If there’s one thing everyone is concerned about in insurance, it’s climate change. Perhaps you’ve heard of it?

Pre-season forecasts for the 2024 Atlantic hurricane season from Colorado State University show an extremely active year, with the highest forecast CSU has ever issued. In part due to the La Niña conditions they anticipate being in play by the time hurricane season begins and in part due to the warmer-than-normal sea surface temperatures, they estimated there would be 23 named storms, 11 hurricanes and 5 major hurricanes.

Of course, it is still early and the forecasts could change, but CSU has a higher-than-normal degree of confidence in the active nature of the season given how active the forecast is predicting. Importantly, as the forecast notes, for coastal residents, “it only takes one hurricane making landfall to make it an active season.”

But while hurricanes often cause the largest loss totals in the U.S., we’ve seen a growing concern for secondary perils over the past year, as events like hail, lightning and freeze — which are less understood than the more frequent wildfires and tropical storms — provided something of a death-by-a-thousand-papercuts for properties around the country.

The confluence of increased frequency of natural disasters — resulting in more claims — and increased intensity — resulting in greater dollars lost — has underscored the importance of truly understanding the vulnerability of a property. And that starts with thorough underwriting.

Here are the top five things to keep in mind to optimize your underwriting in 2023.

1. Roof condition is in. Roof age is out.

The roof has long been the most important part of the house to underwrite correctly, in large part because of how expensive (and how frequently) it can be required to pay out roof claims. Whether from wind and hail events via a severe convective storm or hurricane-force winds, these perils, by and large, destroy shelter from the outside-in and top-down. Roofs are a big deal.

Traditionally, the risk of a roof has been assessed by using roof age, but in truth, roof age isn’t an ideal metric to understand the vulnerability of a roof. For one, roofs age very differently depending on the type, with concrete tile lasting as long as 50 years and asphalt shingle varying in its lifespan between 15 and 30. For another, even roofs within the same material type can behave and age differently. Companies like UL conduct testing for wind resistance, fire resistance, impact, thermal emittance, and more — all of which are major factors in how a roof might perform. 

Almost three-quarters of the roofs in the U.S. are made of asphalt shingle, and environmental fluctuations of heat and cold play a particularly significant role in how they age. As such, even an old roof can be in great condition if it’s well cared for, has seen favorable environmental conditions, and was installed well. (A hopeful metaphor for life, perhaps.)

Roof condition, however, a metric that has been traditionally harder to judge, is now coming to the forefront with artificial intelligence-enabled technologies. As there continues to be an explosion of imagery of our built environment, companies like Arturo have harnessed the opportunity to build diligent AI models that can scrutinize these photos and identify key, more nuanced indicators of roof health, like staining, rusting, evidence of damage or previous repair and more.

These roof intelligence traits paint a clearer, more sophisticated picture of the health of a roof — and for a fraction of the cost of an onsite inspector. Not only does this help to understand the risk a home faces and thus quote and price a policy more accurately, but it can even be used as an indicator of future claims, with the knowledge that a more damaged roof will fare worse in poor weather.

2. Incentivizing good policyholders makes for happier customers and a more profitable book.

The first step to reducing the risk of claims is to identify vulnerabilities in a property and then make corrective actions where possible. Every property has some risk, and there is always an opportunity for improvement.

The same imagery explosion and use of AI can also enable a more proactive relationship between the insurer and the insured. With AI models that can scan a house, carriers can now have the tools to conduct a home health check and even recommend mitigative options in exchange for a decreased premium — like replacing a damaged roof, trimming the trees that scrape the house or installing a water shutoff sensor.

These actions help to decrease the overall risk profile of a policy, and they also allow insurance companies to take on the role of a teacher, educating people on the things innate within their home that could cause them problems later on down the line. Not only does the financial incentive of lower premiums create a better book of business for an insurance carrier, but it can also improve the customer experience of the insured and reduce churn. Win-win.

