With an increasing percentage of total property losses caused by the peril of wind, insurers are looking for more detail to use in their risk evaluation. Verisk Review recently spoke with Kevin Kuntz, PE, assistant vice president of risk engineering for Verisk Insurance Solutions – Commercial Property, about the need for a commercial property rating program for the wind peril.
Verisk Review: Why does the industry need an enhanced rating program for the wind peril?
Kevin Kuntz: Damage due to wind has been growing steadily as a percent of overall commercial property losses. In 2011, insured losses due to wind and thunderstorm events exceeded $30 billion. Coastal areas in particular have experienced tremendous population growth — bringing with it more structures and potential damage. Coupled with an increase in hurricane and storm activity, the wind peril has made it increasingly clear that commercial property insurers need wind-specific information to analyze and price insurance coverage accurately.
Until recently, rating for the wind peril had been rooted heavily in the methodology used for fire rating. We know that light metal construction performs well when evaluating the fire peril but may not hold up as well when subjected to severe wind loads. With Enhanced Wind Rating, we’re taking into account detailed building specific characteristics and details of the surrounding environment that affect a building’s ability to withstand wind damage. It became evident that the industry had to look beyond the simpler fire-based rating model for wind to enhance the rating process and develop a premium that’s more commensurate with the exposure.
Verisk Review: But can you quantify a building’s resistance and exposure to wind damage?
Kuntz: Yes, you can. By analyzing wind-related building characteristics and geographic and environmental exposures, you can identify, measure, and price exposures specific to the wind peril. For example, building characteristics such as roof covering, type, pitch, and geometry; hurricane shutters or window protection; detailed construction information; and percentage and type of glass can all affect resistance to wind. Geographic and environmental exposures such as distance to coast, terrain type, and wind-borne debris all play a role in how a wind event will affect a particular building. Using this specific information about the building with sophisticated wind-related models, an underwriter can quantify each building’s unique exposure to wind damage and its ability to resist damage from that exposure.
Verisk Review: How does location help determine exposure to wind damage?
Kuntz: Certain geographic areas naturally have higher levels of wind exposure than others do. And it extends beyond the typical coastal exposure we normally associate with wind. The last few years have underscored that — take for example the losses generated by tornadoes in the Midwest. We’ve actually grouped the United States into four wind hazard zones: low, medium, high, and severe. Using known loss statistics in those zones, we can refine a building’s wind resistance and vulnerability into a more accurate loss cost.
Verisk Review: What have you heard from insurers about the value that wind-related rating can give them?
Kuntz: Insurers have told us that such a rating program could help them compare disparate risks, allow them to match the premium they charge more directly to loss exposures, and provide them with building data to feed into underwriting systems and catastrophe models. The bottom line is that more detailed wind rating can improve the process of identifying and pricing building-specific wind exposure. This process has proven highly effective for the fire-related (Basic Group I) pricing, and fine-tuning the wind-related pricing is a natural evolution of the process.
Verisk Review: Why do underwriters need BGI* and BGII** loss costs for optimal rating?
Kuntz: With a commercial property policy, millions — even tens or hundreds of millions — of dollars of value may be insured. A small difference in the rate charged to such properties can make a big difference in the premium dollars paid, and that can affect an insurer’s ability to land desirable accounts. Also, with that much exposed value on a policy, a proper assessment of the risk in providing insurance is important to the company’s financial health. Even properties that are considerably less desirable may become attractive with more accurate rating.
ISO loss costs are industrywide benchmarks of the cost of paying for losses. We’ve developed them from a broad database of information. Our specifically rated loss costs are based on individual building inspections and reflect a highly detailed, building-specific assessment of a structure’s susceptibility to damage from fire (BGI) and now wind (BGII). The features of a building that make it vulnerable to fire loss and wind loss aren’t always the same. In highly wind-prone areas, the expected loss due to wind can easily exceed the expected fire loss. It’s therefore necessary to look at commercial properties from a wind vulnerability viewpoint as well as the traditional fire-based evaluation of those structures.
Verisk Review: How does ISO collect such a vast amount of building information?
Kuntz: The collection process requires a huge investment in people resources to go on-site physically to identify and capture building characteristics that affect loss potential from wind. ISO’s field representatives do just that. They survey properties and look for specific building characteristics affected by wind events — things such as what equipment is on the roof and how it’s secured, awnings or canopies, roof details, surrounding terrain, wall area covered by glass, and property exposures and wind-borne debris. We capture this data for surveys performed in high wind-exposure areas for eligible buildings — adding tens of thousands of new buildings to our commercial property information database each year.
Verisk Review: What has ISO and Verisk developed for wind rating?
Kuntz: We’ve developed the Enhanced Wind Rating Program. The program fills a void in the insurance industry by quantifying a building’s resistance and exposure to wind damage. Using wind-related building and exposure characteristics, you can now identify, measure, and price exposures specific to the wind peril. The specific building data this program creates can be used to support natural catastrophe models. We’ve filed the program with state regulatory authorities with a January 1, 2013, effective date for interior states and a February 1, 2013, effective date for coastal states. But enhanced wind rating loss costs and rating information will be available October 1, 2012, in advance of those effective dates.
Program eligibility is based on the relationship between building size and the geographic wind exposure, as the chart shows.
The program uses a credit/debit approach to allow each building to be individually rated to the degree it’s above average or below average in each rating territory. Phase I of the program will apply debits and credits based on number of stories, year built, enhanced construction classification, and UL 90 Roof Uplift Certification, supplemented with distance to coast and terrain and the Building Code Effectiveness Grading Schedule (BCEGS®). Future program phases will include additional building-specific data such as roof geometry, percent of glass, terrain, yard exposures, and debris exposure from neighboring buildings.
Verisk Review: Is the wind-specific information available anywhere else?
Kuntz: Yes. We offer the information in several of our commercial property underwriting reports, helping insurers make informed decisions about the potential damage that wind can cause to buildings and how to mitigate the exposure. Some of the key data elements in the reports are enhanced BGII rating; building construction and usage characteristics; environment and exposure information; wind loss history; and detailed roof, wall, and framework information.
Verisk Review: How has the industry reacted to the program?
Kuntz: We’ve received very positive feedback from our insurer customers. This is the first program of its kind! Insurers have told us that while BGI loss costs, which emphasize fire, are a critical component of their rating process, that can no longer be the only focus. The increased concentration of exposed values coupled with increased hurricane and severe storm activity drives the need for wind-related information to assess the complete risk exposure. The enhanced BGII loss cost and report information improves the rating and underwriting process. We’re confident that the program will allow insurers to evaluate their individual exposures and their entire book of business.
*Basic Group I (BGI) loss costs include BGI perils of fire, lightning, explosion, vandalism, and sprinkler leakage.
**Basic Group II (BGII) loss costs include BGII perils of windstorm or hail, smoke, aircraft or vehicle, riot or civil commotion, sinkhole collapse, and volcanic action.