Jason Wexler is the Head of Insurance Underwriting at Procore, a leading global provider of construction management software. Jason was interviewed by Michael Fiedel, a Managing Director at InsurTech Ohio and Co-Founder at PolicyFly, Inc.
Jason, what’s the impact of Hurricane Ian for property insurance markets?
“Hurricane Ian is looking to be the second largest natural cat (catastrophic) event in US history, just behind Hurricane Katrina, and the impact is significant. We all know how devastating Katrina was and recall the ripple effects in the insurance market after substantial events such as Andrew, Katrina, Sandy and 9/11. Over the last couple of weeks, the claims numbers are looking closer to $60 billion plus NFIP (National Flood Insurance Program) claims. This cat event may be unique from other notable events because rebuilding in 2023 will have to tackle mounting inflation, labor constraints and unknown supply chain issues.
On a national level, there are intensifications of cat events across the US. There’s an increase in severity in convection storms in the Midwest, coastal hurricanes, winter storms and drought-fueled wildfires throughout the country. Global catastrophic insurance losses are expected to exceed $130 billion in 2021, which is almost double the average for the last 10 years. Most capacity providers in this segment have lost money in the prior five years and are rethinking capital allocation. As we near the 1/1 renewal season, we are hearing fundamental reversals in natural cat strategy, and it appears Ian is the beginning of a tectonic capital shift.”
How might other current economic events be exacerbating catastrophes like Ian?
“We are all feeling the impact of rising housing, food and gas costs, and the insurance carriers are about to get a heavy dose of inflation on insurance claims. This inflationary impact factor, I believe, has yet to be accurately instituted into the loss models for Ian. The loss estimates are based on building repair or replacement costs in 2020, which does not account for extreme material and supplies inflation in 2023.
Let me give you an example of persistent inflationary factors that will impact claims reserves post Ian, which few actuaries could have predicted months ago. According to the National Association of Home Builders, the price of exterior paint is up 50% over the last 12 months. Lumber prices made national news last year as the prices soared. The Framing Lumber Composite Price, an industry benchmark, increased roughly 175% in 2021 and set all-time highs. Gypsum (also known as drywall) products prices are 20.8% higher. The Producer Price Index tracks building materials prices and shows an average increase of 33% since the start of the pandemic. When you account for 30% increases on building materials and forecast across 422,000 claims reported in Hurricane Ian, the effect is dramatic. Furthermore, according to DAT Freight and Analytics, trucking spot rates, which measures freight cost, increased by more than 80% from May 2020. Labor costs are also challenged, and a major cat event further stresses labor shortages across the region's workforce. Frankly, the models haven’t fully accounted for those factors.
If that isn’t enough, Florida is also grappling with aggressive lawyers targeting insurance carriers leading to social and litigation inflation. According to the Florida Governor's office, Florida accounts for 79% of all homeowners insurance lawsuits filed, despite representing only nine percent of all U.S. homeowners insurance claims.”
Will insurtech save us from the impending doom in catastrophe-prone markets?
“Let me share why insurtechs can be incredibly helpful in delivering products and services to consumers in areas where traditional markets are exiting because they are tied to traditional underwriting models. Insurtechs, historically, have been more nimble and leaning into novel technology that allows them to improve loss ratios on tough business. On the other hand, large carriers are challenged to test new ideas, until proven, and lack the speed to update actuarial models and rating algorithms in real time.
I believe advanced underwriting models and technology such as geospatial mapping information will improve underwriting speed and accuracy in cat zones. This will allow insurtechs to develop an optimal, or suboptimal portfolio, and better predict outcomes. For example, many carriers and the federal government NFIP program use outdated flood maps to underwrite floods. This is one of the best examples of bad data, which leads to poor underwriting results.
Let's start with the results: NFIP posted a 121% loss ratio over the past 15 years, paying out $9.4 billion more claims than premium. If the maps were effective, NFIP wouldn't be $20 billion in debt. Why are the results so poor? Most of the NFIP data are decades old, two-dimensional, outdated flood maps, which appears to be poor indicators of flood risk. Newer technology uses three-dimensional LiDar elevation analysis, which is far much more predictable and precise. Insurtechs have an advantage in that space to utilize cutting edge mapping and models to cherry pick preferred risks or leverage risk-based pricing, versus a traditional carrier.
In another example, a recent report was delivered to the Florida Senate in 2022 regarding building codes. It showed a picture of a beachfront street in hurricane Ian’s path, and there was only one home still standing. That home was built in 2020 and had the most current South Florida Building codes. All of the homes built prior to 2000 were gone, and the impact of updated codes for property damage and life safety is clear. I believe insurtechs will take advantage of claims information from recent events and quickly implement underwriting strategies to optimize results.”
What are some of the other ways in which you think insurtechs should be focused or have an opportunity to outpace traditional underwriting competitors?
“It's really the advent of technology and using the latest and greatest data models to improve underwriting and develop risk-based pricing. There’s a growing market of third-party vendors that provide innovative data to help improve risk selection. From satellite companies to cyber security threat vendors and construction data firms, they provide enhanced data to underwriters and allow them to pick a dynamic mix that fits a desired portfolio. In doing that, they can be extremely nimble in how they deploy capacity.
Another advantage for insurtechs is the ability to adjust quickly. Equity traders use algorithms to trade in milliseconds, yet insurance companies update models quarterly to annually. Insurtechs can also apply dynamic pricing and update actuarial models to be nimble and opportunistic.
In summary, technology, data models and speed to adjust to an ever changing environment are the core ingredients of any great insurtech. For my friends at InsurTech Ohio, Jim Harbaugh said it best - “Hustle. Hustle. Constant hustle. Hustling at all times. Better today than yesterday, better tomorrow than today.’”