Location, location, location: new threats of man-made catastrophes sharpen the need for mapping technology to assess density of exposures and proximity to potential targets. (Underwriting: Technology).

Few industries are as driven by geographic information as the property and casualty insurance industry. In fact, geography has proven to be one of the most basic considerations for writing policies and setting premiums.

Over the years, insurers and reinsurers have begun to use basic mapping technology to better understand their property exposure in relation to geography and natural hazards, such as hurricanes, floods and tornadoes. Recent events, however, have reminded everyone that catastrophic risks go far beyond natural hazards. Now, risk management needs to be redefined to better account for man-made catastrophes and "what if" scenarios that consider not only the policyholder or the number of policies managed in one area, but also the density of structures in a particular area and the property's proximity to other businesses or landmark sites.

Although man-made catastrophes were rarely considered until recently, they are taking center stage these days, whether intentional or accidental. Man-made and natural catastrophes together claimed more than 33,000 lives worldwide in 2001, with insured losses totaling more than $34 billion, according to Swiss Re. The property and business-interruption losses caused by the Sept. 11 terrorism are estimated at $19 billion, which makes the event the highest property loss ever in the history of insurance. The trend toward higher losses continues, given the risk factors of higher population densities and greater concentrations of insured values.

The ability to manage catastrophic risk is tied to managing the density of risk within a particular area. To quantify risk and manage exposure to acceptable levels, insurers and reinsurers must be equipped to ask--and answer--a new set of questions, including those about the location of the business in relation to "target" structures, such as an office tower, stadium, chemical plant or other highly valued or densely populated structures. To manage insurance portfolios accurately, the industry needs to consider the potential risks and how they relate to geography across various lines of business.

In its most basic sense, using location-based technology is a simple solution to a complex, real-world problem that is now a headache for the insurance industry. The time is now for insurers to re-evaluate how they will bear the cost of risk in 2002, which is expected to be up sharply to an estimated $9.40 per $1,000 in revenue, as compared with the estimated $6.88 per $1,000 in revenue in 2001, according to Prudential Securities.

Too Close Together

Insurance companies can enhance their customer databases by adding a field that indicates the density of policies in a neighborhood. Mapping technology will allow insurance companies to quickly analyze their existing database of policies and determine whether they are overexposed in dense concentrations. They can then change their parameters of acceptable risks and determine which policies to keep or pass on, thereby managing and mitigating their risk exposure.

An understanding of location enables insurers to perform sophisticated risk analysis based on policy data. As the industry wakes up to harsh new realities, decisions to purchase location-based technologies are at the level of a chief executive officer or higher.

One of the nation's largest insurance and financial-services companies recently implemented a risk-management strategy to help assess and plan for risks based on catastrophic scenarios. The strategy required that it first prepare and clean its policyholder data. Location-based technology allowed the company to validate the accuracy of the addresses currently on file for existing policyholders. As expected, the company found that many addresses were inaccurate.

Once the data was cleansed, the company added the location of a policyholder's branch offices to obtain a holistic view of the assets it was insuring. In many cases, the insurer was covering an entire company, including branch offices and field assets, but it did not know where the branches were located. The insurer then enhanced the newly cleansed policy record with detailed geographic, company and building information, including the following:

* floor and suite numbers (higher floors mean more risk);

* number of employees (more employees mean more risk);

* building square footage (more size means more risk); and

* number of floors in a building (more floors mean more risk).

Other details include the standard industrial classification code, which will help explain what type of business the insured conducts.

By plotting the detailed policy locations, the insurer is able to understand the density of policies and the proximity to risks, such as airports, high-rises, subways and national points of interest. It also enables the insurer to determine whether a policy is in the suburbs or in an urban area. The insurer then can append a risk score to each location to obtain the overall risk assessment.

Plan for the Worst

In the new business environment, insurers must be able to evaluate a disaster plan to ensure business continuity of its insured businesses in case of a man-made catastrophe. To maintain business continuity, organizations need to plan evacuation routes, back up and store data and, in the event the business is destroyed, determine an alternate office location. Businesses need to consider not just employees, but also people coming in and out of their location during the course of a day.

Location and mapping play a significant role in underwriting, allowing an insurer or reinsurer to account for these factors and others, including the types of businesses in an office building, the residential population near it and schools that are nearby. These factors must be considered to properly determine policy rates in the event of a catastrophe.

There are no authorities when it comes to setting risk standards for manmade catastrophes. The location-based strategy must be flexible and customizable to manage different risk possibilities. Using mapping technology to mitigate exposure and location analysis to assess and understand risk is critical to improving underwriting decisions and enhancing overall operational performance. The ability to map out policy data allows insurers to test different catastrophic scenarios and plan, prepare and price for the possible outcomes.

A location-based risk-management strategy addresses immediate concerns by helping property and casualty insurers measure current exposure around specific sites in the event of a catastrophic or terrorist event, mitigate exposure across all operating units and an entire portfolio, and improve pricing and underwriting decisions. As insurers are forced to evaluate risk in this way, prices will likely be higher and net retention rates lower. The ability to view a "what if" type of impact via a map is a user-friendly and powerful way to understand these risks.

With new threats and a new business environment, location information becomes the foundation of knowledge that can be nothing less than the difference between profitability and disastrous loss.

Jon Winslow is CRM Market Director for MapInfo Corp., Troy, N.Y