How Insurance Companies Use Data To Plan For The Next Big Storm

Mother nature can be unpredictable. Without warning, storms arrive and flood homes. Hurricanes take off roofs and devastate communities. High winds blow over trees, damaging cars and other property.

Insurance companies have always looked at weather patterns to determine whether to cover individuals and businesses. But in a time when it appears climate change may be contributing to an increase in natural disasters, these companies are now turning to weather analytics firms for greater insight and reduced risk.

“Insurance companies use our data and analytics to better evaluate risk and respond to weather-related events,” says Patrick Pollard, vice president of insurance solutions at Verisk Climate, a weather analytics firm.

Currently, Verisk is in the first year of a two-year study on climate change and severe thunderstorms occurring in the United States and Canada. “We expect to provide the industry actionable data related to the changing climate which will be incorporated into insurance companies’ operational processes,” says Pollard.

Research firm Deloitte used government weather data in its report, “The Potential for Flood Insurance Privatization in the United States.” The study, which analyzed the risk of covering Americans for floods, shows whether or not insurers should pursue the flood insurance market. The data and analytics in the report, which show the positives and negatives of flood coverage, allow insurers to make their own decisions when it comes to providing premiums. Deloitte came up with its findings through information from FEMA, public sources and private insurers.

Weather Analytics, a firm that offers weather data to insurance agencies, also takes government and insurance data into account, according to Emmett Soldati, director of marketing at the company. They collect historical data that goes back 34 years, as well as claims verification information from the companies themselves. By looking at the claims, they can determine what kind of damage was caused by weather and double check that the historical data is accurate.

Using data to make coverage decisions

Typically, insurance companies aren’t going to provide premiums when there is too much risk involved. But by looking closely at the effects of weather, they can better identify what areas carry more risk than others.

The Deloitte report, for example, found that over the course of its history, the National Flood Insurance Program, which covers people affected by flooding, has “collected more in premiums than it paid out it claims.” However, certain storms, like Hurricanes Sandy and Katrina, resulted in losses for the public insurance program.

This means that flood insurance could be profitable for private insurers as well. But, right now, Deloitte shows that there are not enough incentives in place and recommends that private companies wait for change. At this point, government regulations don’t allow insurers “the freedom to charge adequate, risk-based premiums.”

When it comes to offering wind damage coverage, insurance agencies may be in luck, however. On Cape Cod, winds can gust to over 40 miles per hour. In the past, covering homes there was a huge risk for private insurance companies because they didn’t have the proper research to determine otherwise. Instead, the government and public insurance companies stepped in, offering premiums to residents that lived there.

When Weather Analytics examined wind in the area, they found that those high wind gusts affected homes primarily along the Cape Cod coast. When they went a little further inland, they discovered that those homes were not susceptible to the high winds. Therefore, coverage could be provided.

“When you look at the Cape as a whole through the data that the government provides, you don’t capture the granularity,” says Soldati. “We are able to run reports and say these homes inland have lower risk exposure and they’re valuable.”

Thanks to Weather Analytics’ data, insurance companies utilizing their services were able to drum up business and offer residents premiums, therefore increasing their bottom line.

Pollard says, “Our primary goal is to work with insurance companies to ensure their policyholders, and society in general, have the necessary data and tools to persevere through some challenging events.”

Source: Forbes