Applying a Netflix® Model to Homeowners Insurance Risk Management

One of the biggest challenges faced by the U.S. Homeowners insurance industry are the losses driven by hazardous or poor maintenance conditions. There are many unknowns when a risk is being underwritten and field inspections help carriers learn more about the conditions of the structure and the property. An inspection report that costs between $30 - $100 serves the immediate need of the carrier that is underwriting a given risk, but after the underwriting work is completed, the inspection report gets archived and is never touched again. If the homeowner starts shopping within a year or two and decides to move to a new carrier, the new carrier that is acquiring this risk has to spend the same amount of money on inspections to learn about the condition hazards of this risk or take a chance and underwrite it without having all the required information. This scenario got me thinking about applying a derivative of the Netflix® business model to the Homeowners inspection program. You can pay full price for all the movie DVDs that you want to watch, or you can benefit from the power of the network by sharing the initial investment and gaining a higher level of value than your individual investment would provide on a standalone basis.

Here are a couple of questions to consider:

  1. A suboptimal risk management strategy: A significant percentage of most U.S. Homeowners insurance carriers’ books never get inspected because of limited budgets and underwriting resource constraints. Is there a cheaper and more effective way to learn more about the true condition of every property risk that is being underwritten?
  2. Should the industry continue to look at inspection dollars as an expense and continue to operate in silos? Or would it be possible to monetize a carrier’s historical investment in their inspection program for the greater good?

The Inspection Data Exchange Network

The above questions provide a compelling reason for U.S. Homeowners carriers to come together and consider an Inspection Data Exchange Network. In an imaginary world, this central data exchange platform would allow carriers to share address-specific historical inspection reports with participating carriers for underwriting purposes. In a majority of risks, the condition hazard profile of a given address is unlikely to change drastically within 12-to-18 months from the date of the original inspection. Depending on a carrier’s risk tolerance and inspection budget, the decision to use historical inspections can be made based on the currency of the historical report. The carrier that would rent the historical inspection report would pay a fraction of the full price back to the carrier that contributed the original report. Proper measures need to be implemented to ensure everyone gains appropriately from participating in the network and avoid scenarios of a small group of participants subsiding the inspection investment for others. When carriers don’t find the historical inspection report for a given property address within the network, they can always order a new inspection report through their vendor. This Inspection Data Exchange Platform should ensure the ‘content creators/artists’ - in this case the inspection vendors - also benefit from this solution. Even carriers that order inspections based on predictive model-based solutions should be able to benefit from the reduced spend by renting a section of the inspection reports from the network.

Imagine the benefit of monetizing from something that was considered a sunk cost and the ability to get valuable insight on the true condition of all the policies on your book? Every $7,000 condition hazard-related claim that can be avoided goes straight to the carrier’s bottom line. The Inspection Data Exchange Network could be an additional lever that can help drive profitability in the Homeowners line of business, but the real question is, are we ready as an industry to do this?