Event loss sizing as the flood waters rise – Q&A with ICEYE

How much of a capital strain do floods place on insurers given the high degree of uncertainty around the potential size of the loss?

The scale, speed and complexity of flood events can create significant capital challenges for insurers. Sizing these losses quickly and accurately is critical, but the process is highly technical, and achieving adequate situational awareness can take weeks, during which time capital allocation and reserving strategies are in limbo.

Often insurers are having to cross reference the incomplete flood footprints – from multiple different sources of varying degrees of accuracy – with exposure data as it becomes available to understand the cost of the loss. Damage data is often limited and disparate early on, while claims data takes time to compile due to inspection delays and late claims reporting.

Further, underlying calculations are usually calibrated at postcode level and are dependent upon industry-validated rather than bespoke damage curves. So, insurers run a clear risk of over-reserving for floods and tying up significant capital.

How important is the flow of loss information when it comes to managing capital through an event?

After a major event, CEOs, CFOs and CROs want to know instantly what the likely capital impact is. And that need for information extends in several different directions as major shareholders, reinsurers, regulators, and other industry bodies want to understand the financial fallout.

So, that flow of loss information and the speed at which insurers can begin to provide accurate and stable numbers on the potential financial impact is extremely important, particularly as it demonstrates a level of control during a very volatile period.

It is also key to establishing initial claim reserving levels, which is extremely challenging in those early phases when loss data is limited. Potential reserving ranges can be significant and material when insurers are reserving on modelled data rather than on a bottom-up view of the depth of the flood waters impacting their policies.

How can satellite data be used to support improved loss sizing and more effective capital management during a major loss?

Integrating satellite data into the event loss-sizing process provides a much more secure data platform to determine the likely loss and be on the front foot earlier in terms of making any capital decisions.

Insurers have near-instant access to detailed and reliable information on the property-level impact across their portfolio. With information on the overall flood extent and water depth at the building level, actuaries can conduct precise, robust calculations to establish the optimum reserving levels to be recorded against the claims and size of the overall loss.

Insurers can start this process as the flood starts, using satellite data showing the impacted area in time-stamped snapshots of the flood’s progression. As the event develops, estimates can become much more robust by incorporating water depth which gives an even clearer picture of the direct portfolio impact and likely claims fallout.

Early access to the right data helps reduce the time to calculate and update expected loss figures while increasing the overall accuracy much earlier in the lifecycle. That helps reduce the overall cost of capital as well as the potential P&L impact by limiting the risk of over-reserving and tying up capital.

How critical is the ability to demonstrate the integrity of your data early in the flood response process?

It is becoming increasingly important for several reasons. Firstly, it shows to the insurer’s key stakeholders that they are in control of the loss and will be able to reserve claims appropriately.

Furthermore, the near real-time flood extent data can be used to make important decisions to help mitigate the loss, improve event response and reduce the ultimate claims costs.

It also provides a level of reassurance to all parties to the loss, especially when you are not only producing financial impact figures much earlier in the process, but also figures that stand the test of time. The more robust the initial hazard and damage data, the more likely initial loss estimates will remain relatively stable post event. The solidity of those early-stage figures in turn demonstrates strong overall control by the insurers and heightens stakeholder confidence.