Understanding the changing nature of catastrophes is the first step toward enhancing underwriting performance. The 1990s marked the onset of several industry wake-up calls, prompting increased use of geographic information system (GIS) technologies for better management of portfolio exposures to protect surplus and improve reinsurance strategies. Hurricane Andrew, for example, was the impetus for many insurers to start using modeling and mapping technologies, as well as address scrubbing and geo-coding, which provided a more accurate and timely view of aggregate exposures across personal and commercial lines.

Following the 2001 terrorist attacks, it became clear attaining precision down to the level of a four-walled structure was necessary, not just the aggregate exposure within a particular county or ZIP Code. On top of that, insurers realized the need to aggregate exposures beyond property lines–across virtually all insurance products.

The financial disasters of Enron, WorldCom, and others earlier in this decade involved reputational risk with implications for enterprise risk management, fiscal accountability, and the insurability of such man-made acts. Hurricane Katrina challenged insurers in 2006 to distinguish multiple perils (wind and flood), again raising the need to become much more sophisticated in managing underwriting operations. Inevitably, each new wake-up call prompts the need for greater precision in the use of location intelligence to manage risk exposures across multiple lines of business.

Enhancing the underwriting operation is an imperative remarkably well understood on Wall Street. To gain insight into how insurers can earn superior financial ratings, Accenture recently commissioned Institutional Investor Market Research to survey more than 100 leading insurance equity analysts.

Property/casualty analysts cited pricing and underwriting, collectively, as the most important area of technology investment in order for P&C insurers to improve their business performance. These analysts ranked environmental issues, such as climate change, as the top industry challenge for insurers over the next three years, followed closely by aging technology systems. Terrorism and geopolitical instability also were cited by the majority of analysts as a key challenge going forward.

Shortsighted Tactics

In recent years, on the heels of major hurricanes and floods in Florida, Louisiana, and elsewhere, many carriers responded in knee-jerk fashion by pulling out of those markets. Similarly, post-9/11, others stopped covering high-rise buildings in New York City.

Avoiding major markets, however, is not a winning strategy. In today's highly competitive environment, insurers must find more intelligent means of writing the best risks in the best buildings within tough geographies. Through greater precision and more accurate data, insurers can do a better job of selecting, pricing, and servicing risks, thereby improving their market sustainability and shareholder results.

Many carriers fail to make strong underwriting decisions because they don't have sufficient access to timely and accurate data. Further, they are not integrating assessments of perils, such as earthquakes, tornadoes, floods, wind, and other hazards, into the automated flow of their underwriting process.

Too often, the acquisition and storage of data involves multiple entries into multiple systems that are unconnected–an inefficient, burdensome process that hinders carriers' ability to obtain needed insight. One large multiline insurance company, for example, manually enters location data into nine different systems for its commercial lines risks, frequently leading to inaccurate or missing information. Large submissions take up to four days for the carrier to complete, creating voids of data and an unnecessary drag on service and underwriting quality.

For this carrier and many others like it, the problem isn't the availability of data or the technology to map and cleanse it. The weak links are data capture and process automation, which prevent them from fully harnessing the power of their own underwriting insight.

Historically, personal lines carriers have struggled with how much information to request from an applicant upfront. Discovering after a policy has been initially quoted that the applicant's California home, for example, is in a severe brush zone may require a substantial hike in the initial quote or even a decision to decline coverage, resulting in an unhappy potential customer.

Today, with carriers asking more and more questions about hazards (e.g., Do you own a pit bull? Do you have a trampoline?), the challenge is: How can they leverage external sources and GIS tools to acquire additional data earlier so they can give applicants a more accurate quote without slowing down the process? Carriers that can determine quickly whether, for instance, a particular dwelling is in a brush zone and whether they have the appetite to write the policy and how to price that risk have a competitive edge because they will:

o Enjoy higher profit potential by accurately aligning underwriting and pricing decisions with the quality of the risk;

o Be easier to do business with because they can acquire information quickly without having to burden their customers with extensive questions; and

o Develop unique insights into the most important data to capture and improve the customer quotation experience.

