Getting a View from the Stars
Pressure to develop better risk models and cheaper data storage are driving increased use of satellite imagery
Fiona Shaw, executive director, global analytics at Willis, says these new satellites will provide data on everything from the movement of oil spills in the ocean to the rate of new building on land. “There’s going to be a lot of information that becomes more practical and cost-effective to use and that’s where we’re kind of limited by our imagination as to how we could use it to our benefit,” she says.
Currently, Shaw says analysts at Willis are using existing satellite data to represent clients’ exposures more accurately and to supplement incomplete information that they already have about risks. Following the 2011 tsunami in Japan, for example, Shaw worked with insurance companies to determine their exposure. “This is bizarre, but a lot of insurance companies … might not have an exact location for all the properties that they insure,” she says. Her team, therefore, relied on satellite imagery to identify the built-up areas along the Japanese coast so they could quickly figure out the extent of their clients’ losses.
Jens Mehlhorn, Head of Flood at Swiss Re, says reinsurance and insurance companies are also increasingly using satellite data, especially in the building of risk assessment models. “One area where we use it is the validation of the hazard component in our models. We simulate, for example, thousands of different flood events and what you want to do is a comparison of the simulated flood events to those ones that actually occurred,” he explains. “So if we have a flood footprint of a larger event then we compare this to the simulated flood footprint in our model and we want to get as close as possible. It really helps to improve or to validate the hazard component of our natural catastrophe risk models.”
Another area that insurers are using satellite data is in parametric insurance products. Rather than indemnifying specific losses, with parametric products the amount of coverage is agreed upon prior to specific trigger events, such as natural catastrophes. Mehlhorn gives the example of a state that suffers a flood. “If 10% of the state is flooded then there is a payout of X, if it’s 12% then its X plus an additional amount,” he says. Satellite information, he says, helps to quickly settle the claim. “If [the insurance is] based on an indemnity basis then typically we need loss adjusters and it takes a couple of weeks and even months or up to years until we know what the final loss is. [Satellite data] really increases the speed of loss settlement,” he says.
Getting the Data
Though satellite information is providing insurers, brokers and underwriters with an excess of useful information, there are still many challenges associated with using this data. According to Mehlhorn, obtaining satellite information promptly is a significant issue that still must be addressed, especially when it comes to natural catastrophes. “For Sandy, unfortunately, there was no processed data available that could have been used as modeling information,” he says. “We use satellite images and satellite information whenever it is available, but it is not yet always available because there’s not a real process put in place or a platform that provides processed satellite information for each event that can be directly used by the insurance industry in their models.”
Processing the multitude of satellite data into information the industry can use and understand is another barrier the industry faces. “We need it processed to [a level] where it’s practically [at] an off-the-shelf state, where we don’t have to do that much with it, we just need to use it and build it into our tools and models for it to help with our analysis,” says Shaw. But getting the right level of processed data is still hard to do, she adds.
Cost and Capital
Cost, of course, can also be prohibitive. Data is purchased by square kilometer tile. “Imagine if you had to cover all of Canada or even all of Toronto, how many tiles of imagery you’d have to buy,” says Shaw. “It’s quite expensive for us.” But total costs to purchasers may be decreasing. Up until recently, storing the data and putting the correct infrastructure in place to use the data correctly was also incredibly expensive. The advent of cloud computing, however, is drastically reducing these costs. “All that information can be stored somewhere else and we don’t actually have to store it ourselves and we can just stream what we need, when we need it,” says Shaw.
As the cost/benefit improves, Shaw says the appetite for satellite data is also growing. “The demand is for us to know what exposures we have and how much our clients are likely to lose if there’s a catastrophic event and actually have quantified it. The regulatory environment, as well, is driving that,” she says. Insurance companies are being pushed by regulators to provide more accurate loss estimates. “Up until now, you’ve been able to say, ‘That’s probably how much we think we would lose,’ but in the new regulatory environments, the question will be asked, ‘How did you come up with that number? What assumptions did you make? Where did you get the information on which to base those assumptions?’ ” That’s where satellite information can help.
With more information becoming available from the ESA satellites and as the demand for this information increases, it is up to the industry to take advantage of what is available. There are lots of possibilities, says Shaw. “It’s just having the imagination and the will to try out new things.”
Copyright 2013 Rogers Publishing Ltd. This article first appeared in the February 2013 edition of Canadian Insurance Top Broker magazine.