This article was provided by AXA XL
Our customers are currently exposed to a risk profile due to increased exposure and risk of severe weather, as well as volatility in commodity prices due to fluctuations in commodity prices, among other things. Mike Hood, head of global pricing, and James Grimshaw, head of open markets London-based brokerage, AXA XL, explain how they are working to give clients a risk picture at the right prices and transfer that exposure.
Our clients who own assets are facing a series of risk factors. The risk of significant damage caused by frequent and severe weather events, including the potential for errors in the risks due to fluctuations in commodity prices and network problems, means that it is very important for them to have an accurate idea of the cost of their exposure.
The frequency and severity of climate damage has shown a significant increase in recent years. Last year was the fourth cheapest in history for insurance losses from natural disasters, according to Swiss Re analysis.
In addition to hurricanes and wildfires in the United States and Asia, Europe was affected by floods, which caused major insurance – and insurance losses; According to the German Insurance Association, 2021 was the most expensive year for natural disasters in Germany.
Our companies have a long history of presenting and transferring risks. But climate change impacts the exposure of customers’ goods in different locations. The increase in the number of unpredictable events, such as last December’s hurricanes in the United States, is a serious warning that weather-related events are becoming more frequent and difficult to predict.
Based on this, the financial system has a significant impact on the cost of raw materials and other products. A variety of factors, including the ongoing COVID-19 pandemic and the conflict in Ukraine, have contributed to the increase and decrease in other products. A recent report by McKinsey stated that the cost of certain products is rising by double digits.
And the Builders Merchants Federation in the UK recently reported that the prices of some materials have risen by around 10% to 15% this year, while others, such as timber, have risen in price by more than 100%. Prices in the US have recently fallen and are now up “only 30%” since pre-COVID.
The challenges posed by extreme weather conditions and fluctuating commodity prices mean that it is vital for our customers – and us – to have a good level of insurance coverage. As our customers have become increasingly global in their operations, the volume of goods in locations with a high risk profile has increased dramatically. No two homes are the same in terms of cost or perceived risks. And our prices should reflect this.
Creating examples of work
In order to provide our customers with a better idea of the location and risks that drive their loss value – and the cost – we have been working to create models that can provide an accurate view, for each type of risk, and therefore, the cost of that risk.
One of the first things we did to achieve this goal was to create a program to clean, convert and capture the data we receive from thousands of unofficial data that defines the risk factors. The software cleans and transforms geographic data and records facts and conditions, and reconciles it with geographic information, which is used to derive potential risks for risk assessment and pricing.
This doesn’t just increase energy; improves data quality, resulting in higher quality and more consistent risk assessments than site visits. In addition, the new program of our risk consultants “Hazard Analysis” can provide this information without the need for engineers to visit and assess the site.
For example, to obtain flood risk rates, we can assess factors such as water depth, flood protection, building height, occupancy and so on. With hazards such as flooding, a 10 meter placement error on one side or the other can make a big difference in the expected loss.
This model provides us with detailed information about the risk of the property, which allows us to assess and rate the risk with greater accuracy. This geocoding accuracy is difficult to achieve if a client has 1000 sites in 50 different countries around the world. Some countries have better addresses than others. We are investing in new technology, which will soon raise the accuracy of cat and price forecasts to the next level and enable our Risk Consultants to improve their flood advice to clients.
We also use risk models to implement our new global costing tools which, combined with fire risk data from engineers provide us with local cost information for each problem. This enables us to quickly understand the risks and locations that are driving the cost of loss to our customers. The fire prices in the new tool have been reviewed based on what has been reported over the past 10 years, which has cost over 150 trillion dollars in investment since the same period.
Our clients are grappling with the challenges of climate change, macroeconomic and supply-chain issues – in some cases dramatically – changing their risk environments. Our ability to provide accurate information on geographic exposure and pricing helps them better assess, mitigate and manage ongoing risks.
The new global pricing tool (Harta) also helps us reduce price volatility. By not reacting to loss events and instead pricing based on risk information, we are able to provide our clients with a consistent understanding of their cost of risk – ahead of any event. This is an important part of our desire to be a long-term partner with our customers, not just to provide what they want.