Increasing Exposure in Catastrophe-Prone Areas Makes Catastrophe Risk Assessment for Individual Properties a High Priority

By George Davis

AIR Worldwide estimates that the insured value of properties in East and Gulf Coast counties has roughly doubled over the last decade to more than $7 trillion. The increasing value of prop­erties in catastrophe-prone areas makes rigorous catastrophe risk assessment essential. The stakes are high. For homeowners insurers, the catastrophe load of a premium can be as high as 86 percent, according to published ISO advisory loss costs.

Homeowners insurers take different approaches in assessing catastrophe risk for residential properties, but due to the real-time nature of personal lines underwriting, most decisions need to be automated. Straight-through processing, with the vast majority of underwriting decisions made by programmed rules, is common.

As a result, simple metrics — such as distance to coast, county-level restrictions on total insured values, and territorial ratings — are frequently used to manage catastrophe risk for residential properties. While useful, these metrics are not a substitute for an analysis that estimates the risk based on the actual construction characteristics of the building and its geo-coded location.

One of the impediments to managing catastrophe risk effectively is that very few companies collect sufficient data on individual residences. Most companies collect data relevant only to their rating algorithms, such as address, year built, and other basic information. This limited data set is usually insufficient for developing a complete view of the catastrophe risk.

Fortunately, much of the property data needed for catastrophe risk analysis is also needed for reliable estimation of property replacement values. Recognizing this, AIR has added the ability to assess catastrophe risk for individual properties directly to ISO HomeValue™. For the first time, personal lines underwriters can analyze catastrophe risk at the individual property level in a seamless, efficient, and cost-effective manner.

A key to reliably estimating both replacement costs and expected catastrophe losses is high-quality property data for individual risks. Data including location, construction method, building shape, exterior wall type, foundation, roof type, roof cover, and many other building characteristics is essential. Additional property characteristics that may mitigate damage — such as storm shutters for hurricane risk — should also be captured, easing the process of assessing rate credits for such modifications.

As people continue to build properties in catastrophe-prone areas, homeowners insurers' losses will continue to increase. However, by capturing detailed residential property data essential for robust catastrophe loss estimates at the individual risk location, homeowners insurers will be better equipped to assess and manage their catastrophe risk.

For more information on ISO HomeValue, call George Davis at 617-267-6645, or send e-mail to This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .

George Davis, FCAS, MAAA, is a vice president at AIR Worldwide Corporation, the ISO subsidiary that developed ISO HomeValue.