Why insurance can be like a ‘mouse safari’

Everyday property insurance companies survive, or not, by how successfully they find the elephants in a portfolio. That may be an unusual statement given the COVID-19 pandemic: the virus is small, but is having an outsized impact.

It could be argued that the little virus was a hidden unknown. Regardless, property underwriting and rating can be severely impacted by overlooking an elephant or two.

The life and survival of many animals depends on hiding: they need to be good at camouflage and stealth. A polar bear has white fur, versus a bear living in a forest that has brown or black fur. An Arctic fox looks very different from those in the British countryside. If your life and survival depend on finding and hunting your prey, you must be equally good at finding camouflaged animals. What about finding an elephant?

The world has big animals like elephants and smaller ones like mice. Safaris tend to look for the big animals—elephants, lions, etc. It should be easy to find an elephant or lion in the grass. Conversely, have you heard of a mouse safari? Sometimes it may seem insurance is a mouse safari.

If you had an elephant in your home, no matter the camouflage, you would notice it. An elephant may be able to hide in the plains of Africa, but not in your kitchen. If your home had three mice, it’s probably okay and you may never notice. However, if you had 1,000 mice in your home, it’s probably not okay and you would notice.

Obviously, if you use a mouse trap to catch an elephant, it won’t fit. And if you have an elephant trap, it won’t help you catch one mouse.

Insurance runs on the law of large numbers. Surely 1,000 mice are more important than one elephant? Maybe.

The rise of fintech and insurtech is intended in part to discover things. To find trends, and then mould those trends into predictions. If a carrier can use data to find trends and make predictions, it might survive better than those that can’t.

The theory seems right: insurers that price more accurately are more successful. Insurers could price more accurately if they analysed more and better data with the best and most up-to-date insurtech tools.

This is particularly the case for property insurance. Not just houses but commercial premises of all sorts: factories, shops, shopping centres, office buildings, farms and any other structures in the built environment.

Value is at the base of everything that policyholders do for their financial protection, and risk management comes down to the policy limits in their contracts. Knowing as precisely as possible the correct value at risk enables insurers to calculate the most accurate premium rate.

Yet it is a wise consumer who knows the exact value of his or her home. Many homes are vastly underinsured. And insurers make often broad, sweeping estimates of the value of structures based upon geographic or historic averages based on previous years’ averages.

Appropriate insurtech
New technology tools may provide the route to improve valuations. However, according to Todd Rissel, chief executive officer of Stamford, Connecticut-based insurtech e2Value, technology—no matter how great—will not overcome poor fundamentals.

If the amount spent on golf clubs had a direct correlation to one’s golf score, there would be many better golfers. Insurtech is like a golf game.

Insurance has three costs: claims, delivery, acquisition. Claims are the loss ratio, acquisition and delivery are in the expense ratio. Golf has skills and equipment that get you on to the green, and other skills and equipment to get the ball into the hole.

Professional golfers must be good at all phases of the game. It’s not their equipment that separates them from the weekend warriors. One club or one technology won’t make that weekend warrior the club champion.

“There’s a lot of terrific insurtech and other ideas that people are developing to solve problems in the insurance model,” Rissel says.

“They can be targeted at the marketing, business generation and delivery sides of the business where there’s good money to be made. However, you can attack that side or you can look at loss prevention or containment.

“We have yet to see anyone get to both sides of the equation with a single insurtech approach.”

That is where e2Value has focused its business. It’s a model that has been increasingly relevant in areas of the US where there have been significant market changes, or which are prone to high impact natural disasters.

Rissel points to the effects of the explosion of property values in North and South Dakota as a result of the shale oil boom in the late 2000s. He highlights the exposure of Florida property to hurricane risk and to the catastrophic effects of wildfires which have ravaged California. Property values are rising in areas where weather and climate are impacting population growth. In many cases, incorrect or inaccurate property valuations are resulting in significant losses for consumers and for insurers.

“It goes back to the root of the issue. As a consumer, I have purchased a large asset. I want to protect that asset. The key to building your protection package is the worth of the asset,” Rissel explains.

“Consumers tend to think ‘market value’. Why not? They’ve been involved in a mortgage based on market value. They pay taxes based on market value. Why isn’t the market value relevant to their financial protection?

“That’s what we tried to answer when we originally developed our software. The user didn’t have to be an expert in construction processes, roof coverings, building materials and so forth.

“Many people don’t know the size of their house. They know the number of bedrooms or bathrooms but beyond that they’re not sure, and they shouldn’t be in a position where they have to be.

“Yet their financial future may be based on whether they knew they had a slate roof or an asphalt shingle roof, determining whether they’re going to be paid $100,000 or $120,000 for a loss.

“That’s where we try to bridge that gap. Homeowners don’t have to be the expert. We say: ‘Just give us your address. Does your home look like this? Does this sound reasonable?’ and they’re off and running.”

The essential element with the e2Value process is that it can find the elephant, mouse, lion, gazelle, rhino, and other animals in the grass all from the same inputs. The e2Value clients benefit from knowing the amount and values at stake.

One thousand mice can be unsightly and cause some damage, but one elephant can really hurt you. We allow carriers to see what’s in their portfolio before it hurts them. The end buyers of the insurance product know precisely what they have at risk when they get the policy.

Data, data, data
The key point here is that there is technology available that can precisely locate, assess, and detail a property. Homebuyers know this very well. They can go to websites such as Rightmove, Zoopla or PrimeLocation, find a property, explore its interior with pictures, review the exterior using Google Street View and locate the property using online maps and satellite views.

With very little effort, applying what amounts to a lot of easily available, basic data, the house hunter can quickly establish what a property is like.

Rissel explains that commercially available real estate satellite pictures are now very precise and more accurate than Google Street View, where some of the data can be quite dated.

“Fifteen years ago, if I said to someone: ‘Give me your address. Your house is this and it’s worth this much’. Or ‘Your commercial building is this, and it’s worth this much’, that was regarded as kind of freaky.

“Today it’s less freaky because you can go to all the different real estate services for the different processes. We also use new technology as it becomes available, aggregating more precise data into our models. It’s an ongoing refinement of the data and the process,” he says.

Rissel goes on to compare this approach to other insurtech products. While some promise to be disruptors in the insurance marketplace, he says, there has been some pushback in favour of evolution, rather than revolution using untried tech.

“There has been some realisation among the big incumbents that they can apply existing, tried but always developing technology such as ours and remain the incumbents, because it enhances how they deliver their process.

“That’s where digital enhancement and infrastructure enhancement are winners. If you can enhance the process and make it better, that’s probably the quicker path than developing and integrating new technology from scratch. Realistically, we think that is revolutionary for some,” he says.

All that data still needs the correct refinement to align elephant traps with elephants and mouse traps with mice. As there are skills and tools to get a golf ball from the tee to the cup, there is technology to attract, price, acquire, retain, and if needed pay claims for, clients. The winners align the right technology with the right skills. Either one, alone, is not enough.

The cloud
e2Value provides a software-as-a-service (SaaS) technology; this is another key approach to data searching, retrieval, analysis and storage. The power of cloud storage combined with online research tools brings more computing power to property valuations than any single insurer would want to invest in for itself.

This is especially true as many of the larger, established insurers can be shackled to large, cumbersome and expensive legacy systems. Harnessing a SaaS approach is a much simpler way to tap into new and evolving insurtech than wholesale migration to new systems.

In conclusion, using accurate insurtech data analysis tools to understand and price risk aids policyholders and insurers alike. What Rissel’s e2Value is doing with property data in the US and Canada could be applied across other types of insured assets and other geographic locations, where more and better data are constantly evolving.