3. Beware of premium leakage.

How often are you able to reevaluate a home once it’s been underwritten the first time, and how often is it reinspected? Without a clear understanding of how a home changes over time, it’s easy for properties to become underinsured.

From adding pools and trampolines to simply allowing a home to slowly degrade, homeowners can be at risk for both an increased likelihood of claims on their Coverage A — and potentially need to bump up their liability. But that doesn’t always happen.

Altogether, this represents a significant risk for P&C portfolios, much of which will go unreported and uninsured until the next time an inspection is required. As an example, according to a study conducted in January 2022 by Pew Research, 39% of Americans said they had given “serious thought” to adding solar panels to their homes, and 8% of homeowners have already installed them, an uptick from the 6% from 2019 and 4% from 2016.

Each solar array of one to five panels adds around $30,000 to Coverage A — with additional panels incrementally adding another $10,000. With the average home price in the U.S. at $270,000, this represents 15% of the value of the home. Among these respondents, it’s safe to assume that at least some of them have or will follow through to install solar panels, but how many of them will get around to informing their carrier about it when they do? This is just one example of the modifications homeowners can make that affect their policies – ones that their carriers may or may not find out about in time.

But with AI models keeping an eye on homes, these types of major changes can be detected in near real time. There’s no need to rely on the homeowner to take the initiative and notify carriers of changes. Additions like pools, trampolines, or solar panels, any of which can have major impacts on the structure and pricing of a policy, won’t be missed. Things that were once often exasperatingly overlooked are now always on your radar.

Keeping an eye on the house in this way gives carriers the opportunity to be more consultative in their approach, ensuring that the homeowner is properly covered in the event of a disaster.

4. Spend time and money on inspection…carefully.

Handing off the task of inspections to an artificial intelligence model sounds like a science fiction fantasy. But the technology to do just that is here today, and it is making a real difference in improving the accuracy and cost-effectiveness of insuring properties. Similar to the efficiencies other industries are finding using ChatGPT, the use of computer vision models to help with property inspection can help optimize inspection budgets and increase overall efficiency when the inspector is onsite.

By and large, this means the AI takes care of the stuff that is easy to identify but is otherwise time-consuming for a person to handle. It serves as the inspector’s assistant for the obvious. When it’s clear as day there’s a pool, it takes note. When it’s obvious there is staining on a roof, it takes note.

Partnering with a provider that diligently builds models upon a strong foundation of ground-truthed data and data sources that are selected specifically to solve the given challenge at hand is critical. This foundation enables carriers to make informed decisions about what information to trust, and this is where an inspector’s decades of expertise can truly be maximized: by deploying them when they’re really needed.

At its best, utilizing AI is today's version of what humans have been doing throughout history - leveraging technology and letting it do what it's best at in order to achieve better outcomes.

5. Be wary of adverse selection

In a space that is as nuanced as insurance and insurtech, it’s critical to know what tools are at your disposal to make smarter decisions when it comes to underwriting, not only to get a strong sense of your portfolio’s overall exposure but to effectively compete with other carriers.

Having the right knowledge is a linchpin to building a future-proof insurance carrier that can thrive in this highly competitive space. And today, that knowledge is primarily delivered in the form of new technology that can provide critical intelligence in milliseconds. In particular, AI continues to pave the way for these insights; this is reflected in research conducted by Gartner which found that 90% of insurance industry leaders affirmed that technology and talent investments in AI were a top priority.

As more and more carriers continue to adopt new technologies to better understand the makeup of a property, carriers that continue to lag behind risk becoming victims of adverse selection. This is a near-future state where the tech-savvy, early adopter competition segments the market, identifies the lowest-risk policies and leaves behind the highest-risk, lowest-margin properties for the buzzards. This split of haves and have-nots, exacerbated by climate change, creates the grounds for climate gentrification, a duality that is neither good for homeowners nor carriers.

By keeping these technological applications in mind and exploring how insurance underwriting analytics can transform your business, you can be better prepared for the future — competition, climate change or otherwise — from 2024 and beyond.