A failure to embrace advanced geospatial technology when determining premiums could leave home insurers lumped with excessively high-risk portfolios, a leading geo-insurance specialist has warned.
The caution came on the eve of the release of the Queensland Floods Commission of Inquiry report and follows the Natural Disaster Insurance Review (NDIR) which recommended compulsory inclusion of flood cover in policies for homes in medium and high-risk areas.
Speaking at the Technology and Innovation in Insurance Conference in Sydney today, Esri Australia principal financial services consultant Gary Johnson said the changing approach to flood cover created new challenges for insurers as homeowners searched for the most cost-effective policies.
“Most insurers currently calculate premiums by averaging the annual losses in a postcode or locality, which leads to inequitable pricing,” Mr Johnson said.
“For example, some homes have a greater exposure to flood than others in the same street simply because they are built closer to a creek or storm-water drains – however, this method overlooks those differences.
“Geographic Information System (GIS) technology enables insurers to calculate exact risk at the property level, providing an accurate gauge of a home’s likely exposure to natural disasters.
“Insurers using GIS can accurately separate high-risk and low-risk customers and set appropriate premiums, while actuaries who continue to rely on locality averages will set the same premium for both.
“Over time, low-risk customers will trend towards GIS-driven insurers, and price sensitive high-risk customers will flock to those that use the old methods.”
Mr Johnson raised techniques and strategies on how to manage and assess risk using flood mapping to an audience of the who’s who of the Australian insurance sector.
He said as more insurers began to leverage GIS-driven property assessment procedures, those left behind could find themselves with hundreds of millions of dollars’ worth of high-risk properties and nowhere to go.
“Insurers world-wide are increasingly beginning to recognise the value of geography in assessing risk properly when it comes to covering people’s homes,” Mr Johnson said.
“In my opinion, insurers must have geospatial systems in place soon – or they will find themselves in a downward spiral of riskier portfolios, greater losses, reduced profitability and an eroded market share.
“The flipside is that the first insurers to really take hold of GIS technology and run with it will have a significant edge over their competitors as they lower their risk profiles and raise profits.”
As market-leaders in Australia’s $2.1 billion geospatial industry, Esri Australia is the nation’s authority on flood mapping and GIS technology.
During last year’s Queensland flood crisis, Esri Australia developed the award-winning Brisbane City Council Flood Map, which provided a clear view of the scale of the 2011 flood disaster before the event fully unfolded.