Summary of geo-opportunities for Insurance in the UK

Mike Cooper October 2011

The insurance market

In summary, insurance can be defined as ‘hedging against the risk of uncertain loss’. From a geographical perspective, every insurance event that happens, happens somewhere at sometime. As a Geo Community we are primarily concerned with the relationship between insured policy locations and their proximity to risk.

The UK market can be further broken down into the following business groups: • General Insurance; There are 1,005 General Insurance companies registered in the UK, of which

129 are listed by the FSA. General Insurers are primarily concerned with providing non-life insurance cover to customers for a calculated price. Within the UK this can be further broken down into; the London Market covering large risks, Commercial Lines covering small and medium businesses and Personal Lines covering private individuals with products that are generally sold in large quantities.

• Reinsurance; Reinsurers are small in number and hold £B’s in capital reserves, they are primarily concerned with insuring, insurance companies. This can be broken down into Facultative Reinsurance, which covers a specific policy, or Treaty Reinsurance, which covers many policies. Approximately 10% of insurance premiums go into this global pot to cover major events and is the ultimate global community product.

• Brokers; are primarily concerned with helping insurers to understand their likely exposure to risk. Based on the insurers risk appetite and exposure, they then place business with insurers and reinsurers.

• Catastrophe Modellers; Cat Modellers are primarily concerned with modelling perils risk and estimating the possible exposure and losses from a catastrophic event.

Some facts and numbers (Source ABI September 2011):

• The UK insurance industry is the third largest in the world. It is a vital part of the UK economy and contributes approximately £10.4 billion in taxes each year and employs around 290,000 people.

• In 2010 net premiums amounted to £46.4bn. From this, £30.8bn was paid out in claims and following outgoings, expenses, commissions and reserve adjustments, an overall loss of £1.2bn was reported.

• Net 2010 premiums for motor insurance were approximately £10.5bn and property amounted to £8.1bn.

• From an estimated 28 million residential properties, 19.6 million households have contents insurance and 16.5 million have buildings insurance. 2.1m claims were made in 2010. A major flood is estimated to cost between £20,000 and £40,000 per property on average.

• The average household spends £836 per annum on building and contents insurance

• In 2010, £3.6bn was paid out on residential property claims and £1.7bn on commercial property claims

Current adoption of geographic products

• Within reinsurance, reinsurance broker and cat modeling organisations, the use and take-up of geographic products is extensive and sophisticated. Primarily, geo professionals, create risk and catastrophe models, which are often published as web mapping services. The majority of geographic related activity is undertaken using desktop GIS and server technology along with geocoding and data services that are increasingly being delivered via the web.

• Cat modelers generally embed the data that has been created within productised ‘black box’ solutions. However, in response to insurers demands for a more open approach a number of cat modelers are responding positively with exposed services that are faster, more complete, and dramatically easier to run, adapt, and interpret.

• Within the General Insurance sector, the majority use geographic products in some shape or form at differing levels of granularity. A number operate at premise level with fully automated and integrated solutions sitting behind their own firewall while a number use hosted or outsourced mapping visualisation services to manage insurance underwriting and risk exposure. Point solutions may also be used within some departments such as; marketing, claims processing, territory design, reinsurance and fraud management applications that combine software and data. A small number of general insurers have dedicated geo risks departments.

Why every insurance company needs a Geographic Strategy

• All insurance companies operate from within a modeled world. Although never perfect, these models improve in sophistication, precision, depth and coverage on a daily basis and geography acts as a pivot point to so many of these fragments of information. With mastery of the modeled world comes improved understanding, which helps us to make better decisions and in the face of uncertainty to create better and more sustainable solutions.

• Recent legislation under Solvency II, now requires an insurance company to hold capital reserves to cover a 1 in 200 year loss event. Many of the models deployed to manage this are fundamentally geographic in nature and have the ability to create and consume capital as they are further refined and calibrated. For example with access to improved data, an updated model may demonstrate that a larger capital reserve is required to comply.

• A number of insurers are looking to build their own models, which is proving difficult for smaller firms due to lack of qualified modellers and the other difficulty is the complexity of the models insurers are demanding.

• Modern IT and data architectures will require new approaches. The challenge for the geo professional is to educate a market embedded in 100’s of years of tradition, hierarchy and standardised processes to understand the significant benefits that can be realised by taking a geographic approach to business problems. Something more than a ‘box ticking’ exercise under the compliance agenda.

• For an industry where location is core, opportunities exist for those with the ability to think spatially as many insurers build Geographic Strategies to support core business operations.

Accuracy and precision:

• 10 years ago, many UK insurers operated with models based on postcode geography without really understanding that, within the same postcode, probably the only thing each property had in common was that they shared the same postal delivery person. A geography built for the purpose of delivering post most efficiently can cover an area of a number of square miles and equally a single property can contain many postcodes. This could result in properties within a large area having a very different risk score regards their proximity to risk and equally a property containing many postcodes could result in significant financial exposure if the insurer has failed to realize that the postcodes share the same location.

