If the past 10 years have taught insurance companies anything, it's that risk assessment strategies constantly need to be revisited and adjusted.
Between climate change, new regulatory measures and market saturation, insurers must rely on new assessment tactics and forms of analysis in gauging the level of exposure posed to different areas of the country at various times, while accounting for the fact that there are simply more competing coverage providers. No longer is it safe to assume one part of the country is immune to hurricanes, as Superstorm Sandy proved, or that weather patterns will reliably move as predicted. And as a result, policies for homeowners insurance and mandatory flood insurance are being devised with the help of new data and analytics tools that aim to prepare them for the unpredictable.
The new norm
A recent Forbes report detailed insurance companies' increasing reliance on weather analytics firms, which attempt to quantify risks at a time when climate change - occurring faster than ever anticipated - seems to have the rest of the industry guessing.
"Insurance companies use our data and analytics to better evaluate risk and respond to weather-related events," Patrick Pollard, vice president of insurance solutions for weather analytics firm Verisk Climate, told Forbes. "We expect to provide the industry actionable data related to the changing climate which will be incorporated into insurance companies' operational processes."
Verisk is one of many firms that incorporates the so-called Blackout Risk Model, which evaluates the infrastructure in place and the level of inherent exposure present in a given area. Based on those systems, the impact that would be felt from various storm effects, including high winds, fallen trees and even solar flares, is assessed. In essence, the model provides an estimate for how much a given event, such as a hurricane, would debilitate a community or region. That estimate then offers insurers some idea of the costs that would be associated with said event, while also providing the area itself with some insight into where improvements could be made.
With more uncertainty, analytics become more necessary
Deloitte, the international research firm, recently conducted a study titled "The Potential for Flood Insurance Privatization in the United States," which used government data to assess the level of risk different Americans face and how flood insurers should go about accounting for that exposure. In light of what's recently been discovered about sea level rise - the National Oceanic and Atmospheric Administration's June 2014 trend data found that changes in mean seal level are occurring at a rate of at least 3 to 6 mm per year in no fewer than 30 major American cities - it's becoming harder to argue against mandatory flood insurance policies for communities that lie on flood plains.
In an environment where change is happening almost faster than can be accounted for, it may become the norm for insurance providers to start leaning heavily on such analytics tools. And while the uncertainty is scary, for consumers, that's probably good news in that it at least means everyone will be operating on a relatively level playing field, as they all rely on the same information.