Geospatial-Based Property Risk Ratings

The limitations of territory-based rating can become a thing of the past because of increased access to location-specific data and risk scores.

Overhead view of Earth with lights

Rising losses in the property and casualty insurance sector can partly be attributed to the increasing frequency and intensity of large natural disasters, as well as the movement of populations to regions more susceptible to catastrophes. However, an often-overlooked yet significant factor is the lack of granular and accurate information about potential hazards – and exposure to loss at every insured location.

From a risk/analytics perspective, it’s clear that the industry needs to improve its methods of evaluating, underwriting and pricing property risks – and more precisely choose and price policies according to actual risk.

The root cause of the issue is the inadequacy and ineffectiveness of conventional, territory-based definitions and pricing methods. Insurers face the challenging task of striking a balance between having territories big enough for credible statistical analysis and small enough to encompass regions with uniform exposure to risk.

The limitations of territory-based rating can become a thing of the past as a result of substantial advancements in Geographic Information Systems (GIS) and Geospatial Artificial Intelligence (GeoAI) – and the increased access to location-specific data and risk scores that these technologies can offer.

See also: How Geospatial Data Lowers Traffic Risk

Geospatial Hazard Rating leverages these technologies to provide location-specific data and hazard scores. These scores rely on complex calculations, made rapidly with the assistance of GeoAI, and delivered in real time through application programming interfaces (APIs). Geospatial Hazard Rating is produced for each individual address by aggregating historical data and events for a given peril within a specific geographical radius instead of relying on much larger, arbitrary and less accurate territorial boundaries.

The increased detail and accuracy of Geospatial Hazard Rating provide a range of benefits over territory-based ratings, most notably:

  1. Accuracy in Risk Assessment — Geospatial Hazard Rating can isolate the geographic distribution of risk at the individual residential or commercial property level, as opposed to the much larger area municipal, ZIP code and census block boundaries used in territory-based methods. As such, insurers can precisely understand, underwrite and price a specific property’s risks.
  2. Increased Premiums Without Rate Changes — Another benefit is the ability to respond to changes in risk levels without rate changes. When a specific area starts to see more damaging events, the corresponding hazard scores for those specific addresses will increase and result in a corresponding increase in premium at renewal, making some rate changes for an entire territory unnecessary.
  3. Fairness and Accuracy in Pricing — With such accuracy comes the ability to tie higher risk probabilities to higher premiums -- and lower risk probabilities to lower premiums automatically when Geospatial Hazard Rating are updated at acquisition or renewal.
  4. Supporting Data for Rate Changes — Although Geospatial Hazard Rating will make it less necessary to seek rate changes for geographic changes in risk, in the event a rate change is needed, insurers will have the very detailed data needed to justify the change.
  5. Speed and Efficiency of Risk Assessments and Policy Quotes — With specific hazard ratings for every peril for every customer and prospective customer address, Geospatial Hazard Rating enables insurers to greatly increase the speed at which they undertake property assessments and policy quotes.
  6. New Risk Insights — Because geospatial data is highly structured, highly objective and collected at a high scale, insurers gain increased abilities to analyze data and identify risk insights that are not possible with traditional territory-based rating. 
  7. Loss Prevention — As geospatial data can help discover trends and patterns in specific locations, insurers can help customers better understand their risks and ways to mitigate them. By providing risk insights, carriers are able to engage customers in the risk management process and build relationships, while promoting loss avoidance.
  8. Reduced Losses and Expense Ratios — Although it is early in the adoption of geospatial data, the business use cases for such applications point to a real and significant opportunity to reduce losses and improve combined ratios by better aligning price with risk – and eliminating the burden of administering territories.

These benefits collectively present a significant opportunity for property and casualty insurers: By shifting away from traditional territory-based ratings, each property can be evaluated accurately and equitably based on its actual exposure to loss.

Tammy Nichols Schwartz

Profile picture for user TammySchwartz

Tammy Nichols Schwartz

Tammy Nichols Schwartz, CPCU, is the senior director of data and analytics at Guidewire, a leading provider of technology solutions to the P&C insurance industry.

She has more than 20 years of experience as an actuary, underwriter and executive at leading insurance carriers and financial institutions, including Farmers Insurance and Bank of America. Prior to Guidewire, Schwartz was the founder and CEO of Black Swan Analytics.

Read More