Why Accurate Geospatial Data is Essential in Insurance and Banking Risk Management
Insurers are feeling the squeeze to better manage the risk on their book of business. On one hand, catastrophic events are on the rise while on the other, consumers have more ways to comparison shop for policies since online aggregators provide near-instant access to rates. This confluence is driving down prices on policies and reducing margins. In this environment, having the most accurate data that will determine the risk associated with each potential policyholder is paramount to winning business. If a policy is priced too high, insurers risk losing the deal; priced too low and they suffer down the road by retaining a riskier policyholder. One solution for more optimum risk management for insurance companies is to utilize geospatial technology and analytics.
Banks, too, feel the need to increase lending, but in the process, they may incur additional risk. Mortgage rates are at historic lows and the housing market is exceptionally “hot.” The COVID-19 pandemic forced many people from their offices and workplaces. This led to a realization that perhaps their current home was not suitable to accommodate the “work from home” (WFH) lifestyle as well as providing a hybrid learning environment for school-aged children. First-time millennial home buyers also juiced demand. As a result, the housing market and the refinancing market of existing loans exploded.
Data Drives New Insight for Banks and Insurers
Banks and insurance companies are looking for more insight into how they can both accommodate the volume of new business and mitigate risk at the same time. Their starting point is to become a more data-driven organization. Today’s market leaders are not only using data that’s more accurate, but they are also finding ways to enrich their understanding. They’re gaining insight about natural disaster risks, demographics and credit card transactions, all leading to a better understanding of customer behavior. They are leveraging the enormous potential of location-based analytics to support marketing, compliance, strategic planning and risk management.
This process begins with geospatial technology by obtaining an accurate address through address validation and geocoding. Address validation corrects errors related to misspellings and misfielded information such as an incorrect postal codes. Geocoding converts an address text string to a geographic location. Here, accuracy becomes critical. Depending on the geocoding methodology and data used to assign an accurate location, the true position of a property may vary. A property is most accurately located when its position can be assigned to the actual physical structure, such as a house or building, and not to the street address. The point location of the street address may, in fact, be located some distance from the structure. If the elevation of the physical structure was well above the street level, it could likely be located outside the boundary of a floodplain, for example, thus changing the nature of the risk.
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While accurate geospatial data is important, it is only one element in a total risk management solution. An abundance of additional data is available related to building attributes (e.g. total square footage, number of rooms, roofing material) and the distance to perils such as earthquake fault zones and floodplains. Distance data can be appended to the location of buildings and parcels. This process of geoenrichment provides an abundant assortment of information, now connected to the accurate addresses. This allows insurers to make this information available throughout their organizations so they can efficiently inform underwriting and actuarial decisions, improve customer engagement and gain a competitive edge.
Where insurers once relied on approximate property locations, now they can access address-point accuracy for more than 90% of U.S. and Canadian addresses. Where they once relied on spreadsheets, now they can analyze opportunities and risks via powerful interactive mapping and visualization capabilities. By homing in on specific risk factors and customer demographics, it becomes possible to identify market opportunities and price policies with extraordinary precision.
Why is Geospatial Data Important to Manage Risk?
- 67% of people in flood zones, where flood insurance is supposedly mandatory, still don’t have flood coverage, according to the First Street Foundation.
- 90% of Californians do not have earthquake insurance, even though the U.S. Geological Survey projects a 93% probability of a major earthquake in California in the next 25 years, according to the California Earthquake Authority.
- Even when the right coverage is in place, up to 60% of homeowners are underinsured by an average of 20%, according to CoreLogic.
Advances in location intelligence, geospatial data and geoenrichment make these insights more accessible. Maps reveal discrepancies in coverage and alert to the possibility of higher risks. Now, with the right tools, you can assess a more factual level of risk associated with every insurance or mortgage application and renewal:
- Incorporate details on the property owner, zoning, land use and condition.
- Know the exact square footage, plus the number and type of rooms.
- Pinpoint the location of perils such as flood, wind, earthquake, explosion, and wildfire.
- Calculate the exact distance from coastlines, flood zones, fire hydrants and more.
- Assess crime rates, accident trends and historical traffic patterns.
- Validate consumer profiles, including marital status, occupation, and the presence of younger drivers.
Defining a Foundation for Accurate Location Data
By starting with the best geocoding solution, it is possible to derive an accurate coordinate pair for each property, and then augment the results with a wealth of data. This creates a foundation for accurate location analytics. There are five important ways to leverage this foundation of accurate location data.
- Pricing: enhance the ability to price precisely based on the risk associated with a specific applicant or property.
- Targeting: identify and proactively market to target audiences in the otherwise high-risk environments that competitors may avoid.
- Engagement: reach customers before catastrophic events to limit or reduce potential losses.
- Management: optimize deployment and respond quickly to claims.
- Exposure: review the entire portfolio’s exposure through the same lens, with enriched insight that can effectively balance risk.
New Technologies also Offer New Possibilities
Property and casualty insurers can capitalize on new technologies and data with near-instant access to location data and analytics. Through telematics, for example, insurers can assess and price automobile coverage using each individual driver’s own performance data. Underwriting can focus on driving behaviors such as where policyholders drive, how much they drive, and other factors that impact risk. Rather than simply depending on an age, address and prior driving record, risk-based pricing can be tied more closely to the individual driver’s habits and skills. Customers can “opt-in” for this type of pricing and, by meeting driving criteria, benefit from better rates.
For mortgage lending banks, it’s important to have the most current and accurate geospatial data on perils related to fire hazards, as well as flooding and wind-related events such as hurricanes. The impact of a changing climate was especially recognized during 2020 when over 30 named tropical storms were spawned. In addition, in the U.S., the National Interagency Fire Center reported that “as of Nov. 27, 2020, there were 52,113 wildfires that had burned 8,889,297. This is approximately 2.3 million more acres burned than the 10-year average and almost double the acreage burned in the 2019 season.”
Insurers and Banks Need to Leverage Geospatial Data: Accuracy is Essential
In summary, it’s vitally important that the most accurate geospatial data is maintained in order to accurately assess risk so that insurance policies may be correctly priced, and mortgages can be properly underwritten. Both customer satisfaction as well as a reduction in the potential maximum loss is substantially improved. The result is an immediate impact to total revenue.
Where can Korem Help?
Korem works with partners that provide the industry’s most accurate data and enterprise-level software. Korem works with geospatial solution providers for geocoding such as Precisely and HERE Technologies. Korem has allied with BuildingFootprintsUSA, a company that processes satellite imagery to extract features such as building footprints, and impervious services. Precisely has an extensive portfolio of demographic, psychographic and retail data available as separate files or as an API. Korem has the most accurate data for natural perils and extensive options for political, administrative, telecommunication and tax boundary data. Contact us today for more details.