Developing a Comprehensive Wind Mitigation Incentive Program Is Complicated, but Modeling Simplifies the Task

Wind mitigation features demonstrably reduce losses, and credits are a great way to encourage their adoption. U.S. homeowners can save 40% or more on their insurance by demonstrating that their home has been built or retrofitted with a range of features that include improved roof shingles, strengthened roof decks, or protection for windows and external doors. The challenge for insurers is appropriately calculating the credits their wind mitigation program offers.
At its most basic level, calculating credits is simple. You divide the expected loss to a building with a particular feature (or combination of features) by the expected loss of an equivalent building without that feature(s). The resultant quotient gives you the amount by which expected loss has been lowered by the feature(s). When you look into the specifics of putting together a mitigation credit program, however, there are many complexities to consider.

Where’s the Data?

The first challenge is the lack of claims data that can be leveraged to generate experience-based credits. Even if you want to evaluate the performance of a single mitigation feature, no claims data set exists that would have a direct comparison to a book of business that has implemented that feature and an otherwise identical book of business that has not.

Second, the impact of mitigation features varies significantly by wind intensity. At moderate wind speeds, for example, the predominant source of damage is to roof coverings, so the impact of roof anchorage—which is designed to cope with much stronger winds—is small. As wind speeds increase, and the full roof system becomes stressed, the roof anchorage has a larger impact on the overall damageability of the structure.

Finally, a comprehensive incentive program must assess mitigation features across the full range of geographies being considered, with all levels of hazard being accounted for—not only attributes that are common in selected areas. The most efficient and comprehensive way to accomplish this is to run a notional exposure set comprising “hypothetical” properties with a uniform set of base characteristics (construction type, occupancy, replacement value, etc.) through AIR’s U.S. hurricane model. Individual mitigation features can then be turned on or off incrementally to generate unbiased estimates of their impact on modeled losses.

Supporting Multiplicative Effects of Mitigation Features

When a building has multiple mitigation features, one feature alters the mitigating impact of the others, which complicates the calculation of appropriate credits. For example, if a property were to use hurricane-rated roof shingles instead of standard ones, expected losses would be reduced. Similarly, there would be a reduction expected if the property were to use screws to attach those shingles instead of adhesive. Leveraging screws and hurricane-rated roof shingles will reduce the expected losses more than either feature individually. Although both features reduce damage to the same component of the building, their mitigating impact to the structure overall is not additive.

Because a comprehensive wind mitigation incentive program must assess all reasonable combinations of rating variables (such as territory, deductible, construction, etc.) and mitigation features, the AIR model’s Individual Risk Module (IRM) supports any combination of multiple building features and produces an integrated modification function to the vulnerability function. In other words, the IRM does not operate in a simple “additive” or “multiplicative” fashion; every combination is different. This allows the user to develop a comprehensive set of mitigation credits.