How tech can move insurers from prediction to prevention

"Predict & Prevent" is not a new concept to the insurance industry, but it has a special resonance today – especially when considering wildfire risk. In 2023, California's heavy winter and historic snowpack are expected to heighten wildfire risk, a concern for insurers given the state's annual average of 400,000 to 1 million acres burned. 

But despite increased levels of risk, prediction and prevention is becoming more attainable than ever for insurers. Whereas five to 10 years ago this approach was considered idealistic and implausible, now thanks to digital transformation insurers can fully embrace and implement this proactive strategy. Focusing on wildfire risk, let's see how new technology and other industry trends have made prediction and prevention an option for insurers. 

The shift towards this as a viable strategy is made possible by technological advances over the last decade. Popularly known as the "Fourth Industrial Revolution," the explosion of new technologies – including artificial intelligence, Internet of Things (IoT), and big data analytics – has had a widespread impact on every industry. Not only do these new technologies create value for insurance companies – and improve expense ratios when used correctly – but they also make it easier to predict risk.

As an example, let's look at how these new technologies can help insurers to establish a "black line" in wildfire risk. An underwriter can use aerial imagery enhanced by AI to analyze properties in a wildfire-prone region and determine their precise level of wildfire vulnerability, weighing such factors as defensible space, roof condition, and community-level safety certifications. Predictive analytics built on computer vision and machine learning tools can then analyze this imagery for proven risk drivers. From there, the insurer can communicate with their insured, notifying them of steps they can take to mitigate risk before the first spark ignites and clear out the undergrowth leading to loss.

This confluence of the right tech, models, and curated property data empowers the underwriter – and insurers at scale – to better write and manage wildfire risk. More importantly, as opposed to the old, reactive approach, where an insurer would only respond after a claim was filed, this new strategy empowers insurers to work proactively to prevent avoidable losses and even reduce premiums. This proactive approach is the essence of prediction and prevention and is only possible due to the technologies now available to insurers.

Tech-enabled change

New technology is only part of the story, however. Insurance, a tightly regulated industry, must move deliberately. When change does come, it tends to happen at a measured pace. Even after digital transformation made it possible for insurers to succeed with Predict & Prevent, many companies continued to cling to legacy business strategies such as boots on the ground inspections. However, wider industry challenges, such as economic downturn and climate change, can motivate insurers to fully embrace a more proactive business strategy.

Once again, the example of wildfire risk is illuminating. Many factors have contributed to a higher degree of wildfire property risk in the western U.S., including decades of misguided forestry management, increased populations moving to the urban-wildlife interface, and the overall impact of climate change. On top of this, in recent years states have introduced legislation like the Safer from Wildfire Framework, aimed at protecting property owners from wildfire damage, while also requiring new risk mitigation measures from insurers. Meanwhile, the 2023 bipartisan FIRE Act paves the way for the development of new technologies to detect and prevent wildfire damage. 

In order to maintain profitability while still providing coverage in wildfire-prone areas, insurers have embraced a forward-looking, proactive approach to risk management. By adopting new strategies, insurers show customers that they are on their side, working as trusted advisors to help them prevent avoidable losses and ease their peace of mind.

Navigating regulatory hurdles

An often-overlooked factor in embracing prediction and prevention, and more generally in managing wildfire risk, involves insurance rate filings. These complex procedures vary significantly from state to state, each featuring different methodologies for assessing wildfire risk. This complexity can create roadblocks, especially in heavily regulated states like California where getting rate adjustments approved can be an arduous task.

This process can be streamlined for insurers by working with insurtech companies focused on wildfire risk. As mentioned above, these companies use cutting-edge technology including AI and big data analytics to obtain a more transparent, complete view of wildfire risk. In many cases, these risk methodologies can be pre-approved by states and used directly by insurers as part of their rating process. This approach would not only save time and resources but also ensure that the methodologies are actuarially verified and in compliance with the latest regulatory requirements.

For instance, as detailed in a recent Milliman article, new California wildfire rating requirements pose substantial challenges for insurers. By adopting pre-approved wildfire ratings methodologies from insurtech companies, insurers could better navigate these regulatory hurdles.

This potential synergy between insurtech companies and insurers further underscores the importance of the Predict & Prevent strategy. By fostering a more proactive approach to risk management, the insurance industry can better meet regulatory requirements, improve customer trust, and ultimately build more resilient communities.

The path forward 

As wildfire is poised to hit the southwest U.S. in 2023, insurers should embrace new ways of managing risk. Adopting a strategy that incorporates a prediction and prevention mindset, in combination with innovative new technologies, is the best way to protect communities and prevent avoidable losses. Instead of shying away from high-risk areas, insurers can instead identify properties that policyholders need the most help with. If this approach can save just one home from a catastrophic loss, it will pay off for everyone.