Why use GIS in the Home Insurance Industry

John J. Bark

Contents

  1. Why Use GIS in the Home Insurance Industry
  2. What Data is Needed for Property Risk Assessment
  3. Additional Options Offered Using GIS
  4. Where GIS Could Help
  5. The GIS Solution
  6. Property Insurance GIS In Operation
  7. Cost ~ Benefit Analysis of Home Insurance GIS
  8. Ethical Considerations of Insurance GIS
  9. Where Does the Use of Home Insurance GIS Lead
  10. References

 

In the last decade Insurance companies have come under increased financial pressure. The growing influence of global market players, the introduction of direct selling techniques and a succession of ‘freak’ weather conditions such as the recent tornadoes on the South coast have lead to increased competition. Traditional insurance companies have struggled to remain competitive in this changing marketplace, whilst also faced with increasing levels of compensation claims. For example, the dry summers of the late 1980’s produced a seven-fold increase in claims so that by 1991 insurers were paying out over £500 million per annum to repair damage resulting from subsidence. Insurance companies began looking for tools to help them understand "more about the underlying risk factors in the areas they insure." (Evelyn C. 1997). They sort to use this new information to reduce the number of poorly underwritten policies.

As Insurance is a very geographic based entity they began looking at the use of ‘Business Geographics’ to gain a competitive advantage (O’Neill J. 1997). Although Underwriters have been utilising mapped information since the early 1800’s, the recent advances in GIS presented them with new opportunities in risk assessment. This report investigates the advantages offered through the utilisation of GIS when setting policy premiums in the Home Insurance market.

Calculating the risk associated with a properties' location is complex due to the many factors influencing policy decisions, especially as location has always being "easier to discuss then to operationalize" (Castle G. 1993). Insurance GIS aims to make location measurable so that the underwriters can "incorporate spatial characteristics into models of risk" (Landis, J. 1993). Through the incorporation of these factors the insurer has a better estimate of the potential risk to the property and can offer policy rates that correspond to the mapped risk.

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What Data Is Needed For Property Risk Assessment?

 

When formulating home insurance polices, an Underwriter considers many geographic and non-geographic factors, such as:

Traditionally these factors would only be available in tabular form. Some paper maps may be available or produced, but their use consumes both time and storage space. Although tabular data can be stored on a database with easy updating facilities, the time length and high cost involved in map production means that even when an Underwriter can use a map, the data contained may already be out of date. The recent growth of the digital mapping industry means that many of the attributes an Underwriter refers too are available or could be created in a digital format. Using digital maps allow changes to be made quickly, thus ensuring more accurate premium formulation. Examples of some of the data available in digital format are contained later in Table 2.

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Additional Options Offered Using GIS

	

	
Using a GIS the insurance company can integrate all of the attribute tables
	and maps into one database, for easy access by the Underwriters. Through the integration of these datasets they
	can establish new polices when formulating property premium rates. Most companies already store data within computer
	databases and this can be integrated directly into the GIS, negating the need for any costly data transferring.
	With these datasets stored within the GIS and combined with the required digital maps the Underwriter can employ
	various geographical analysis techniques to calculate a premium.

	
Useful GIS Functions for Insurance:


	

	
Through the continued use of the datasets within a GIS the insurance company
	can model patterns in spatial and socio-economic evolution allowing premium rates to be set in line with future
	trends. The following chapters discuss the use of the GIS by the Underwriter when formulating premiums.


	
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Where GIS Could Help

	

	
The calculation of a premium through analysis of the attributes concerned
	may seem relatively straight forward and the need for a GIS over stated. The following example, which although
	somewhat extreme illustrates the need for assistance to Underwriters.

	
What Premium should an insurance company set for a property situated:


	

	
Compiling the datasets and maps needed to calculate a premium for this
	property would be complex and time consuming. The task would be simpler and quicker it the data was centralised
	in a GIS, allowing the Underwriter to perform the analysis and premium calculation.


	
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The GIS Solution

	

	
An insurance company considering a GIS requires a system that can be quickly
	installed and then put to use. The Ultimate objective would be a geocoded system, in which a property on a computerised
	map could be ‘clicked’ upon, prompting a table to appear giving its attributes. By incorporating the equations
	already used by the underwriters into the GIS a policy premium rate could be suggested.

