Property Insurance: Meeting Core Data Challenges

Inflationary pressures, an increase in natural disasters, and secondary perils are creating challenges for property insurance carriers, exposing them to additional risks and undermining profitability.

How can property insurers mitigate these economic challenges? Data plays a critical role, but to succeed, carriers must govern and manage their data effectively, building data integrity and developing scalable systems for efficiently maintaining it.

Five Key Challenges Facing the Insurance Industry Today

The insurance industry currently faces five key challenges that threaten to undermine profitability. They are:

1. Inflationary pressures
2. Valuation challenges
3. Risk management issues
4. Increased frequency of secondary perils
5. Data integrity issues

Inflation is very much in the headlines and is a strong contributing factor to valuation and risk management. As the volume of available data increases, modern analytics and AI/ML offer potential solutions – yet poor data integrity stands in the way of potential wins.

Let’s look at these five challenges in further detail.

Inflationary Pressures 

The term “inflationary pressures” is useful as it is intentionally broad, encompassing a range of forces that contribute to rising costs. The insurance industry is impacted most by two specific factors: economic inflation and social inflation.

Economic inflation is in the headlines. It includes core inflation, which rose annually by around 5% through the middle of 2023. That impacts the cost of doing business, but for P&C insurers, it directly impacts replacement costs. Some insurers report an increase of around 40% in their exposure base. Naturally, that makes it expensive to pay out claims, especially where large-scale natural disasters are involved.

For insurance carriers, that calls for an increased focus on accuracy in pricing, capturing likely increases in risk exposure at the point of sale. Despite widespread perceptions that premiums have seen steep increases over the past six or several years, the industry has held prices to a lower rate of increase than core inflation. The net impact on the industry is an erosion in profitability totaling nearly $20 billion since 2017.

Social inflation is also creating a significant drag on profitability. Growing litigation costs and the increasing incidence of so-called “nuclear verdicts” loom large. Yet those are not the only elements of social inflation. Negative public perceptions about the insurance industry prompt some policyholders to exaggerate claims in the event of a natural disaster. Social inflation adds an estimated 5 to 10% to loss payouts during natural disasters.

Valuation Challenges

One of the most obvious impacts of inflationary pressures is its impact on valuation. Replacement costs play a large role in that challenge. Supply chains have been under stress since the onset of the COVID pandemic. Labor shortages have been a persistent problem and have remained acute.

Undervaluation has a number of consequences for insurers. Companies may undercharge for risk and underestimate total loss potentials for both natural catastrophes and man-made events. The value of deductibles in such cases is likely to be overstated, providing little in the way of a hedge against policyholder claims.

Insurers are responding with greater scrutiny, requiring insureds to go further in substantiating valuations than in the past. They’re also using advanced data analytics to increase the accuracy and reliability of their internal ratings.

Risk Management

Core inflation, social inflation, and valuation challenges are coming together to make it more and more difficult to accurately price and manage risk. Although risk management has garnered increased attention in recent years, the fundamentals have remained very much the same.

Greg Freeman, Senior Vice President for US Retail General Property at Berkshire Hathaway says effective risk management is about “increasing confidence and minimizing uncertainty.” His organization has adopted what he calls an “engineered approach” that combines account-level information with detailed location data to deliver granular risk assessments with high levels of confidence and accuracy.

To manage the risks associated with major catastrophic events, Berkshire Hathaway has an analytics team that uses dynamic weather data to track major storms as they happen, model potential outcomes, and overlay that on a map of the company’s risk exposure in the area. The effective use of location intelligence is an important tool for the company.

Increased Frequency of Secondary Perils 

Over the last five years, the insurance industry has seen an increase in large losses from secondary perils, particularly from convective storms such as tornadoes, hail, wildfires, and flooding. That trend is driven in part by population growth in coastal areas that are disproportionately susceptible to such hazards.

Although attention has historically been focused on major catastrophes such as earthquakes and hurricanes, losses averaged over several years indicate that secondary perils have a roughly equal impact on losses.

Once again, location intelligence is playing a critical role, as precise geographic mapping with integrated data analytics platforms has enabled insurers to develop sophisticated cat rating and accumulation approaches for both primary and secondary exposures. By analyzing wind patterns and understanding the precise location of combustible vegetation, for example, insurers can develop highly granular models to assess the risk of individual properties within their portfolios.

Data Integrity

Advanced data analytics provides solutions to these challenges, yet for most insurers, data integrity itself presents a unique challenge. As insurers strive to refine their risk models and predictive capabilities, the effective use of data is quickly becoming a central tenet of competitive advantage. To achieve success, data integrity is absolutely essential.

AI, machine learning, and powerful analytics offer tremendous opportunity, yet the accuracy, precision, and contextual completeness of the data are critical if insurance carriers are to produce trustworthy results that protect the bottom line.

John Ravenna, Head of Underwriting Development, Property and Specialty at Swiss Re Corporate Solutions underscores this point: “Data and analytics is part of the future of the company. We’ve made more investments in actuaries and data scientists than in underwriters in the last few years. It’s the key to our future.”

Precisely fuels stronger insurance processes by increasing trust through data integrity. Our customers are enhancing their risk assessment capabilities with sophisticated geospatial analytics and enterprise data quality tools to drive consistency and accuracy.

To learn more about how Precisely can help your organization meet the five key challenges of the insurance industry, read our free ebook, Achieving Data Integrity: A Guide for Insurers.