The Link Between the Remodeling Boom and Premium Leakage

Premium leakage

There’s been a massive boom in remodeling across the country over the last few years. Residential remodels have increased by 9% between December 2014 and December 2015. Since 2010, the number of homes undergoing work has increased by 40%.

Those statistics are just the beginning of what BuildFax has to show for in terms of property insights. The company works with some of the largest insurance providers to deliver relevant information from its massive database of over 23 billion data points on residential and commercial properties.

And now, Megan Bell interviews Sefton Patton, Senior Director of Product and Customer Engagement at BuildFax to explain exactly how that remodeling increase is affecting insurance carriers around the country.

Megan Bell: Hey Sefton, I heard you were working on a handful of projects that had a crazy high ROI. Something like $600,000 per 100,000 policies? Is that right?

Sefton Patton: Yeah absolutely! You know how we’re in the middle of a big remodeling boom? Well, I’ve been working on projects related to detecting change on the properties carriers insure.

MB: Can you tell me about some of the challenges insurance carriers face with regard to the remodeling boom that we’re in?

SP: What we’ve observed during this massive boom in remodeling is that properties are changing, and they’re changing faster than carriers can keep up. Customers rarely think to notify their insurance company when they renovate or remodel, so it’s very common for carriers to be kept in the dark about changes, and thus experience unknown premium leakage as the property’s replacement cost increases.

MB: That makes sense. I never would have thought to let my carrier know about my home renovation. 

SP: Exactly. And when you think about how many policies carriers have, that’s a lot of change carriers don’t know about. Holly, our CEO, actually had a great analogy the other day. You know the opening credits of Game of Thrones?

MB: Where the castles pop up out of the map?

SP: Yeah. She said that’s how she visualizes the information we get from the BuildFax permit database – as structures popping up and constantly changing. It’s just so fast. That visual definitely resonated with me in terms of how properties are changing across the US.

MB: How fast are properties changing, do you think?

SP: Based on our historical observations, 1 in 20 homes have a permit pulled each year. Of those, 20% are major renovations, which works out to about 1% year over year. In the last 2 years, we observed a notable uptick in velocity where we’re seeing more like 2 or 3% and even as high as nearly 15% in areas like Colorado Springs.

MB: Does any permit count as a remodel?

SP: No. We’re only talking about the most substantial changes.

MB: So the main challenge is that carriers can’t keep up with the rapid pace of property change?

SP:  Right. Each year, more and more properties are updated, especially as we’ve been in a remodeling boom for the last handful of years. Carriers try to keep up through reviews and inspections, but that can be costly. So, many use inspection models and aerial images to target reviews. However, both of those methods tend to miss additions and remodels.

MB: Sefton, what about property characteristics found in tax assessor data? Wouldn’t that give insight too?

SP: Not really. In theory, it should be able to, but it’s not a complete picture. Tax assessor data often isn’t updated in a timely fashion and tends to lag behind reality if it’s updated at all.

MB: How does BuildFax help carriers discover which properties have changed?

SP: Remember that Game of Thrones analogy? One of the awesome things about BuildFax is that we’ve captured over 70% of the national permit volume and are updating over a third of the country every month and getting faster every day. That means that we know about changes before anybody else.

We’ve done change detection studies for a number of carriers, for both main street and high value. With each, we do an analysis of samples from their book of business, and return a summary. The report details which properties have had the most coverage A impacting change, and recommends which properties to address first. Not only does it give a good visual of the overall change across a carrier’s books, but it also provides a targeted prioritization for review, as well as a target dollar amount for how much premium they could potentially recoup.

MB: As you engage with companies to find a solution, what criteria do you look for to determine success?

SP: Good question. Any time we do an analysis for a customer, we want to fully understand how well the process worked when the carrier took action on results we provided. We ask carriers about their ROI.

MB: And what were those results?

SP: Looking at a blended analysis of several carriers’ studies, we would take a slice of policies that had material change. From there, we asked them to review a portion of them. Within the policies that they reviewed, increased exposure ranged from about $25,000 to $53,000 per property.

The average policy premium increase was about $100 per year. As a rule of thumb, for every 100,000 policies you have, that’s $100,000 in additional premium. Every year that builds on itself, so in 3 years’ time, you’d have $600,000 of additional premium.

MB: Hang on. Wouldn’t it be $300,000? 

SP: That would just be the ROI from the set of properties identified in the first year. Keep in mind, you’ll add an additional $100,000 in extra premium each year thereafter from new properties identified, which builds on itself year after year.

Another good way to think about it is that you’ve captured $100k in year 1, $200k in year 2, and $300k in year 3, because in year 3 all of those properties identified in years 1 and 2, continue to pay off as long as they stay on a carrier’s book. So by the end of year 3 you’ve actually added an additional $600k in premium. Extend that out to 5 or 10 years and the numbers really start to get big.

MB: Yeah, that’s a big impact! What are some concerns carriers might have during this process?

SP: Some carriers were initially concerned that their customers would shop around for another carrier because of the touch itself (especially if the touch involved an increase in premium). But it actually had the opposite effect! People didn’t shop more. It turns out, that when people remodel their homes, they want the right amount of coverage for the improvements that they made.

MB: For you, what’s the most rewarding part of engaging with carriers on change detection?

SP: If you go back to the Game of Thrones map analogy, I think the most rewarding part of these engagements is sort of transforming a flat map into one that reveals change more tangibly. It’s showing carriers exactly where their efforts to reduce premium leakage will have the greatest impact. Plus, when carriers see ROI from our solutions, it validates our data and our ability to detect change on properties.

On another level, it’s incredibly satisfying to address a problem that a carrier is having (especially one that’s been hard for them to address historically). Whether it’s pricing or underwriting, it’s rewarding to dissect that carrier’s pain point and address it with our data. From a product point of view, it feels like solving a puzzle. It’s not a question of whether or not it’s just interesting data, but what matters is, does it work? Does it actually solve the problem? Does it have ROI? Does it predict something? And if it does, then we’re in good shape to solve the problem and that’s what our data does well.

For more information on how our data can help you reduce premium leakage and prioritize inspections by detecting change across your book, contact us today.