The Risks of Hazard

In the United States, ZIP codes are universally understood proxies for location. People often instantly recognize an address’s state or region from the first digit or two, and sometimes a full ZIP becomes well known (e.g., 90210 for Beverly Hills).

But these days, ZIP codes do much more than route mail. They are used for things like credit card identity checks; demographic data collection by the U.S. Census; real estate pricing and marketing; and (incongruously) property insurance risk rating, accumulation, and reporting. That last one may come as bit of a surprise, so let's take a look at how insurance companies use ZIP codes — and whether or not their methods make sense. 

I have been watching some of the videos published by AM Best from the RIMS annual convention in New Orleans last month. The city hosted the event to mark 10 years since Katrina and Rita devastated the region. I couldn’t make it to the show, so I wanted to catch up on some of the current thought leadership surrounding natural catastrophe risk. 

While reading Gallagher’s CEO first quarter synopsis (Best’s, subscription required) I was interested by his thoughts on the flat rate market in property insurance:

"I've never lived this way before," he said. "It's either one way or the other, where you've got rates coming down substantially and you're shopping everything, or rates are going up and you're scrambling to get the coverage you want."

He continues by describing how comfortable he is in such an environment because his company is built for competition: “Give us a stable rate environment and … we will drive organic growth."

Underwriting property insurance is a very complex operation, with limitless variety on methods of management. I tend to concentrate on the risk associated with natural catastrophes damaging a location, but that is actually just a small part of the overall process. How an underwriter receives requests for quotes, builds quotes, and sends them out (not to mention how that quote affects a book’s accumulation) is an intricate process. What is so interesting to me is how software solutions are solving the inherent problems associated with underwriting as a whole.

Property insurers and reinsurers all have a dataset that is simultaneously:  

It’s worth exploring how a historical database of claims can be all three things at once.