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Tying Risk to Geography Can Help Limit Exposure

John McCormack July 2007

The founders of Boston-based Homesite Insurance Group came together nearly a decade ago to create a progressive homeowners insurance company. In the quest to make their dream real, they got some help from software that links risk to geography.

Today, Homesite sells in 43 states, and its underwriters evaluate the risk associated with each potential policyholder's address, says one of the founders, Manuel Rios, who now serves as Homesite vice president and chief underwriter. They do it with GeoStan geocoding technology from Group 1 Software Inc., a Pitney Bowes Co. in Lanham, Md.

"We immediately understood the value of knowing where a property is located relative to geographical hazards," Rios says. "We have to have a good handle on geographic concentration and the associated geo-hazards, such as hurricane and brush fire."

Such hazards appear poised to wreak havoc in the near future, according to Karen Pauli, senior analyst, insurance, for the TowerGroup, a Needham, Mass.-based research company.

Californians living along the San Andreas Fault are due for one of the major earthquakes that strike there at 250- to 300-year intervals, she says. Meanwhile, experts calculate the chance of a major hurricane hitting the United States this year at 81%, she says.

To make matters worse, population is increasing rapidly in parts of the Southeast most vulnerable to hurricanes and portions of the Southwest most susceptible to earthquakes, says Berkley Charlton, director of product management, business geographies for Group 1 Software. In both areas, sprawling subdivisions filled with high-priced houses are going up in areas developers used to deem too dangerous, he notes.

The potential for loss can seem particularly onerous to a company like Homesite, which Rios calls the "Geico of homeowner's insurers." Homeowners, mainly a direct channel marketer, sells policies only to homeowners, condo owners and renters.

"With homeowner's, you live and die by natural disaster, so to speak," Rios says. Evaluating the geographic risk associated with certain locations is the single most important aspect of a homeowner's insurance company's underwriting process, he asserts.

The founders determined they needed nothing less than "bleeding-edge" technology to realize their goal of starting a truly progressive company. The trick would be to latch onto the right emerging technology-a challenge often tinged with an element of risk.

"We needed to find a way to use technology that would enable us to build an underwriting process that is high-volume and low-touch," Rios says. "We can't afford to touch every policy and wind up spending half of what we make on underwriting."

Steve Walden, Group 1 vice president and general manager, explained why Homesite chose geotechnology.

"It's common for insurers to use ZIP codes to evaluate risk-but they are created out of convenience for the post office and they change quite frequently," Walden says. "The geocode engine takes an address and immediately figures its latitude and longitude-providing a much more accurate assessment of risk."

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