How Cost-Effective are Inspections?
A major regional insurance carrier has done extensive analysis of the inherent value of inspecting - both new business as well as re-inspecting existing business on the book. This analysis was provided by their AVP of Personal Lines Underwriting:
2009 Coverage A – Premium Lift Results:
Inspections conducted in 2009 resulted in a Coverage A increase of $542M, for an estimated $1.8M in additional premium.
2009 Coverage A – Premium Lift 10 Year Projections:
Some Key Takeaways:
- Expenses outweigh the premium generated in Year 1 (year inspection was conducted) resulting in a Loss of $821K
- A positive ROI of $683K is realized in Year 2
- The 10 year premium lift from 2009 inspections is estimated at $8.9M
Inspection Loss Avoidance:
Of the 80,543 inspections conducted in 2009, 8.2% (6591) were cancelled or non-renewed
Inspection also offers a loss avoidance benefit. In order to estimate the loss avoidance benefit, the total number of policies terminated was multiplied by varying degrees of frequency and severity. It is estimated that there is a loss avoidance benefit of $6.4M
The termination of 6,591 policies also results in lost new direct written premium. There would be an estimated premium decrease of $4.1M.
Cancelled policies would have estimated losses of $6.4M and an estimated premium of $4.1M. As a result, the loss ratio for this segment can be calculated at 155%.
Conclusion:
While the expenses associated with inspections seem high, the benefits realized from inspections are even higher. The greatest benefit of Inspections is Loss Avoidance. Discontinuing inspections would not move the needle, as the expense savings would be quickly absorbed by incurred losses. The impact would be zero with a frequency and severity equivalent to our 2009 results. Analysis indicates that an increase in frequency or severity would have a negative impact on COR, as the incurred losses would outpace the expense savings.
