If there’s one thing everyone is concerned about in insurance, it’s climate change.
Early pre-season forecasts for the 2022 Atlantic hurricane season from Colorado State University and Tropical Storm Risk show a slightly above average year, indicating an above average number of named storms, hurricanes and major hurricanes.
But while hurricanes can cause the largest loss totals in the U.S., the lion’s share of claims continues to be from wind and hail events. In fact, nearly 90% of catastrophe claims in 2020 were from wind and hail events, according to LexisNexis Risk Solutions’ U.S. Home Insurance Trends Report.
The confluence of increased frequency of natural disasters — resulting in more claims — and increased intensity — resulting in greater dollars lost — has underscored the importance of truly understanding the vulnerability of a property. And that starts with thorough underwriting.
Here’s the top five things to keep in mind for underwriting in 2022.
1. Roof condition is in. Roof age is out.
The roof has long been the most important part of the house to underwrite correctly, in large part because of how expensive (and how frequently) it can be required to pay out roof claims. Whether from wind and hail events via severe convective storm or hurricane-force winds, these perils by and large destroy shelter from the outside in and top down.
Traditionally, the risk of a roof has been assessed by using roof age, but in truth roof age isn’t an ideal metric to understand the vulnerability of a roof. For one, roofs age very differently depending on type, with concrete tile lasting as long as 50 years and asphalt shingle varying in its lifespan between 15 and 30. Almost three-quarters of the roofs in the U.S. are made of asphalt shingle, and in particular, environmental fluctuations of heat and cold play a significant role in how they age. As such, even an old roof can be in great condition if it’s well cared for, has seen favorable environmental conditions, and was installed well.
Roof condition, a metric that has been traditionally harder to judge, is now coming to the forefront with artificial intelligence-enabled technologies. As there continues to be an explosion of imagery of our built environment, across satellite, drone, aerial, and more, companies like Arturo have taken the opportunity to build diligent AI models that can scrutinize these photos and identify key indicators of roof health, like staining, rusting, evidence of damage or previous repair and more.
These roof intelligence traits paint a clearer picture of the health of a roof— and for a fraction of the cost of an onsite inspector. Not only does this help to understand the risk a home faces and thus quote and price a policy more accurately, but it can even be used as an indicator of future claims, with the knowledge that a more damaged roof will fare worse in poor weather.
2. Want to underwrite better risks? Incentivize good policyholder behavior.
The first step to reducing risk of claims is to identify vulnerabilities in a property and then make corrective actions where possible. Every property has some risk, and there is always room for improvement.
The same imagery explosion and use of AI can also enable a more proactive relationship between insurer and insured. With AI models that can scan a house, carriers can now have the tools to conduct a home health check and even recommend mitigative options in exchange for a decreased premium — like replacing a damaged roof, trimming the trees that scrape the house or installing a water shutoff sensor.
Not only do these actions help to decrease the overall risk profile of a policy, but they also allow insurance companies to have the heart of a teacher, educating people on the things innate within their home that could cause them problems later on down the line. Not only does the financial incentive of lower premiums create a better book of business for an insurance carrier, but it can also improve the customer experience of the insured and reduce churn.
3. Beware of premium leakage.
How often are you reevaluating a home once it’s been underwritten the first time, and how often is it reinspected? Without a clear understanding of how a home changes over time, it’s easy for properties to become underinsured — or for carriers to miss out on capturing premiums.
During the pandemic, with more and more people staying at home, one of the greatest ways people chose to pass the time was in home improvements. According to the Home Advisor True Cost Report, the average household spent $13,138 on home services in 2020, with 63% of this sum allocated to home improvements. In addition, as home prices skyrocketed across the U.S., existing homeowners made big gains on their equity, giving them the means to remodel their homes.
All together, this represents a significant risk for P&C portfolios, much of which will go unreported and uninsured until the next time an inspection is required. As an example, according to a study conducted in October 2019 by Pew Research, 46% of Americans said they had given “serious thought” to adding solar panels to their homes, up from 40% in 2016. Each solar array of one to five panels adds around $30,000 to Coverage A — with additional panels incrementally adding another $10,000. With the average home price in the U.S. at $270,000, this represents 15% of the value of the home. It’s easy to see how these additions can make a drastic difference in the size and scope of a policy.
But with AI models keeping an eye on homes, these types of major changes can be detected in close to real time. Additions like pools, trampolines, or solar panels, which can have major impacts to the structure and pricing of a policy, won’t be missed. Utilizing AI may require a homeowners’ waiver, but by keeping an eye on the house, it gives carriers the opportunity to be more consultative in their approach, ensuring that the homeowner is properly covered in the event of disaster.
4. Spend time and money on inspection…carefully.
Handing off the task of inspections to an artificial intelligence model sounds like a science fiction fantasy, akin to flying cars and teleportation. But the technology to do just that is here today, and it is making a real difference in improving the accuracy and cost effectiveness of insuring properties. At Arturo, we have seen an immense ROI using this technology as a result of property inspection reduction and efficiency.
By and large, this means the AI takes care of the easy stuff that is easy to identify but is otherwise time-consuming for a person to handle. When it’s clear as day there’s a pool, it takes note. When it’s obvious there is staining on a roof, it takes note.
But sometimes, the model can be confused or unconfident in its output. There is no AI model that can provide 100% accuracy on its return, so partnering with a provider that diligently monitors both the models’ inputs by selecting the right imagery and the models’ outputs by delivering results with a confidence score, is critical. This transparency enables carriers to make informed decisions about what information to trust, and this is where an inspector’s decades of expertise can truly be maximized: by deploying them when they’re really needed. At its best, utilizing AI is a symphony of machine and humans working hand-in-hand, with each focusing on what they’re best at to achieve better outcomes overall.
5. Elevate the role of underwriting professionals.
This framework of letting the AI model handle the easy, monotonous tasks and uplifting the expertise of the inspector can be applied across the underwriting department.
Now, underwriters can focus on the hard questions that are at the bleeding edge of insurance. In a world with work from home, what’s a commercial space vs. a residential space? When more data is presented at the point of quote, what’s the best way to digest and fairly price a policy?
The opportunity to bring greater value to the table to fill in the gaps that AI cannot and make better use of underwriting professionals’ time and ability to understand nuance cannot be understated.
Be wary of adverse selection
In a space that moves as quickly as insurance and insurtech, it’s critical to know what tools are at your disposal to make smarter decisions when it comes to underwriting, not only to get a strong sense of your portfolio’s overall exposure but to effectively compete with other carriers.
Having the right knowledge is a linchpin to building a future-proof insurance carrier. And today, that knowledge is primarily delivered in the form of new technology that can provide critical intelligence in seconds. In particular, AI continues to pave the way for these insights; this is reflected in research conducted by Gartner which found that 90% of insurance industry leaders affirmed that technology and talent investments in AI were a top priority.
As more and more carriers continue to adopt new technologies to better understand the makeup of a property, carriers that lag behind risk becoming a victim of adverse selection. This is a near-future state where the tech-savvy, early adopter competition segments the market, identifies the lowest risk policies and leaves behind the highest-risk, lowest-margin properties. This split of haves and have-nots, exacerbated by climate change, creates the grounds for climate gentrification, a duality that is neither good for homeowners nor carriers.
By keeping these technological applications in mind and exploring how insurance underwriting analytics can transform your business, you can be better prepared for the future — competition, climate change or otherwise — from 2022 and beyond.