costs down, minimize training, and streamline and standardize the process of analysis.
With the aggregation of historical claim data growing larger each year, the future of weather analytics is clearly migrating toward underwriting. Now that weather analytics can be assessed at the census block or even rooftop level (as opposed to the county level), managing individual property risk profiles based on loss history is quickly becoming a reality. Weather patterns are changing; hail, wind, tornadoes, and other perils are occurring more frequently and in unexpected places. In the insurance marketplace of the future, understanding those trends will be of utmost importance.
Joy Rohde is director of Market Strategy for Atmospheric and Environmental Research (AER), which helps businesses and government anticipate and manage risks from natural hazards, climate, and weather.