The hurricanes of 2004-05 revealed that the quality of insurers' risk exposure data was insufficient, particularly for commercial insurance carriers, according to a new industry study.
New York-based Ernst & Young consulting firm, in its insurance practice quarterly outlook, states that improvement in data collection should be a key imperative this year.
Tom Stone, manager of the E&Y Insurance and Actuarial Services practice, said the current lull in storms provides a good opportunity for insurers to change the way they store, collect and use data.
"As insurers begin to plan improvements, it is important to fully understand all of the issues surrounding data quality that equally impact exposure to other naturally occurring catastrophes such as earthquakes," Mr. Stone said.
In some instances a major reconstruction effort will be needed, which can lead to significant competitive advantages in terms of pricing and risk selection, he added.
The report issued the following suggestions:
o Insurers should research which exposure data elements are important and how they can be obtained.
o Carriers should evaluate the effectiveness and potential improvement of using third-party tools and databases.
o Insurers should initiate a review protocol to periodically assess the processes and controls surrounding data collection.
In other areas, the report noted that companies are now taking Enterprise Risk Management more seriously than ever thanks in part to rating agency pressure.
"Unfortunately, many companies have begun implementing ERM programs without doing the necessary upfront legwork of gaining management consensus around the overall risk appetite of the organization," the report said.
Carriers should develop a formal risk appetite, which the report defined as the level of aggregate risk a company can undertake and successfully manage over an extended period of time.
"By working with management to draft and validate the appetite, circulating it for comment and obtaining buy-in from the board of directors, insurers can formalize their risk appetite so that it can serve as a cornerstone for making both strategic and tactical business decisions around risk," the report said.
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