The development by insurers of individualised flood underwriting capabilities lead to negotiations with UK politicians and civil society for a fairer arrangement. The result was Flood Re. Now insurers are developing similar underwriting capabilities for wind risk. What does this point to?
When insurers acquired the expertise and systems to deliver flood underwriting down to the property by property level, it was clear that other perils would at some point be treated in similar fashion. This seems to be emerging now for wind underwriting, which I interpret to encompass everything from storms to tornadoes.
We know that here in the UK, insurers utilised those individualised flood underwriting capabilities to drive up premiums for homes in areas deemed to be of high flood risk. The result was exponential increases in renewal rates and many communities, many long established, facing a very uncertain future.
As a result, the Government faced a much heightened exposure as the ‘insurer of last resort’ for those communities no longer able to afford or find flood cover. This lead to a political engagement with the sector, out of which emerged a pooled reinsurance solution named Flood Re.
In short, politicians were uncomfortable with the consequences that individualised flood underwriting had for access to and need for insurance across UK society. They saw re-election risk and budget exposures, just as insurers saw flood risk and claims exposures. It was therefore inevitable that the two came together to hammer out some form of solution.
Remember however that those flood underwriting capabilities were largely based around factors external to the property in question. In other words, the location of the property in relation to external sources of flood risk, such as rivers and coastlines.
Newly published research into wind risk assessment goes a step further. It combines external factors like exposure to different levels and patterns of wind speed, with fragility indicators for buildings standing in the wind’s way. And by fragility, I mean the individual fragility of up to five thousand components of the building itself, both individually and combined.
What’s being measured then is the probability of selected building components exceeding certain damage states under certain levels and patterns of wind. And that probability then being aligned with claims data from insurance firms to derive financial exposures.
One rather high level example of such a fragility indicator might be what your roof is made from and how it is attached to the underlying structure. And there are five thousand such indicators, delivering incredibly levels of granularised insight into how susceptible a building might be to wind damage.
This amounts, to put it one way, to individualised underwriting on steroids.
Not Just Commercial
I was not surprised to find that this research has been funded by AXA-XL, one of Europeans leading commercial insurers. Now, those of you working in personal lines might think at this point of turning their attention to something else. Do not do so, for while these wind underwriting capabilities are being focussed for the moment on commercial building portfolios, they are capabilities that work on a building by building basis. In other words, there’s little stopping those capabilities being applied to my home, your home and all those in-between.
AXA has a long track record of funding academic research into topics that appear at first to be quite general and altruistic, but which, if you explore them a little more, reveal real potential for use in personal and commercial underwriting (more here in relation to selfies and smiles). This sort of relationship between business and academia is becoming more and more common now, so while AXA stand out on this in insurance circles, in wider business circles they are just one of many.
The questions of fairness raised by individualising trends in flood underwriting in the period up to 2016 were settled through the adoption of a pooled reinsurance vehicle. How will the obvious questions raised by even more powerfully individualised wind underwriting be addressed? Are we going to see another round of negotiations, a ‘Wind Re’ type solution?
And after wind, what is next? Even more ‘Re’ solutions, created one by one to tackle the same issue as it progresses from one peril to another? What exactly then is that ‘same issue’? It is the equality of fairness (more here). In other words, how do you balance questions around merit with other dimensions of fairness, such as access, need, time and communities? How do you balance the public’s need for commercial and personal insurances, with the sector’s willingness to provide them, and upon what terms?
Sometime in the first quarter of 2023, the Institute and Faculty of Actuaries will publish a detailed paper by me addressing just that question – how the different aspects of the equality of fairness can be balanced. What I do in the paper is stand back from the trees and look at the forest, to avoid getting into that ‘peril by peril’ spiral of detail.
A plethora of reinsurance vehicles designed to placate political concerns on a peril by peril basis is like using several packets of plasters to fix a serious underlying health problem. That problem is being addressed in the wrong way, one that will lurch insurers, communities and politicians from one crisis to another. Not something to look forward to.
The tectonic plates of insurance are moving, and they’ve been put into motion by the influence that data and analytics are having on the ability of insurers to select and categorise risk. The key trends of personalisation and hyper-personalisation that sum up those influences need to be understood and addressed as a whole, not on an event by event basis.
These emerging capabilities around hyper individualised wind underwriting remind us that the questions raised by these big trends are not going away. Better to engage with them now, before the insurance that the public expects starts to deconstruct before their politicians’ eyes.