Insurers are keeping flawed data on the value of properties they insure, which leads them to underestimate reinsurance needs and improperly evaluate their risk portfolios, the head of a catastrophe modeling firm warned today.
Karen Clark, AIR Worldwide Corp. president and chief executive officer, made her comments in an interview with National Underwriter, discussing her firm's report that found quality issues with insurers' calculations of their loss exposures.
The Boston-based firm's analysis determined that the quality and completeness of most insurers' commercial policy data is insufficient for a detailed and accurate assessment of their catastrophe risk.
AIR found that nine out of 10 commercial properties analyzed had replacement values significantly less than the amount estimated by AIR construction specialists.
The firm also found that variability in the quality of data among companies was also significant; with insurers' average replacement values ranging from 20 to 80 percent of values derived using a standard engineering-based cost estimation process.
Ms. Clark said if the insurers' data is wrong, it will impact on their use of catastrophe loss estimates and models, and if their exposure is undervalued "it will not give them the true indication of how much reinsurance they need." She added that they need proper modeling as well to build their portfolios in a way that mitigates their risk.
?AIR, said Ms. Clark, provides clients with scenarios for a $150 billion industry-wide catastrophe loss in the United States, but there must be consistency between insurers' data and the overall model.
"Given the very large increase in property values of the last several years, we're afraid these discrepancies are getting wider and wider," she noted. "There's a difference between what everyone knows the industry loss potential is and what our companies are showing with their own data."
AIR's analysis examined four data elements used for catastrophe loss estimates: replacement value, construction, occupancy, and location. The analysis reviewed exposure data from companies representing more than 50 percent of the total U.S. property market.
Accurate replacement value, the full cost to replace a building in the event of total loss, is essential for an accurate catastrophe loss estimate, AIR noted.
AIR said its analysis exposed large discrepancies between insurers' replacement values and replacement values derived using a standard engineering-based cost estimation process. It found replacement values were equal to coverage limits for many commercial policies, suggesting that some companies are using the coverage limit as a proxy for the replacement value.
This will tend to underestimate catastrophe risk, particularly for policies covering only a share of the property, according to AIR.
AIR said it found a large variation among companies in the degree of completeness of their construction and occupancy information, with the majority of companies lacking construction and/or occupancy information for more than a third of their policies.
The modeler's analysis noted that to take full advantage of a catastrophe model's site-specific characteristics–such as distance to coast or nearest fault, elevation or soil data, and land use/land cover information–catastrophe risk analyses must be run using street address level data, which can be translated into a specific latitude and longitude.
AIR said its analysis did find significant progress in the quality of location information for commercial policies as a high percentage of commercial policies were identified by street addresses. However, it found many multi-location policies contained only a single address (typically the headquarters or billing address), which is not sufficient for an accurate catastrophe loss analysis.
The full report is online at www.air-worldwide.com.
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