As wildfires scorched California's Los Angeles and Ventura counties in October, thousands of firefighters tried desperately to extinguish the flames that-fanned by dry winds-threatened to spread.Homeowners weren't the only ones following the spiraling fires with concern, as insurers, too, have seen how once seemingly safe urban areas are now vulnerable.
The advent of location technology, however, is providing insurers with the tools necessary to more accurately underwrite and rate homes in high-risk areas.
"If someone wants to buy a home in an area that is a wildfire risk this year-based on current conditions-the insurer can know that immediately-because wildfire data is now kept in real time," says Chad Hersh, senior analyst in the insurance practice at Celent, LLC, a Boston research and advisory firm.
"Particularly in California, you can actually know that this month this home is a particularly high risk and you may not want to insure that risk." That is critical, he says, because in the past if an area had not been classified as a wildfire area, it might not have come up during the rating process. Such technology, which can help deter construction in a wildfire-prone zone, is invaluable for insurers in light of recent disasters, says Hersh.
In only seconds, the technology enables agents and ultimately underwriters to view a homeowner's location and determine the type of risk presented if a fire department has to extinguish flames engulfing the property. Insurance firms are increasingly adopting such location technology in order to boost profits, price risk more accurately and appease state regulators.
And yet, while many firms have made the swift transition to the technology and the spate of recent natural disasters is triggering others to join the bandwagon, many others remain on the sidelines, wary of adopting more expensive solutions, unsure of which vendor to choose, hesitant to cede control of data, or simply overwhelmed by a litany of other pressing business and technology issues.
Improving operations
More than 85% of insurance data has some location component, according to Troy, N.Y.-based MapInfo Corp.
Insurance companies can provide appropriate public protection classes with location technology because constantly updated data, including the quality and location of the fire department and the availability of the water supply, can be geocoded and incorporated into insurance firms' rating systems-and used by agents at the front end.
Traditionally, when property/casualty policies are underwritten, insurance firms use slow and cumbersome approval processes, and track a litany of information about earthquakes, windstorms, lightning, floods and other factors from third-party sources.
With this approach, even those companies that have effectively consolidated that information still aren't able to simply enter an address in a system and receive precise pricing.
The number of insurers recognizing the importance of automated solutions, however, is growing. Some 80 insurance firms now license the Location database from ISO, Jersey City, N.J., including new converts Nationwide and USAA.
Location identifies the precise address, not just the ZIP code, of individual policyholders and the fire department that is legally responsible for, and capable of, responding to a fire.
Enabling underwriters to use location technology to properly classify risk not only can boost profitability, it can also improve customer satisfaction, says Celent's Hersh. "You get better pricing, but not necessarily higher prices for consumers," he says. "If insurers are not already leveraging these technologies and leveraging them in a substantial way for virtually every property-related issue, they probably aren't pricing their products correctly."
Florida Farm Bureau Insurance hasn't had problems with state insurance regulators since relying on location systems rather than trusting the rating decisions of agents who look up figures in a manual or on a paper map," says Steve Wallace, senior strategic planner for the Gainesville, Fla.-based subsidiary of the Southern Farm Bureau Casualty Insurance Group.
The firm uses a combination of proprietary technology and location intelligence from MapInfo, Troy, N.Y., as well as browser-based quote systems for P&C policies.
Insurers can also use location technology to determine their risk is too high in certain areas and offload some of that risk to reinsurers, says Hersh.
"Especially with the catastrophes in the last few months, insurers need to be able to quickly assess where their risk lies and how to spread the risk-both in terms of new policy sales and reinsurance," he says.
Furthermore, the technology enables insurers to quickly identify hot spots or create new rating territories, even carving a dividing line down the middle of a street to create two different policies, according to Craig Bedell, MapInfo's director of insurance.
For instance, these systems account for the fact that the traditional "brush zone" in California is changing, with urban sprawl causing homes to encroach on previously undeveloped areas.
"A certain commoditization is occurring with insurance products-and it's driving carriers to differentiate themselves in various ways," explains Bedell. "Two ways to differentiate are product and pricing, and ultimately there's a third-service delivery."
Until recently, insurers have dragged their feet in assessing the risks in tight geographical areas, and too few insurers were sufficiently prepared for the recent California wildfires, says Barry Rabkin, senior research analyst, insurance, at Financial Insights, a Framingham, Mass.-based research and advisory firm.
"Insurance companies have been slow off the mark," he says. "But we are going to see an increasing use of location systems because after 9-11, Katrina and Rita they realize they have a density of risk that they have not really gotten a good handle on."
Some believe the industry can no longer afford to ignore such technology. "From a competitive and cost-benefit perspective, it's getting close to being a no-brainer," says Celent's Hersh. "The reduction in risk is so beneficial that the price of these services, while not negligible, is certainly worthwhile."
Some still cautious
Why, then, haven't most insurers adopted location intelligence technology?
"Insurers might be concerned about the integrity of the data, the source of the data, or its timeliness," says Rabkin. Or they may think they'll have less control over data or jobs will be lost due to automated processes, he adds.
Some critics of the technology have raised the prospect of red-lining, fearing that insurance companies will abuse the technology's precision to abstain from providing reasonable coverage in a particular neighborhood or to certain minority or ethnic groups.
Others question whether such systems in certain cases automatically default to give clients a higher-priced policy. Furthermore, with so many developments in the insurance industry, this technology may not be a high priority, says MapInfo's Bedell.
In addition, not many people understand these systems or are able to discriminate between vendors, sources say. "It's becoming more mainstream technology, but it is still rather specialized," says Florida Farm Bureau's Wallace. "There are few people who actually know how to use the technology."
However, because insurance firms don't know how to use the technology effectively, "dumbed-down" location tools designed for the average user have cropped up, he notes.
Such a development, along with the increased focus on training agents to use the more sophisticated location systems, may spur more insurance companies to give up their manual methods of the past for a more automated and accurate approach to assessing location risk.
Daniel Joelson is a business journalist based in Washington, D.C.
