Among the number of data points that go into calculating the premium of a typical home or auto insurance policy is location. Traditionally, the insurance industry has relied on data that substitutes an estimated location for the actual location. But this “close enough is good enough” approach to location in premium pricing opens up insurers to underpricing risk and adverse selection, not to mention overall business impact.

That’s the main message of a new report released by Forbes Insights and Pitney Bowes, “Close Enough is not Good Enough: Why Hyper-Accurate Location Data Matters for Insurance,” and I couldn’t agree more (in fact, I was quoted in it). The report is based on a study conducted by Perr&Knight for Pitney Bowes, which looked into how approximate location impacted policy pricing. The study found that five percent of homeowner policies and as much as 10 percent of auto policies based on zip code data could be priced incorrectly.

You may think those percentages are low, especially when the insurer’s leakage rate is low. But it’s important for carriers to recognize that the leakage isn’t just affecting the five to 10 percent of policies. That leakage is based on an actuarial discipline, and it’s spread as a few more dollars on every other policy that’s in the portfolio, which makes the insurer a little bit less competitive. If carriers used more accurate pricing it would improve the overall quality of their book, as well as the ability to offer better pricing throughout their book.

There is a twofold lack of awareness among carriers about the imprecisions they have in their data. Typically, IT or procurement handles data purchases and the carriers just trust that the data they get from the geo-location vendor is good and move on. The second issue is that carriers don’t often realize how much their pricing would benefit from better location data.

Going forward with new data, carriers must have a plan in place to achieve the value relatively quickly, fix the underpricing as fast as possible and not make the problem worse. Imprecision can have big costs. The insurers that have the most accurate location data will be the ones with the competitive advantage.

To learn more, register to download for the full report from Forbes Insights, “Close Enough is not Good Enough: Why Hyper-Accurate Location Data Matters for Insurance.”


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