Risk intelligence: Accelerating innovation in catastrophe risk management

The goal

Challenge — generating real-time, data-led quotes

Covenant Underwriters is a program administrator that specializes in commercial package policies for specialty lines with a focus on small hotels. It uses an e-commerce distribution platform to reach its network of retail brokers and operates in 48 states with concentrations in Texas, the Southeast, and the Midwest. 

Like many managing general agents (MGAs), Covenant’s established approach to pricing was a combination of past experience and underwriting expertise, often applying blanket rating factors across different geographies. While this approach worked reasonably well for Texas and Louisiana, where past rating experience was plentiful, it was less successful when applied to new territories with differing catastrophe exposures and limited rating experience. 

As Covenant expanded, it began to see a disconnect between how it priced business using this blanket approach to rating and how partner carriers viewed the same risks when assessed with probabilistic catastrophe models. Being heavily property focused, Covenant’s portfolio was also impacted by a number of claims arising from hurricane and severe convective storm events. Overall, there was an increasing need for access to location-based catastrophe insights at the point of underwriting to allow a more sophisticated approach to rating.
 

The objective

Providing refined, consistent quotes within seconds

Given the prevalence of Moody’s RMS™ models among its brokers and capacity providers, Covenant was keen to use Moody’s analytics at the point of quote. That way, it could start providing more refined location-level ratings incorporating our model science. At the same time, this would increase confidence with broker partners and capacity providers by demonstrating the use of more sophisticated and consistent data for making underwriting decisions.

Covenant’s underwriters were spending between five and 10 minutes providing a premium estimate to their broker partners. These calculations were carried out manually, based on Covenant’s own proprietary loss data, knowledge of the market, and some estimations around construction type and insured value. This approach used up valuable resources in the absence of catastrophe model insight and made it challenging to ensure that business was priced adequately. A retrospective analysis of the in-force portfolio showed that almost 25% of policies were not receiving sufficient premium to cover the risk, making reinsurance purchase — informed by catastrophe models — almost unaffordable.

The MGA’s goal was to reduce manual time spent on every quote and limit mispricing at the point of underwriting while simultaneously delivering a greater level of comfort to capacity providers. Covenant also required a solution that would support its growth and vision.
 

The solution

Moody’s Location Intelligence API

To meet the objective of building a balanced and profitable book of business over time, Covenant needed a solution that would allow every quote to be risk adjusted and provide the potential for loss from a range of natural perils and reflect the specific exposure attributes of each individual risk. 

Our Location Intelligence API offers the sophisticated model science at the point of underwriting that Covenant was seeking. The API provides real-time risk insights at a granular level for all key perils including those critical to Covenant, such as windstorm, severe convective storm, and wildfire. The model science powering the API allows for close alignment with Covenant’s capacity providers’ view of risk (as well as that of their reinsurers) and offers transparency at every stage of the process. 

The Location Intelligence API’s ability to produce insights at the point of underwriting that reflect not only hazard but also vulnerability allows Covenant to generate accurate indicative quotes within seconds rather than minutes. This boost to efficiency frees up time to focus on high-value-add activities such as business development, and the speed of response means Covenant’s brokers have a higher success rate on the business they are quoting.
 

The process

Onboarding with an analytics-hungry team

Covenant’s tech-savvy team described Location Intelligence as the most exciting API integration to date due to the immediate and noticeable impact on pricing and underwriting. Once the team had gained access to Location Intelligence, underwriters spent the first few months testing before integrating the API directly into their rating process. 

Initially, there was some churn as Covenant reappraised business that was shown to be inadequately priced under the new rating process. Going forward, the company anticipates its book will be more sustainable as it has more confidence in the profitability of the accounts it is retaining. Of the business it retained in 2021, there was an average of 30% uplift in premium rate.
 

The outcome

Significant growth, new opportunities, and a more nuanced approach

Covenant has seen an immediate impact after just one year, with 99% of accounts — up from 75% — now rating with technical adequacy and business nearly doubling. By assessing each location on its own merit, Covenant is able to take a more nuanced and selective approach to underwriting than its competitors, many of which underwrite at a ZIP code level and issue flat declines in areas of bad experience.

In addition to improvements in rating, Covenant’s ability to transparently provide an indicative premium amount to its broker partners within seconds better positions them for success. This also means less time is wasted in situations where other providers are offering quotes below pricing levels acceptable to Covenant when assessed with our model science.

Covenant has been able to double the amount of capacity it is committing to the business. The company’s data-driven, insight-led approach has won the approval of its partners in the insurance value chain and their actuaries, paving the way for growth.

The company is now in a position to branch out into new areas. In June 2022, Covenant will launch a new insurance solution and platform for convenience stores. This new niche aligns well with its existing hotel portfolio as many of Covenant’s broker partners also cater to this segment. 

Our Location Intelligence API adapts flexibly to support the business as it diversifies, empowering the underwriting team to rate several locations rapidly in real time — offering a distinct competitive edge in the MGA universe.

"The only time you can control that rate is when it’s being priced. Moody’s Location Intelligence has been able to assist in [making sure] we are pricing adequately at the end of the quarter."

Daniel Murray, Chief Underwriting Officer, Covenant Underwriting