The quality of primary insurer underwriting data could beaffecting their reinsurance purchasing costs more than theyrealize, according to a survey by Ernst & Young, which foundthat almost all reinsurers levy a surcharge to compensate forunreliable cedant data, while most would cut premiums if qualitycould be assured.

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Quality of critical data can include the number and location ofbuildings owned by an organization or the number of retail outlets,said Trish Conway, an actuarial advisor in the Insurance andActuarial Advisory Services practice of Ernst & Young, in thefirm's New York office.

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Missing data was brought to the forefront after HurricaneKatrina, she pointed out, when losses projected at $20-to-$40billion in actuality were $60 billion.

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According to the E&Y 2008 “Catastrophe Exposure Data QualitySurvey: Raising the bar on catastrophe exposure data quality,” whenit comes to their ability to underwrite property-catastropheexposure, the biggest concern among domestic and offshorereinsurers is the quality of cedant data. In fact, primary insurersmay not be aware they could be paying more for their coveragebecause of missing information.

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Nearly all reinsurers (90 percent) said they apply surcharges tocompensate for data quality deficiencies. Among these, 70 percentsaid they would include a 20-to-25 percent premium penalty.

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What's more, 92 percent of reinsurers said confidence that thecedant did use strong controls when collecting data could meanpremium credits between 5 percent and 15 percent. More thanone-third said they would be willing to offer a minimum 10 percentpremium credit for cedants with high-quality data.

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This could mean big savings for insurance buyers. For example, alarge insurer purchasing $10 million of reinsurance could receive$1 million premium credit, or more capacity, she said.

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One reason reinsurers apply surcharges rather than going back tofill in the data is that “reinsurers renew a lot of contracts atthe same time,” during Jan. 1 renewals, for example. “They have alot to do at once, and may not go through the smaller accounts asthoroughly,” Ms. Conway said.

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She added that supplying better data would benefit the primaryinsurer's underwriting process as well. She said criticalinformation, such as location and number of buildings, could bebetter gathered with specific data fields.

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The study found that more than half of reinsurers usesophisticated tools to evaluate the accuracy of exposure datareceived in broker submissions, while 83 percent have basic checksin place confirming that the most critical data fields arepopulated.

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When asked which data items they consider most problematic,reinsurers pointed to insured values, complete inventory oflocations and secondary characteristics.

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How would reinsurers be convinced that data is, in fact, highquality? With the input of a third party, such as a catastrophemodeling company, or actuary–with the insurance broker being thelast choice, she noted.

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When analyzing the potential risk of a cedant with poor dataquality, a majority (58 percent) of reinsurers said they directlymodify their cat model results, while the remaining 42 percent ofrespondents make upward adjustments to the data before runningtheir models, the study found.

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To help boost their confidence level in data quality, the vastmajority of reinsurers (92 percent) agreed that if the cedant usedstrong collection, enhancement and data maintenance controls, therisk would be more attractive to them.

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While it's an important consideration, cat modeling is somewhatlimited in that much recorded data for extreme events, such ashurricanes, only goes back about 100 years.

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Ms. Conway said in a statement that investing the time toimprove their catastrophe data quality is a “win-win situation forinsurers. It helps them improve their own operations, and alsomakes their business more attractive to reinsurers, potentiallyleading to better pricing and more capacity.”

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She said those reinsurers applying similar efforts in assessingthe data they are given by insurance companies “will find successin the increasingly high-stakes property-catastrophe market.”

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E&Y said the survey was conducted in early 2008 amongleading reinsurance chief underwriting officers, heads of propertyunderwriting and heads of cat modeling. Participating reinsurersincluded both domestic and off-shore, pure-play catastrophe anddiversified companies that cover both commercial and propertyexposures.

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