Innovative Technology

High-performance insurance companies are achieving a competitive advantage with innovative underwriting technology that creates an intelligent user experience for information gathering and a rules-based approach to risk selection and pricing. "Location intelligent underwriting solutions" provide:

o Automated workflow to achieve consistent and straight-through or low-touch processing;

o Integration with external data services and GIS utilities to standardize, cleanse, and validate data needed in the underwriting and quoting process;

o Automatic execution of business rules to reach the fastest and best decision and price; and

o Externalization of rules for business user maintenance, which accelerates the introduction of new products, new pricing models, expanded underwriting appetite guidelines, and workflow adjustments.

Winners Have the Best Rules

Using a location intelligent underwriting solution, carriers can leverage greater volumes of data from external sources and capture more results on the loss ratio performance and retention metrics of their customers and policies, enabling them to improve the accuracy of their business rules.

The solution provides a feedback loop from the captured data as to whether certain risk attributes are more or less indicative of loss potential. And it monitors the totality of a carrier's risk decisions, maps them to product performance, and provides the analytics to build better business rules. Finally, the solution enables rapid rule creation and modification so that refined rules can be applied immediately to the business process.

Simply put, insurers with the most sophisticated, insight-driven rules will outperform their competitors. These insurers know more about how to profit on the risks they choose to underwrite and are better at aligning price and risk quality–not only to avoid adverse selection but optimize price elasticity. These insurers are better equipped to take advantage of market cycles and windows of growth opportunity. With the unique insights gained from having superior data access, they can build and refine first-class rules and increase the speed of the underwriting process. In fact, even with greater volumes of data, carriers can reduce transactional process times significantly through more automated systems.

Consider the example of a commercial lines carrier receiving a submission from a broker with a location schedule containing 50 locations. Over three days, the underwriter manually enters the data into eight different systems to determine whether the buildings are potential terrorist targets, whether capacity to insure the risk fully already has been exceeded, and other factors. Unfortunately, since the systems aren't integrated, it's difficult to verify the accuracy of the address and other data or understand the aggregate exposure in a particular building. The carrier inadvertently inputs different data on the same building and underwrites above the known exposure level.

Now, consider the carrier's response using location intelligent underwriting technology upon receiving the same submission. The data is uploaded automatically from the broker's spreadsheet into the underwriting solution location repository. As part of this process, the data is standardized, cleansed, geo-coded, matched, and verified–using external data services–against the carrier's centralized location database. Matching data is automatically pulled into the risk.

The data services not only verify building addresses, they feed in additional data the application omitted or stated inaccurately, such as proximity to flood zone, earthquake fault lines and brush zones, and elevation and slope. Total time elapsed: five minutes.

It is critical to have a common, consistent address cleansing, matching, and geo-coding process as part of the solution to ensure the external data is aligned with the latitude and longitude of the risk. The solution also brings risk visualization to the underwriter's desktop, enabling a more sophisticated assessment of geophysical hazards and other risk potential.

Growth Across Market Cycles

Having a more automated, streamlined underwriting process enables carriers to incorporate quickly and accurately the data necessary for smarter underwriting and pricing decisions that help drive profitability. Armed with better insight into location risks, carriers also can optimize the use of their loss control units–dispatching representatives to consult with insureds on better management and safety practices, rather than merely verifying application data. Rich location intelligence across the portfolio enables innovation of product coverages, pricing, and services to fuel highly differentiated growth strategies.

Beside improving underwriting, location intelligence technology helps insurers sell with greater precision by enabling carriers and their agents to evaluate a wide range of risk factors–including street location, dwelling, and customer attributes–and bring in external data to triangulate against those attributes to target prospects that are likely to be most profitable.

The industry's management of location-based risk has progressed greatly in recent years. But it must continue to evolve location insights from a necessary "back office" capability, designed to protect surplus and reinsurance treaties, into a powerful source of strategic underwriting and transformational growth.

A new set of challenges involving location intelligence is undoubtedly looming in the future in the form of natural catastrophes, man-made risks, and event-based risks. And in an economic climate where growth has become a battle of inches, insurers equipped with sophisticated location intelligent underwriting solutions will be best positioned to outperform their competitors well into the future.

Gail McGiffin is a senior executive in Accenture's insurance practice and head of the firm's global underwriting solutions and services.

The content of "Inside Track" is the responsibility of each column's author. The views and opinions are those of the author and do not necessarily represent those of Tech Decisions.