How Insurance Contributes To Society

CATASTROPHE RISK MANAGEMENT

Although the insurance industry has used catastrophe modeling for decades, ever-evolving computer technology has helped to dramatically improve and refine today's most sophisticated models.

Not only has catastrophe modeling enhanced insurers' underwriting and rating processes, but such technology has played a major role in developing effective catastrophe risk management strategies across businesses and governments worldwide.

Natural and man-made catastrophes can pose significant risks to everyone, from the individual homeowner and commercial policyholder to local, state and national government officials. Models can offer a clear and accurate understanding of all the underlying risks, helping communities to plan, react and recover from a potentially catastrophic event.

For instance, government officials can use an earthquake catastrophe model to evaluate the potential risk and exposures a specific region would face if a significant seismic event were to strike. By modeling the potential risks, officials can adopt strategies such as enforcing stronger building codes to help mitigate losses and possibly save lives.

MITIGATING FIRE LOSSES

As the leading cause of property loss in the United States, fire results in billions of dollars in property damage and related losses to individuals and businesses each year. To mitigate the extent of damages and the risk of injury or death in the event of a structure fire, a quick response from a nearby and well-equipped fire department is critical.

To help communities evaluate and invest in the necessary resources for fire protection, the insurance industry is investing more in geospatial information systems (GIS)–tools that combine hardware, software and various data sources for capturing, managing, analyzing and displaying geographically referenced information.

Insurers and community officials can use such tools to assess a municipality's existing hazards, property and wildfire risks.

For example, firefighters and insurers can use GIS tools to analyze the distribution of fire stations within a defined district and determine the effectiveness of resource deployment during a structure fire. By helping communities prepare to fight fires more effectively, GIS plays an important role in saving lives and property.

OUR CHANGING CLIMATE

Although the political debate regarding climate change persists today, the scientific evidence supporting the rise of greenhouse gases as a result of human activity has become widespread and significant. As such, the continued impact of climate change will have political, economic and scientific implications for society.

The insurance industry is uniquely positioned to lead society's response to climate change risks. Actuarial scientists are developing sophisticated modeling tools that include atmospheric simulations and greenhouse gas observations.

The information generated by the models can create potential scenarios that insurers, scientists and policymakers can use to estimate risk and evaluate the magnitude and consequences of global climate change. And although the uncertainty surrounding climate change can vary as global patterns of weather events change, the industry can use the models to develop effective strategies to mitigate the impact of such scenarios.

For example, models can help evaluate the risk to coastline properties should sea levels continue to rise over the years.

As a result, government and industry officials can use the scenarios to enhance coastal defenses, improve planning and zoning regulations, strengthen and enforce building codes, and curb development in high-risk areas.

SUSTAINABLE LIVING

Consumers and businesses today are growing increasingly concerned with their carbon footprints and their impacts on the planet.

As the push for alternative energy resources and green products gains momentum, so does the desire to make today's residential and commercial properties more environmentally friendly.

Federal, state and local governments are enacting or considering legislation that offers incentives for owners and builders to "green" their properties.

The insurance industry is joining the movement as well by offering discounts to policyholders that own green buildings or providing coverage to help owners rebuild using green materials and techniques after a loss.

In the commercial property space, many insurers are now providing more replacement-cost coverage for repairs made using more energy-efficient, environmentally sound materials, products, or methods, provided they are recognized by standard-setters such as Leadership in Energy and Environmental Design (LEED) or ENERGY STAR. Moreover, this coverage can include business-interruption insurance and coverage for extra expenses related to green upgrades, such as the building material recycling, professional design and engineering fees, and certification and equipment-testing fees.

By providing such coverage incentives in combination with existing government inducements, the insurance industry takes a significant leadership position in the drive for a more energy-efficient society.

RISING HEALTH CARE COSTS

Rising health care costs continue to be a major concern in the United States today despite the passage of a landmark federal health care bill earlier this year.

In these tough economic times, controlling rising costs is a major priority as unemployment rates remain high and consumers lose employment-sponsored insurance benefits.

Moreover, health care fraud and abuse rates continue to climb as cash-strapped providers, consumers and organized crime rings step up dishonest activity for personal gain.

According to the National Health Care Anti-Fraud Association (NHCAA), the United States spends more than $2.5 trillion on health care every year, and approximately 3-10 percent of that amount–or approximately $70 billion to $255 billion–is lost to fraud and abuse. In fact, in 2009, the rising cost of fraud meant an average loss of $200 to $800 per person, or up to $4,000 a year for a family of five.

This means consumers are faced with higher premiums, lost health benefits, inaccurate medical records and increased out-of-pocket spending.

So, how does the insurance industry help today's financially stressed consumer?

First and foremost, consumer education is crucial to combating the problem of health care fraud. Carriers offer consumers tools such as interactive websites, hotlines and newsletters to help detect, report and prevent questionable claim activity.

Perhaps more important, insurers and actuaries are working behind the scenes to develop powerful data modeling tools and analytics designed to quantify fraud, abuse and overpayment savings as well as identify key areas of risk and waste. Not only do such tools help insurers identify fraudulent providers, but they help maximize claims payment accuracy and reduce claims costs– all of which can translate to lower premiums and out-of-pocket expenses for consumers.

Advances in actuarial science have implications that extend well beyond the insurance industry. With the development and application of new technologies, including predictive analytics and geolocation services, insurance continues to illustrate that it's more than just a business–it's an industry dedicated to the protection of people and property worldwide.

Scott G. Stephenson is executive vice president and chief operating officer of Verisk Analytics and its flagship ISO subsidiary in Jersey City, N.J.