• The data quality agenda is complex. The level of precision we can work to is dependent upon the accuracy of the underlying data. The market is slowly being educated as to the value of the opportunity along with better ways to improve customer understanding regards data quality issues. There is also a move to more simplified and value based financial models such as ‘price per policy location’ combined with more user friendly licensing terms to ensure that insurance companies have access to the most accurate and current data available in the way they wish to consume it.

Typical application areas:

Typical application areas:

The future

• The Geo Cloud: Within a number of insurers, for reasons of reliability, security, and resilience, geo solutions are managed and maintained internally. This is generally the case for organisations that have fully integrated geo solutions and those with geo departments who see the benefits of developing their own internal applications and in-house developed data models.

• However, a few early adopters, manly medium and small sized insurers have outsourced completely to service providers via the cloud while others are beginning to fuse in house solutions with generic services such as context mapping, risk data and geocoding straight from the cloud as to what could be referred to as a ‘part cloudy’ approach.

• It’s likely that for many a ‘part cloudy’ approach will be the norm for the foreseeable future and that there will be increased take-up of ‘private cloud appliances’ or ‘portal appliances’ as insurers see the benefits in leveraging ready to go applications and templates within open development environments built on public clouds for internal use as a way of reducing customisation and ongoing support costs. There is a definite shift from large services projects to a ‘buy, configure use’ model with modular, reusable development.

• The geo cloud could also be used as a collaborative framework to facilitate more open transactions between insurers, cat modelers, reinsurance brokers and re-insurers. Such an approach would assist in better communication and improved understanding of risks and exposures.

• For mid scale visualisation and simple ‘dots on maps’ type solutions, access to free data and open development environments, solution providers have the opportunity to deliver low cost web services that fulfill a number of lightweight application requirements at an aggregated level.

The future

• Consume anything, anywhere on many devices: Estimates are that by 2020, 10 billion connected mobile devices will be in use. This will change the way in which users choose to consume services and the insurance sector is well placed to leverage developments in this area. From underwriting surveyors to claims assessors, the same solutions running in-house can be pushed out to the field to deliver significant savings in cost with better and faster decision-making.

• High Performance Computing: Another area that is likely to grow is grid based computing as models increase in detail and sophistication. Cat Modelers and Reinsurance Brokers will look to providers who can provide geo-processing services that can run on a high performance network to build and deliver models in hours rather than days.

• Geo Business Intelligence: A number of customers are looking for solutions that bring the

all their business data together within a single workbench. As a result there is much greater integration and convergence of geography and Business Information with dashboards being deployed on an operational basis. For insurers this means access to and integration with policy administration, pricing and underwriting systems along with the business data warehouse and the geo data warehouse as a single source of the truth. This will allow Insurers to manage exposures more precisely in real time.

The future

• Global Exposure Models: Modeling risk is a grey art and that interpretation of risk may vary for the same location depending on the rules used to create the models. As the models are calibrated, as more data is made available and as we master the modeled world, such variances will reduce in number. Global models are likely to be deployed, such as the Global Earthquake Model or a Global Flood Model, on a dynamic and open framework. This will allow users to consume and contribute to risk models as part of a crowd sourcing or selective expert sourcing arrangement and will undoubtedly result in quality improvements to the models being used for disaster planning and preparedness. Improved access to and availability of these models is likely to open up new insurance markets in the developing economies.

• Social Media: The geographic harvesting of social media will also play an increasingly important role in helping us to understand and respond to events as they unfold.

Geographic Engineering

• Like many businesses, the insurance industry is waking up to the opportunities being created by the geographic sector. As spatial data and information becomes more accessible more insurers will begin to understand the considerable benefits that can be realised from taking a geographic approach with reported ROI returns exceeding 1,000%.

• Considering recent regulation under Solvency II and the need for fiscal responsibility following the financial collapse of 2008, geographic solutions will begin to play a key role in creating a more secure and sustainable insurance sector.

• The UK excels at engineering, be it mechanical, construction, micro, electronic, software, genetic or financial engineering, so why not geographic engineering? As our mastery of the modeled world improves, the processes on which insurers operate will develop and become more sophisticated and automated with increased demand for greater precision. The UK geo community is well placed to respond with accurate data combined with services and solutions that can be integrated into the customers’ workflow with relative ease.

• As event extremes continue to occur, geography will play a crucial role in the creation of new supply chains and new services for this important sector. This will undoubtedly help to position UK businesses as leaders in geographic engineering for insurance on a global scale.

For further information contact

Mike CooperMail to: Mike@partcloudy.com