	

	
To create such a system a digital map of the area is first required. To
	this, the other datasets can be overlaid combining their attributes. Buffer analysis can be used around hazards
	such as flood prone rivers or high winds areas (Figure
	1), whilst network analysis can calculate distance and travel time to hazards or services.
	Through the use of geocoding the attributes allocated to each property are stored together, enabling the underwriter
	to make only one computer enquiry.


	
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Property Insurance GIS In Operation

	

	

	
The use of GIS within home insurance began with America companies looking
	for ways to cut their losses incurred due to major incidents such as earthquakes (Figure 2), tropical storms and forest fires. They wanted a tool
	to assess risk when granting policies to customers within these prone areas. These situations may seem extreme
	for Britain but offer a good demonstration of property insurance GIS at work. The following example concerns flooding
	in the Mississippi River Valley, Missouri.

	
MapInfo was used to create an editable flood map from satellite raster images of previous floods. The analyst
	then created buffers around the river to assess possible flood outcomes, taking into account factors such as elevation,
	soil characteristics and man made objects such as dams and existing flood barriers (Figure 3.).

	
 

	
Figure 3. Flood Buffers Around the Mississippi River

	
 

	
Figure 3. Flood Buffers Around the Mississippi River

	
(source: www.mapinfo.com/)

	
Creating an accurate prediction of flood stages is crucial to risk assessment
	and by using a good flood map it is possible to predict which areas will be flooded at depending upon the rivers'
	height. The underwriter can then overlay property locations to determine whether a clients' property will be affected
	(Figure 4.).

	
 

	
Figure 4. Overlaying Clients Property Locations

	
 

	
Figure 4. Overlaying Clients Property Locations

	
(source: www.mapinfo.com/)

	


	
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Cost ~ Benefit Analysis of Home Insurance GIS

	

	
In the present business climate the use of computers, particular PC’s within
	all companies is commonplace. PC GIS is generally adequate for the needs of insurance companies, and with employees
	existing knowledge of Windows the need for extensive retraining is reduced. MapInfo is an appropriate Windows software
	package for their needs and is relatively cheap at around £500 per license. Other more expensive GIS packages
	such as PC ARC/INFO and Atlas GIS could be used but MapInfo has a number of advantages apart from its lower cost.
	Its Windows format makes it easy to use and allows it to be inter-linked with other Windows format packages, recently
	a MapInfo mapping system has been incorporated into Excel. It is the main software package that that the American
	Insurance firms use and because of this a number of interrelated packages have been developed. Examples of these
	MapInfo software packages are contained in Table 1.

	
 

	
Table 1. MapInfo Insurance Packages

	
 

	
Auto Miler Audit: a routing software application created to verify the mileage on an automobile
	policy application by determining the driving distance between two locations;

	
DisasterMap: allows custom building of digital maps from satellite imagery and aerial
	photography, processed to highlight features designed for disaster planning;

	
EG Coastal BandIT!: creates inland buffer regions around coastal areas. The resulting
	regions allow the calculation of exposure of selected points within a specified distance of the water;

	
Fault Analysis and Lightning Location System: a package designed to correlate lightning
	activity within insurance coverage areas;

	
FaultFinder: provides precise lightning verification reports that correlate events (power
	outages, fires, structural damage, loss of life, etc.) with measured lightning stroke information;

	
GPS-Commander: integrates desktop mapping with GPS technology. It can be used as real-time
	vehicle tracking and navigation program, or as a GIS data collection system;

	
GridMaker: produces rectangular grids over a user specified area;

	
Health Care Analysis: customised application designed for health care planning and marketing
	studies;

	
Health Care Reports: a health care report service providing statistical analysis, data
	and maps to health care decision makers;

	
IRASMap: an exposure analysis application for the insurance industry. It imports, geocodes,
	reports, and interprets Hazard data;

	
Land Record Map Conversion: It converts land record data from CAD systems into a MapInfo
	format to combine with insurance databases.

	
National Electronic Drought Atlas: It is designed for those involved in water management
	who require information on the relative frequency of precipitation, stream flow and soil moisture, events normally
	associated with a drought or flood. The user can answer questions such as "What is the probability of receiving
	5 inches of rain in the next three months?" allowing the user to make an informed operational decision.

	
Risk Meter: The Risk Meter is a tool for property underwriters to automate property lookups.
	It automatically enables an underwriter to determine the distance to scenarios such as Shoreline, Wind, Flood,
	Quake, etc. for any property in the U.S.

	
ShoreInfo: a specialised geocoder for returning the distance and bearing to the nearest
	body of water.

