As many have noticed, homeowners insurance is heating up. Over the past few years companies have addressed many of the challenges in the highly competitive auto insurance market; now, carriers are switching their attention to homeowners. With highly volatile weather patterns, carriers have increased their focus on determining the right premium for their customers. Companies are looking for new and innovative ways to better assess the exposure of their customers and prospects, increase price segmentation and leverage technology in order to improve or maintain operating results.

Below we will explore some of the best practices in ratemaking and underwriting being leveraged by North American insurance companies. Based on results from the Earnix/ISO 2015 Homeowners Ratemaking Insurance Survey* we will take a first-hand look at key areas of homeowners pricing as well as highlight learnings from the real-time polling that was held during the ISO/Earnix live webinar.

1) Risk Selection/New Home Inspection

While risk selection is at the core of the underwriting practice, the jury is still out regarding the level of new homes that should be inspected. There are two schools of thought – one group of insurers are focusing their efforts on cost reduction and by doing so they tend to inspect less homes, while their counterparts are placing their efforts on exposure management, thus leading them to have a higher percentage of new homes inspected. Business cost criteria are one of the main factors that affect the approach of either group of insurers. When evaluating the inspection process of new homes, it should be noted that not all inspections are created equal – some are less thorough than others.

a) Home Inspection before policy is issued
While 28% of the respondents surveyed inspect less than a quarter of new homes, 27% inspect all new homes. Clearly there is not a consensus within the industry regarding the “best” volume of inspection.

b) Home Inspection persistency by company size:
Larger companies (those with over $500M of Homeowners premium) inspect a lower proportion of homes; only 15% of large companies inspect every home while 45% opt to inspect 25% or fewer homes. Typically, these companies have high levels of new business so it would be very expensive to inspect all new homes. Additionally, it is assumed that larger companies have more data and with predictive modeling can more accurately pinpoint which homes to inspect. On the other hand, smaller companies (less than $500M of Homeowners Insurance GWP) are twice as likely to inspect 100% of new homes. For smaller insurers, the potential impact of one bad risk is felt more.

c) Methods of Home Inspection
Of those that inspect new homes, close to two-thirds (64%) use only external physical inspections and 57% use both internal and external inspections. 52% rely on agent photos and 27% use aerial imagery for new home inspections.

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2) Pricing/Segmentation

a) Pricing Setting Considerations
Insurers use competitive information and other supplemental information in various ways for pricing their own products. The vast majority (83%) of insurers that participated in the survey indicated that they consider their competitors’ prices in their rate setting process. In addition, insurers also take into account estimates of retention and business conversion (55%), value of other policies in the customer’s portfolio (37%), and policy lifetime value (27%) when setting their own prices.

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b) Other Pricing Setting Considerations

Companies are trying to better understand customer behavior. The first step is to understand customer behavior for each product and to build robust models to predict how customers and prospects respond to rate changes. The next step is to expand these models to understand the cross-product effects. For example, how are auto renewals impacted if rates increase 5% on the home product. The ultimate goal is to have a view of the customer across the organization. Many insurers manage their organization within product silos which makes it difficult to manage the overall customer experience.

3) Emerging Trends

a) New Sources of Data
As new sources of data emerge from unstructured social media and high volume web history data, it is likely to have an impact on marketing and potentially underwriting but less of a role in pricing. It is unclear how this information could be leveraged directly in pricing unless it can be proven to be correlated to loss or acquisition cost; though some companies have played with a Facebook “Like” discount where an insured receives a discount for liking their company’s Facebook page. Realistically, this information will first be utilized in sophisticated marketing and underwriting models. Using complex machine learning models, insurers could potentially identify risks that are not properly priced within the current rating structure and choose to not carry the risk.

b) Homeowners Usage-Based Insurance
One of the most interesting areas of research in the homeowners insurance field is the idea of homeowners telematics (or usage-based insurance) which is where devices around your home collect and transmit data to your insurance provider. Use of this information could then potentially be aggregated and a discount or surcharge applied. Additionally, customers that choose to deploy these devices may have a different risk profile than others and be deserving of a discount. The more likely usage is for loss mitigation however. Currently, few companies have harnessed this information to use in pricing, but some companies are very actively investigating the rating potential of homeowners telematics.

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Obviously one of the biggest hurdles will be the data. Who will collect it? How will it be made consumable? Is there enough data volume to make pricing decisions? Will the data be affordable? As this area of analytics continues to mature and home monitoring devices become more widespread, these types of questions will be answered.

The industry is starting to experience rapid change. Companies that are embracing new data and new analytics techniques will see a significant competitive advantage. Leveraging the power of data and analytics will be a key.

See our first blog with survey results. In the meantime, feel free to download the full survey report or listen to the on-demand webinar discussing the survey results.

Question – What data assets currently not used in homeowners rating will most likely have the largest impact on the pricing or underwriting of homeowners insurance? Leave your thoughts in the comment box below.

* The survey had 99 respondents from mainly the US (90%) but some from Canada (10%) as well. Respondents represented a good mix of company sizes, with three quarters of the survey respondents coming from companies with up to $500M of homeowners insurance gross written premium (GWP), while the remaining quarter of respondents came from companies writing over $500M in premiums.