The Risks of Hazard

Not only is insurance an industry that is based on a general inability to predict what is going to happen, it is a hyper-competitive industry in which the winners are those who can best predict the unknowable…or at least be less wrong than their competition. Insurance underwriting is the actual process of pricing what is unknowable, and is necessarily performed with rigorous processes underpinned with vast amounts of data. However, underwriting is never perfect, and the gap between actual underwriting and perfection is called underwriting leakage.

Today we decided to unlock the Intermap blog vault to revisit a a past post written by a former employee, Ryan Hamilton. His thoughts on pipeline safety and the relationship to terrain data were written a little more than a year ago, but are more relevant than ever as we roll out our new product targeted to this very industry — InsitePro for Pipelines™. 

Peril, risk, and hazard are three words used frequently in my business. And according to the Oxford English Dictionary, they have very similar definitions:

• Peril: Serious and immediate danger. 

• Risk: Situation involving exposure to danger. 

• Hazard: Danger or risk.  

You could get away with interchanging these words in day-to-day conversation. But in insurance and financial circles, they each have a distinct meaning and it’s important to understand their differences. 

Property insurers rely on many types of tools for risk analysis, but none quite so complex as the cat model. Short for catastrophe, cat modeling uses computer-assisted calculations to estimate the losses that could be sustained due to a catastrophic natural event. Perils analyzed include flood, hurricane (wind damage and storm surge), earthquake, tornado, hail, wildfire and winter storm. The principle function of cat models is to help insurers prove their financial solvency. 

Flood poses risk to property and productivity on every continent, and most developed countries have flood insurance available to mitigate that risk. However, everywhere you go, the flood insurance market is different.