Boston’s snowy streets and sidewalks suggest it’s the last place you’d find a discussion about wildfires and insurance. And yet, a little-known company here says it’s trying to solve California's insurance crisis with a revolution of sorts.
“Most people don’t know this particular industry exists,” said Rob Newbold, President Verisk Extreme Event Solutions. “23 years ago, when I got here, I didn’t know it existed either.”
Verisk is a company that assesses risk for insurance companies using catastrophe computer models. They are “simulated wildfires, simulated tornadoes, hurricanes, earthquakes,” Newbold explained. Verisk frequently estimates damage costs after disasters and makes those estimates public.
The 'Big Deal'
California just recently cracked open a long shut door to let homeowners’ and renters’ insurance companies use catastrophe models to set the price of your next homeowners or renter's policy. The state said Verisk and three other companies have applied for approval.
“So, it is a big deal,” Newbold said.
The state said it expects to conclude its review of catastrophe models sometime this year.
Local
We wanted to see what a catastrophe model actually is and does, firsthand. So, we went to Boston.
Experts + Data = Risk Calculation
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Verisk opened its doors for us. Chief research officer Jay Guin was our tour guide. “Everything in catastrophe modeling starts with people,” said Guin. He explained that he oversees a huge team of 150 people. “The majority of them have Ph.D. credentials in their field of expertise, climate scientists; meteorologists; engineers; fire specialists; and people who understand the ground, the surface, and vegetation.”
Guin says his staff pours data from real disasters and research alike into Touchstone modeling software. At its heart is a humongous disaster library of sorts, Guin said. “We simulate millions of potential fires that have not occurred, but can occur in any year.”
But the software also gets nitty gritty. “The relationships and simulations are done at the one-home-at-a-time level,” Guin explained. So, we entered my home’s info. Within one minute, Touchstone displayed a detailed analysis simulating thousands of catastrophes at my address. and the cost.
Guin said insurance companies can input data about a large area, like a full zip code of neighborhoods and run simulations to assess their future risk and possible payouts. Some of the resulting numbers were huge: we saw a possible $4.9 billion loss for a simulated firestorm that wiped out a town.
House by House
“In any given year, your home has a one percent chance that your home will have damage worth $334,000,” Guin said. If California regulators approve Touchstone (or software like it,) Guin said that insurance companies would use that number plus other factors to determine my policy premium, whether to insure me at all, or what steps I should take to get a discount.
NBC Bay Area asked Guin if the system can generate similar numbers for my neighbors.
“Absolutely,” he said, noting that Verisk can go far beyond my block. “The entire country,” he said. "Home by home."
Guin said that other states have been using catastrophe models for decades.
“California, in our opinion, is taking the right steps," he said. "They are a little late. But these forward-looking catastrophe models are the only way of managing the risks that California faces.”
The group Consumer Watchdog has criticized California’s move toward catastrophe models as a way to just “rubber stamp” rate hikes. Newbold called that criticism unfair. He says Verisk is constantly re-calibrating the model.
Case in point: the recent Los Angeles-area fires. “We have a team in California right now, who’s on the ground looking at what actually happened,” Newbold said. “They’re looking, neighborhood by neighborhood, at ‘what did the model say?’ versus what actually occurred. All of that just comes in and makes the models better.”
Disasters Deliver New Numbers
After Boston, we traveled back west to sacramento. We were eager to see how the California Department of Insurance will ensure those private catastrophe models give the public a fair shake.
“Oh, I expect it to be very fair,” said Deputy California Insurance Commissioner Mike Peterson. He’s overseeing the state’s review of catastrophe models, including Verisk’s. “We have put a lot of effort into designing the process.”
The state recently laid out dozens of pages of criteria to be met before it’ll let insurance companies use a model to price your next insurance policy. Peterson acknowledged California is behind other states. But, he says California is the first state to pick apart the models with a formal review.
“Our staff, we’re looking at a series of steps that come from wildfire science in general and how it applies in a California context,” he explained.
Despite that new scrutiny, Verisk is confident California’s future will include catastrophe models. Newbold again points to the L.A. He said that his team compared the billions in actual losses to the model’s predictions. At a high level, Newbold said the numbers matched.
“It worked,” he said. “It makes me feel confident for the future of insurability in California.”
Check Your Home's Data
Verisk said some of the data it uses comes from you. Namely: the model might use the details about your home that are included in your insurance policy, such as your home’s age, roof, frame, etc.
In that, we see yet another reason to check your policy for accuracy, especially when you haven’t checked it in a long time, recently made changes, or both. What’s true about data in general is true for your insurance models: garbage in; garbage out.
If you have insurance issues, feel free to ping us.
