New York – Data integrity has its rewards, especially for reinsurers. In fact, when it comes to their ability to underwrite property catastrophe exposure, the biggest concern among reinsurers is quality of cedant data, according to New York-based Ernst & Young LLP’s 2008 Catastrophe Exposure Data Quality Survey. The study, released this week, found data quality can directly impact reinsurance pricing and capacity extension.
According to the Insurance Information Institute, New York, reinsurance, a highly complex global business, accounts for about 7% of the U.S. property/casualty insurance industry premiums.
As the reinsurance business evolves and grows, the traditional reinsurance transactions between two insurance entities—the primary insurer and the reinsurer—are now being enhanced with risks of various kinds, particularly of natural disasters, being sold by insurers and reinsurers to institutional investors in the form of catastrophe bonds and other alternative risk-spreading mechanisms.
The Ernst & Young report, “Raising the bar on catastrophe exposure data quality,” queried 12 such companies writing U.S.-based exposure. While not a large sample size, says E&Y, annually these companies combined to write more than US$32 billion of insurance and reinsurance premiums worldwide and represent a cross-section of the industry.
More than half of reinsurers currently use sophisticated tools to evaluate the accuracy of exposure data received in broker submissions, and 83% have basic checks in place confirming that the most critical data fields are populated. When asked to identify the data items they consider most problematic, reinsurers pointed to insured values, complete inventory of locations and secondary characteristics.
Nearly all reinsurers (90%) surveyed acknowledged that they apply surcharges to compensate for data quality deficiencies, and among these 70% say they would include a 20% to 25% premium penalty. Additionally, more than one-third said they would be willing to offer a minimum 10% premium credit for cedants with high-quality data.
When analyzing the potential risk of a cedant with poor data quality, a majority (58%) of reinsurers said they directly modify their catastrophe model results, while the remaining 42% of respondents make upward adjustments to the data prior to running their models. To help boost their confidence level in data quality, the vast majority of reinsurers (92%) agreed that if the cedant used strong collection, enhancement and data maintenance controls, the risk would be more attractive to them.
In fact, says E&Y, seven in 10 companies would consider extending additional capacity, and 75% would consider offering premium credits of 5% to 15% to a cedant who could demonstrate strong controls and policies via an independent report.
“With recent natural catastrophes exacting significant tolls, now is the time for insurers and reinsurers to take action by developing world-class data quality controls and management practices,” explains Trish Conway, actuarial advisor, Ernst & Young LLP. “Investing the time to improve their catastrophe data quality is a win-win situation for insurers. It helps them improve their own operations and also makes their business more attractive to reinsurers, potentially leading to better pricing and more capacity. At the same time, reinsurers who apply similar effort in assessing the data they are given by insurance companies will find success in the increasingly high-stakes property catastrophe market.”
Sources: Ernst & Young LLP, INN archives, Insurance Information Institute
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