If there is one thing that should keep commercial property insurers awake at night, argues Graham Wallace, it is location, location, location
Commercial property insurers have always had plenty of worries to keep them awake at night. Concerns such as managing exposure to risk, visualising accumulation, preventing fraudulent claims and staying profitable in soft times have existed since the industry's conception.
Today, these issues still rank at the top of an insurer's list. However, in a climate that is growing increasingly competitive year-on-year, there is another matter that should be giving property insurers sleepless nights - location verification.
The postcode of a property has always been considered the most appropriate method to verify its location and assess its risk, and, for many years, it was suitable enough. The insurance market was dominated by a few large players, and staying competitive was often a case of reducing prices where appropriate in order to gain new business.
However, today, consumers are growing increasingly demanding, and new competitors offering specialist commercial property insurance services are entering the market. Furthermore, the global environment is changing, and extreme weather conditions such as flash floods are causing insurers to reconsider how they underwrite risk and protect their competitive interests.
Due to this, the postcode method of location verification is starting to show its age. For instance, a postcode will not accurately determine whether a property is located on a flood plain. A large number of properties may share the same postcode, and one may be more at risk because of its positioning closer to the area of concern.
Conversely, businesses in the same street or the same building can have totally different postcodes. As a consequence, an insurer's accumulated risk can escalate without them realising.
Equally, a seemingly low-risk property may be near to a property of high intrinsic risk, such as an embassy, a bail hostel or - as recent news events have demonstrated only too well - a factory producing flammable fuels. This makes its insurance criteria different in practice from how it may look on paper. In fact, some commercial properties do not have a postcode at all.
Postcode-based risk assessment is, therefore, not accurate enough in today's climate - neither to mitigate risk nor to boost competitive edge.
The inaccuracy of postcode-based risk assessment has led to the development of new technology. The ESRI (UK) Insurance Platform, which incorporates geographic information system technology, uses precise XY co-ordinates to pinpoint the location of a property within one to two metres of accuracy for both postal and non-postal locations.
By knowing the precise location of a property, insurers can be more selective about the risks that they choose to underwrite. Fraudulent claims can also be detected quickly. Insurers can also detect if multiple policies are within the same building.
Furthermore, platforms like this can be designed to fully integrate into an insurer's operational processes to enable them to align reinsurance levels with specific risks, which eliminates the need for guesswork based on historical precedent.
Most importantly of all, this type of platform can join up activities across businesses - from underwriting to reinsurance, to corporate governance and marketing and sales, to claims handling and fulfilment.
For instance, more accurate underwriting of policies will optimise the use of capacity, which can affect the reinsurance required. Marketing and sales activities can be faster and more targeted and compliance becomes simpler, while claims teams can be empowered with accurate knowledge of large-scale claims events.
In addition, it can assess risk in real time because it integrates with back-end systems, automating processes that score and price location-specific risks. Consequently, while an organisation may reject more risks at the front door, it may be able to underwrite significantly more business overall.
In this way, GIS becomes more than just an isolated analysis tool for individual, high-exposure opportunities. It should also result in a far better night's sleep for commercial property insurers everywhere.
Graham Wallace is senior strategist, financial services, ESRI (UK).
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