The COVID-19 pandemic behaved similarly to a natural disaster like a wildfire or hurricane. It created financial hardship, wreaked business and supply chain havoc, and even took lives.
In particular, social distancing measures and remote work drove demand for space upwards. Market values for single-family residences made double-digit year-over-year increases, and while wishful homeowners felt the pinch of unaffordable pricing and ultra-competitive bidding wars, existing homeowners celebrated their corresponding increase in home equity.
The combination of a windfall of cash via equity and rise of “pandemic hobbies” created a unique and unexpected risk: the home improvement boom. Do-it-yourself remodels mean that many home policies, priced for a given set of qualities on a home, have the potential to be significantly underinsured and inaccurately priced.
A Home Advisor survey in the United States found that the average household spent $13,138 on home services in 2020, and 63% of this spend went towards home improvements. A separate survey conducted by Qualified Remodeler found that bigger project remodel spending ($8,500+) was down 3% in 2020 as compared to a 13% increase for smaller project spending (<$8,500). Less expensive home remodeling projects are more accessible for homeowners to tackle themselves.
And according to NerdWallet’s 2020 Home Improvement Report, about 3 in 5 homeowners made home improvements between March and August 2020, spending $6,438 on these projects on average. In another survey, 64% of U.S. homeowners reportedly renovated the exterior of their home.
By the numbers, this would mean that the majority of U.S. homes in any given property and casualty (P&C) portfolio have made improvements in the past year—some of which will go unreported and uninsured, until the next time a property assessment is required. Sending someone to do an on-site inspection typically costs around $200 per property and only generates about five helpful attributes for underwriting, renewals and claims. It can also take five or more days to assess and manually process each property. On top of that, the data collected is rarely exact and often outdated.
Lacking clarity around the replacement value and risk of a home can be and has been catastrophic for insurers and homeowners. The dangers of incomplete or inaccurate information, combined with the increasing risk posed by climate change, can result in catastrophic consequences for both carriers and policyholders alike. In 2018, for instance, the Camp Fire in Paradise, California, destroyed over 18,000 structures, and as a result, Merced Property & Casualty, a smaller insurer in California whose portfolio was heavily affected went bankrupt.
When it comes to assessing renewals, it is imperative to capture the latest and most accurate information on a home. Like any other part of life, homes are always changing. As trees grow, hail falls, wind blows and homes are remodeled, artificial intelligence (AI) applied to imagery that is high resolution and high frequency can be used to monitor these changes—and reassess the risk profile.
High resolution imagery means the image is clear enough to be usable. The clearer the image, the better the model can derive high confidence insights. High frequency means that the same property is captured multiple times over time, ensuring a true longitudinal view of risk. Using different capture devices, from aerial to drone to satellite imagery, exterior property conditions can be recorded and reported exponentially faster, more accurately, and more frequently than on-site assessments.
While remodeling presents a pandemic-induced potential exposure, the biggest risk for the P&C insurance industry today is its data. On-site assessments can only generate very high-level information about a property, one at a time. If insurance carriers don’t have a way to verify the most recently recorded exterior condition of all properties in their portfolios, critical data is being lost.
As pandemic restrictions continue to loosen and people grow more comfortable with spending again, the home equity gains will continue to present an opportunity for homeowners to spend. By using these types of AI-powered models, you can keep a finger on the pulse of the health of your portfolio, enabling you to build a balanced risk profile for your book of business.