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Insurance companies have a tall order ahead of them when pricing their products. They have to charge enough to cover losses, expenses and profit while keeping their rates low enough to remain competitive in the market.

Factor in economic cycles and hard-to-predict weather events and natural disasters, and it's clear that navigating these variables successfully is as important as it is challenging. The process would be simpler if insurers had a crystal ball so they could be certain they were charging adequate premium. Instead, they have to rely on something they do have: data.

Historically, Nationwide and other insurers have set rates based on their past performance.

“We would look at the past one, three, five years to pinpoint where we were seeing losses and having issues with profitability,” said Amber Stobel, Director E&S Personal Lines. Then we'd base future pricing on the trends we were seeing.”

Why keeping up matters

The past several years have brought an increase both in the frequency and the severity of catastrophic events, such as wildfires and hurricanes. As weather patterns change and disasters occur more often, trends gleaned from past performance are less valuable in determining future premium. Consumer behavior evolves, too, and market conditions also shift, adding more layers to the intricacies of rate making.

Insurers have to find a way to adapt to an increasingly complex set of variables to ensure they are pricing appropriately so they can continue to protect insureds from unpredictable risks. Some carriers are leaving the market, while others are modernizing the way they rate so they can remain viable.

“Nationwide has been focusing on incremental improvements to the way we price catastrophic perils,” Stobel said. “We have been looking for more effective, efficient ways to do it, and data and analytics are playing a major role in this effort.”

An evolving process

Thanks to technology, endless troves of data are available to aid insurers with their pricing strategies. This includes more historical data than ever before, along with predictive modeling, which provides invaluable, informed insights into the future.

“Modeling wasn't as readily available in the past, but now we can get our hands on it in a consumable format,” explains Stobel.

Nationwide is incorporating this data into its approach with the goal of being more accurate and surgical in pricing. This shift to a forward-looking perspective also provides insurers with the information necessary to maintain a well-diversified, balanced risk portfolio.

“The abundance of data and newer modeling technologies is really transforming the way premiums are set and risk appetites are managed, and this is happening across the industry,” Stobel notes.

Leaning on new best practices

The rise in catastrophic events has caught many insurers off guard in recent years, and some of them have become insolvent due to unprecedented losses.

“Catastrophic events are not consistent or predictable, even to the experts,” says Stobel. “You might not have a hurricane for twenty years, and then you could several within a brief period. This can be devastating for both the insured and the insurance company.”

Insurers are eager to adopt more accurate ways to assess risk, and data and modeling tools are at the forefront of this effort. Catastrophe (CAT) modeling, in particular, has gained traction thanks to its ability to provide in-depth information about the risk of a very small area. For example, through CAT modeling, Nationwide has begun to identify risk descriptions of locations relative to their proximity to a wildfire zone.

“We have started to use modeling to look at an area's distance to high- and very high-risk wildfire zones,” notes Stobel. “This helps us break down rating sections and be much more granular.”

This surgical approach is valuable in hurricane-prone areas, too. Hurricane modeling provides data that helps calculate risk based on proximity to the coast, a structure's hurricane mitigation features, sophisticated climate modeling and other variables. This information has helped Nationwide break down counties into smaller areas so premium can be calculate more precisely.

“This kind of information is helping us pivot our pricing approach so we're not just basing rates on historical data,” says Stobel. “We're able to be more predictive.”

Coming out on top

By implementing the latest technologies and best practices, Nationwide is able to more accurately price risks. When the premium charged is adequate to cover claims for insureds, expenses for the insurer and profits for agency partners, everybody wins.

“If we are profitable, our agents are profitable,” says Stobel. “In the end, modernizing the way we rate will help us remain a viable, long-term partner for our agents and insureds.”