Eye of the Storm
Start With Good Data
Terrorism is far more unpredictable in terms of frequency and severity than weather-related or environmental disasters. Still, the only way to understand how such a catastrophic event affects policyholders is to have a clear view of exposures. This is only possible with a foundation of clean data.
"Data quality is a fundamental part of managing risk well," says Paul VanderMarck, executive vice president of Newark, Calif.-based Risk Management Solutions (RMS), which provides solutions for quantifying and managing catastrophe risks. "The results of a risk analysis model are only as good as the data you put into it."
The most-sophisticated insurance companies are redefining their best practices for risk management, and they are making data integrity a clear priority. Armed with complete, accurate and up-to-date information on the characteristics of insured people and property, companies can make better underwriting decisions and manage their portfolio risk more accurately, continues VanderMarck. "If you don't have data that clearly defines what you are insuring or where it is, how can you possibly know what risk you have taken on, and how it will contribute to your overall portfolio exposure?" he asks.
The 2004 hurricane season was a clear reminder of the importance of data quality. The season caused more than $22 billion in insured losses. Some of these losses occurred at properties that insurers failed to include in the portfolio databases used to model potential losses. In other cases, incomplete or inaccurate information contributed to disparities between modeled and actual losses.
During the 2004 season, "Addresses for some locations were only recorded at ZIP code level - some of these turned out to be right on the coast," relates VanderMarck. "Many of these locations took significantly higher losses than would have been expected based on average conditions for the ZIP code," he adds. "There is nothing like a real event to serve as a reminder that companies must be cognizant of what they insure." If the lessons of the past made an insufficient impression, Hurricane Katrina recently provided renewed emphasis. At press time, it was predicted that the losses associated with the storm could exceed $25 billion.
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