	
 

	
Companies that invest in GIS want to see the benefits quickly and by purchasing
	"off-the-shelf" spatial data sets from companies such as Geoplan and The Data Consultancy useful results
	can be produced once its users have mastered the software. Much of the cost of implementing a GIS comes from data
	acquisition but through the purchase of these datasets the need for the establishment of a high cost dedicated
	GIS department is reduced. Table 2 illustrates some of the data sets available and their cost from The Data Consultancy.
	As a base reference map within the GIS a number of street level mapping packages exist such ‘Streetline’ (The Data
	Consultancy (Table 2)) and ‘Address Finder’(exeGesIS) on which individual properties can be located by their Post
	Code. Companies such as the National Remote Sensing Centre (NRSC) and Dataview Solutions UK are able to provide
	the physical geographical data required to individual specifications, but at a price.

	
 

	
Table 2. Relevant Datasets Provided by The Data Consultancy

	

	

	

	

		
			
Data Sets
		

		
			
Cost of License per annum
		

	

	

		Full Census (SAS)
		
			
£37,700
		

	

	

		Census Boundaries
		
			
£16,000
		

	

	

		Population Counts
		
			
£3,000
		

	

	

		Employment Status
		
			
£3,000
		

	

	

		Dwelling
		
			
£3,950
		

	

	

		Socio-Economic Group
		
			
£5,850
		

	

	

		County Court Judgements
		
			
£4,500
		

	

	

		Streetline Mapping (GB)
		
			
£12,500
		

	

	

		Streetline Mapping (GB Region)
		
			
£2,500+
		

	

	

		Streetline Drivetime (GB)
		
			
£15,500
		

	

	

		Ordnance Survey GB Raster
		
			
£1,225
		

	

	





	
Other costs to the firm include administration, training, database conversions,
	supplies and maintenance. The costs may seem extensive but any conversion to a new working practice involves an
	initial outlay but this is balanced by the benefits felt. Besides the direct monetary benefit through more accurate
	policies the company will also experience a number of working benefits:


	

	
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 Ethical Considerations of Insurance GIS

	
 To reduce the risk the company bares it may
	choose through geodemographic analysis choose not to underwrite policies with in areas prone to high risk. It is
	possible to debate the ethnic of such a decision but Insurance Companies aim to maximise their profit. But there
	are ethical limits, such as the possible unlawful use of "psychographics data for establishing underwriting
	guidelines or to establish standards by which not to choose not to underwrite policies in areas prone to some natural
	hazards" (Francica J. 1993).

	
If major insurance companies decide not to offer policies in high risk
	areas a market opens for smaller, local insurance firms. This occurred in Southern California when the major insurance
	companies withdrew due to the earthquake risk. Since their withdrawal companies such as Pacifica Insurance have
	increased their market share. Pacifica have gained over 30,000 policies using their existing local knowledge in
	conjunction with a GIS to help spread its risk. It safeguards their survival by avoiding over concentration in
	high risk districts (Lackow S. 1997)


	
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  Where does the Use of GIS
	in Home Insurance Lead?

	

	
The experience of other insurance firms has shown that although the initial
	investment in a GIS and the required digital data is considerable the working and monetary benefits are quickly
	felt. The greater accuracy establishing premium rates leads to reduced losses which in conjunction with the working
	benefits makes the company more competitive. This ultimately leads to increasing profits.

	
The use of GIS is not just limited to the formulation of property premiums
	but can be used to see if existing policy holders in high risk areas are adequately covered, it can calculate the
	companies exposure to claims in the event of a disaster and "limit the total risk pool in areas of inherent
	risk" (O’Neill J. 1997). It
	can also be used in other insurance fields such as health, travel, auto and for marketing. As insurance professionals
	become aware of how much of their data is geographically referenced, many more applications for their GIS technology
	will emerge.


	
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References


	
 Books:


	

	
 

	
Company Information Booklets:


	

	
 

	
URL’s:


	


	

		
ESRI 1997 Conference Precedings


	


	
    
	
  1. Using GIS to Improve (1) Risk Management & (2) Strategic Marketing
	at Colonial Fire & General Insurance Company Ltd - C. Evelyn
	
    
	
  2. Using Natural World Features in a Business GIS - Steve Lackow
	



	


	

		
GIS in the Insurance Industry - J. O’Neill


	


	

	
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Last Updated 08/03/99