Probable Maximum Loss – Are You Getting it Wrong?

Probable Maximum Loss


BuildFax works with dozens of the largest insurance carriers by helping them harness our extremely valuable data set to understand property condition so they can more accurately assess risk. One of the primary areas we lend expertise in is assisting carriers with probable maximum loss (PML) calculations to secure more favorable reinsurance terms. We do this by providing a complete list of roof ages or roof update years across an entire book of business. As a result, companies working with BuildFax save at least $300,000 for every 100,000 policies in force.

Today, Megan Bell spoke to BuildFax’s Senior Director of Insurance Engagement Dan Kenney about the intricacies of probable maximum loss – and what many are getting wrong.

Megan Bell: $300,000 is a lot of money! 

Dan Kenney: It is a lot of money! It’s amazing to see how improving just one data element can make such a massive impact on reinsurance spend. And the $300,000 can be put into perspective when you consider that these carriers are spending millions of dollars on reinsurance.

MB:  How are you saving these companies that much?

DK: We find that many carriers we engage with are using a property’s year built as the default roof age modifier in their models, which grossly over-estimates roof age, and that in turn creates a PML calculation that’s inaccurate. BuildFax provides comprehensive roof age and roof update information across their books which improves accuracy, saving them from paying too much for reinsurance.

MB: Sounds like you’ve had a lot of success helping carriers with PML. I’d love to hear about what a typical carrier engagement looks like. 

DK: Sure! One company comes to mind that’s been with us for four years now. I remember being in a conference room with several folks from their underwriting department and their VP of product, and as the conversation moved towards roof age, the integrator said that they only had updated roof ages for properties that had claims on them.

MB: Ah ok, so it sounds like a lot of their roof ages weren’t accurate.

DK: Exactly. There were a lot of roofs that had been updated but the carrier had no idea, so they were paying more for reinsurance than they had to. Reinsurance spend can play a huge role in whether or not an insurer is profitable.

MB: That makes me think of the roof discount I got for my home insurance premium. Because my roof is new, I’m able to save on insurance.

DK: Yeah, so this insurance carrier saved, on a much larger scale, by having their newer roofs reflected in their reinsurance terms. Roof age is a proxy for general home condition and in the world of insurance, it’s a major risk factor. Properties with newer roofs, statistically, are less likely to file a claim.

MB: That’s interesting! Can you tell me more about the statistics part?

DK: BuildFax has done numerous loss studies with our roof age data, and found that loss ratios decrease the newer a roof is. Insurance companies rely on estimating risk to run their business, and this is a top industry variable to help do so.

MB: Ok, so back to the carrier you worked with four years ago. Can you walk me through the process of the BuildFax engagement?

DK: Once we identified that their roof ages could be improved, we started our complimentary validation process where they sent us some basic information from their book of business like address, year built and roof age on file and we updated it with BuildFax roof age data.

MB:  How long does the validation process take?

DK: We turned this particular file around in two weeks. It’s usually just a matter of days to return the file back to the carrier.

MB: Can you tell me more about the file?

DK: We provide summary results on where we think roof age is either over estimated or under estimated. The file contains our roof age data that they can then input into their existing models for PML calculations. Then they take their new results to shop reinsurance.

MB: I can imagine that might be similar to me getting a better home insurance rate for my new roof, right?

DK: Yeah! Essentially, they end up buying only the amount of reinsurance they need. Why pay for coverage you don’t need?

MB: What does success look like in these engagements?

DK: We are in the business of making insurers better insurers by providing data that they may not be using right now. When a carrier becomes a happy customer, then that’s success. When a carrier starts using our data as a holistic solution across different areas of their business and when we have these long term relationships, that’s success. The carrier I’ve been talking about today continues to use our data. We’ve moved over to using real time updates which helps them with pricing, renewals, and all new business.

MB: What was your favorite part about the whole process?

DK: I get to meet the nicest people, like the product managers, IT staff, and underwriting managers. And we’re always learning from each other. These folks are really good at what they do, and it gives me great joy to help them do their jobs better.

Plus, there’s this ripple effect that happens, because more accurately assessing risk ultimately benefits everyone – our customers, and their customers, like you, Megan!

MB: Haha you’re right! It all comes full circle. Anything else you’d like to add? 

DK: We’re seeing a major shift in Florida with roofs updated after 2002 that qualified for the IBC compliance credit. These roofs are starting to age, and many homeowners are beginning to replace them. Because these folks already received the discount, there’s no incentive to tell the carrier they’ve just replaced the roof. The impact on that model, 0-5 years versus 6-10 is significant. There’s a tremendous opportunity for big savings on reinsurance in these cases.

MB: Thanks so much!

For more information on how BuildFax data can improve your probable maximum loss calculations for reinsurance, contact us today.