When it Comes to Reinsurance, 360 Degree Data is Everything

The latest from ZestyAI who highlight the dangers of reinsuring property using incomplete data;

Incomplete and outdated property data is creating an ‘uncertainty premium’ in the reinsurance market, with insurers potentially paying for gaps in information rather than the underlying quality of their risk, according to new research from ZestyAI.

In a live poll of insurance professionals conducted during an InsTech webinar, 71% identified incomplete or outdated exposure data as the biggest challenge when evaluating property catastrophe risk, compared with differing stakeholder views of risk (13%), difficulty validating third-party data (11%) and limited ability to distinguish risk within similar portfolios (3%). The underlying whitepaper reports 94 responses to this question. A second poll asked what would build trust in third-party property data: half of respondents chose independent validation and a third chose demonstrated predictive performance.

ZestyAI’s whitepaper, The Uncertainty Premium, argues that these data gaps can have significant implications for reinsurance. When reinsurers cannot verify important information about the properties in a cedant’s portfolio, they may fall back on conservative defaults in catastrophe models. Those assumptions can increase modeled losses and ultimately affect reinsurance pricing, attachment points or available capacity.

The result is that insurers with stronger books may not receive full credit for the quality of their portfolios, while reinsurers can struggle to distinguish stronger portfolios from weaker ones. The problem cuts both ways: cedants may pay for uncertainty that does not reflect the quality of their books, while reinsurers risk mispricing portfolios they cannot adequately differentiate.

Two-thirds of reported roof ages inaccurate by three years or more

Roof age illustrates how even a single inaccurate property attribute can materially change the view of risk. ZestyAI’s research found that 67% of policyholder-reported roof ages differ from verified roof ages by at least three years. In 43% of cases, the roof is at least three years older than reported, potentially understating risk, while 24% are at least three years newer, potentially resulting in better risks being overpriced or declined.

ZestyAI also found that 78% of carriers examined across the Midwest, Great Plains and Southeast tie Actual Cash Value (ACV) roof endorsements to the age of the roof, with some age triggers beginning at just eight years. An error of a few years on a single attribute can affect rate, eligibility and coverage terms.

Attila Toth, Founder and CEO of ZestyAI, said: “Reinsurance pricing is only as good as the exposure data behind it, and for most of the industry that data is still self-reported, inspected once and left to age. When reinsurers can’t verify what a carrier knows about its portfolio, they have to price the uncertainty. That means a strong book can end up looking much like a weaker one.”

“Everyone in the transaction needs the same complete, verified view of every property. A sharper view of risk benefits both sides, because capital finally flows to the risk that has been verified rather than to the uncertainty around it. ”