Using Data to Keep Risk in the Crosshairs
Insurance Networking News, April 1, 2009
Property/casualty reinsurers suddenly saw the need for catastrophe modeling and risk-concentration data in 1992, after Hurricane Andrew pulverized parts of the Bahamas, South Florida and the Louisiana coast.
Desire for data intensified among casualty reinsurers after the 9/11 terrorist attacks. Life and health reinsurers have begun thirsting for better data ever since the AIDS epidemic broke out in the 1980s, and finally became proactive in seeking better data in the last year or so, sources say.
Advertisement
Not surprisingly, with claims soaring, no reinsurer wants to settle for aggregated data from primary carriers, says Karlyn Carnahan, a principal at Novarica, a New York-based consulting company. Reinsurance companies want to know the exact locations of the risk-down to the street addresses, Carnahan says. They want to know the precise nature of the risk, such as whether a building is brick- or wood-framed, for example. And they want to know the concentration of the risk, such as the number of employees working in a high-rise.
A reinsurer with too much risk in too small a geographic area or poorly understood risk could face gigantic losses from a single event, says Karen Pauli, research director in the insurance practice at TowerGroup Inc., a Needham, Mass.-based consulting company.
Karlyn Carnahan
IN-HOUSE DATA TOOLS
These concerns have helped shape operations at Minneapolis-based ING North America Reinsurance Corp.
In 2003, ING Re created a risk concentration database in-house. The company uses the database to determine risk exposure by address or postal code, or at the city or regional level, and then compare the exposure to risk-management standards, says Rick Becchetti, the company's senior risk management analyst. Cat modeling software from an outside vendor, combined with the database, helps determine potential losses from terror attacks, earthquakes or other disasters, he says.
ING Re uses the information to create risk concentration analysis reports for clients. The reinsurer considers the reports a value-added service that differentiates the company from competitors, Becchetti says. Typically, the reports include color-coded maps that track the risk concentration and cat modeling results of the client's exposure, he says.
Yet, primary carriers handle data with varying degrees of sophistication, says Melissa Tilford, VP of marketing and underwriting for ING Re. "The larger writers typically are farther along in awareness," she says, adding that the differences in capabilities among primary carries derive mostly from their willingness to bear the cost and the commitment from top management.
To improve that performance among primary carriers, underwriters or account managers provide data to Becchetti, who says he "plows through it, filling in the gaps wherever necessary."
He then brings the information into the risk concentration database to check for violations of ING Re's parameters - too much exposure in a single building in Lower Manhattan, for example.
"If there are any violations, the president of our company gets involved," Becchetti says. "The president's going to approve violations with certain restrictions, and then that information goes into the database."
Originally, ING Reinsurance hoped its primary carriers would use the risk-concentration database themselves. Instead, clients have indicated they prefer the reinsurer to handle the entire risk-concentration process. Today, ING Reinsurance operates the system for internal reporting, and as a service to primary carriers.
However, clients take a "hands-on" approach to another service. Primary carriers with treaty agreements are using ING Re's Wingman, an in-house online system, to get quotes and bind individual policies 24 hours a day, Tilford says. Wingman became available in March 2007 for workers' compensation policies associated with corporate aircraft, she says.
When using the system, primary carriers answer questions about the policy, and then click a button and get a price based on the information specific to the policy, the terms of the treaty and other data, Tilford says.
Wingman also handles renewals, cancellations and mid-term changes, she notes, while allowing users to test varying levels of coverage.
ING Re learned to make the system easy for primary carriers to use, without sacrificing the data needed to understand the risk, Tilford notes. "If we had made it too cumbersome people wouldn't want to use it," she says.
FORMING PARTNERSHIPS
Developing a system that primary carriers want to use can transform reinsurers from low-bid contractors into valued partners, according to another reinsurer.
Charlotte, N.C.-based Transamerica Reinsurance Co. got more than it bargained for when it commissioned Edison, N.J.-based MajescoMastek to create an online system that streamlines data collection and underwriting on the life side of the reinsurance business.
The resulting technology not only reduces the underwriting workload more than anticipated, but also brought the unexpected benefit of refining all-important mortality calculations, says David Dorans, VP of product consulting and development for Transamerica Re.
"We went in there trying to save nickels and dimes, and instead found we were saving dollars," Dorans says, noting the system allocates much of the savings to the primary insurers.
Operational costs account for about 8% of each dollar in premiums, while mortality accounts for 60%, says Erik Stockwell, VP and GM of life and annuities for MajescoMastek. Dorans places mortality as high as 70%.
Stockwell quotes the CEO of a large reinsurer as saying that a 1% improvement in mortality results can increase corporate ROI by 3%. "It's a huge swing just by moving this dial just a little bit," he says.
With primary carriers achieving average margins of 3% to 4%, a 1% increase in profitability on the percent of premium brings a 25% increase in profitability, says Dorans. "It's where the money is," he says. "If we get the mortality right, everything else is going to go swimmingly. If the mortality is wrong, it doesn't matter what else went right - you're going to have a real problem on your hands."
For more information on related topics, visit the following channels:
