Wholesalers can help you save time and money with catastrophe modeling.

By  Kevin Amrhein

Retail agents historically lose millions of dollars in premiums (and headache medicine) attempting to structure a sophisticated property risk. Often, the cause of this chronic condition is not lack of knowledge or experience. Rather, the symptoms stem from a lack of resources. It’s called “Resource Dysfunction,” and in the tradition of assisting retail partners, several wholesale brokers offer catastrophe modeling services with hopes of curing this unfortunate condition.

CAT modeling is not new. Carriers, reinsurers, engineers and even a few large retail agents have used similar data for decades. In recent years, members of the wholesale community saw an opportunity: Benefit retailers and insureds by providing the extensive (and expensive) data usually collected at the back-end of the transaction upfront.

“We can analyze and portray a risk before it goes to the carrier,” says John Jennings, president and CEO of Crump Insurance Services. In February he announced a relationship with Risk Management Solutions’ new RMS Wholesale Broker RiskBrowser CAT-modeling platform, which, he explains, “helps facilitate the speed and consistency of the quoting process.”

In short, CAT models are a summary of probable loss derived through a variety of factors including structural and geographical information, historical loss data, and geocoding—a process of assigning a geographic identifier to a specific location. The latter is a critical part of the model. Codes are based on factors such as latitude/longitude, street address, and zip code. Less consistent models default to a generalization, such as within a zip code, while more consistent models can measure to an exact point. Such consistency significantly increases the quality of the data. Models produce a table of expected losses over certain periods of time, ranging anywhere from 10 to 1,000 years.

Few understand the value of this service better than David Pagoumian, president and COO of Napco, a property wholesaler that began offering modeling to clients in 2002. “Napco was early in utilizing the CAT modeling software for use in the wholesale arena and has spent the past six years refining the utilization of the model specifically to establish our platform and leverage better terms and conditions for our clients,” he says. “Application of the model is a necessity for 90% of our accounts due to significant catastrophe exposure.”

Risk Placement Services, Inc. (RPS), another of the early wholesalers to see the value in this service, established an exclusive analytic unit in Nashville, Tenn.

RPS President Joel Cavaness says that in addition to determining adequate coverage, wholesalers use modeling data to negotiate with underwriters.

Pagoumian agrees. “While experienced underwriting, market intelligence and quality data will always be the backbone of a successful property placement, the model is an effective pre-qualification tool helping Napco get the right account into the hands of the right underwriter.”

Dave Williams, managing director of property at RPS, says that by providing models, wholesalers give underwriters easy access to critical information about the account, making it easy for them to act quickly on submissions. “Exercising more control over the consistency of information going in means more consistent information coming out,” he says. “The underwriter wants to know: ‘is the risk laid out in a way that leads me to the key issues? I’d much rather deal with that agent than the alternative.’”

But it’s not all about underwriting. Models produce a bird’s eye view of how carriers see their clients. The data are appreciated by insureds who feel they’ve been told to pay no attention to the mysterious actuarial science behind the curtain.

Williams describes how modeling in conjunction with engineering studies helps RPS agents provide mitigation ideas to change the risk itself and reduce loss potential. He provides an example of when modeling helped identify a risk from improperly anchored A/C components on a hotel roof. Using the data, RPS was able to assist the agent in offering mitigation solutions with specific dollar amounts in conjunction with the loss reduction.

So why don’t more retailers and wholesalers use this product? As with any potential remedy, there’s a warning label. Expense still serves as the fundamental reason why CAT modeling is not boilerplate on the front-end of the classic risk transfer transaction. The process can be labor intensive, and admittedly the value of extensive modeling is questionable on smaller risks with fewer locations or limited schedules. Williams cautions that access to the service is not a free ride for brokers. He warns that information contained in models must transfer consistently to carriers and retailers and should not be contingent on someone who is not a professional analyst.

Williams believes CAT-modeling services will continue to grow as a front-end resource. “By the end of the year, I believe most major wholesalers will be offering this service,” he says. Ready to face your resource dysfunction? Call your wholesaler.

Amrhein is wholesale editor. Kevin.Amrhein@LeadersEdgeMagazine.com