Sarah Goddard takes a look at the work of the Insurance Services Office.

Data is the lifeblood of the insurance industry. It may be a truism, but the better the data, the more likely that underwriting faux pas can be avoided - depending upon the quality of the underwriter, of course.

The US re/insurance industry is in the unique position of having access to what is probably the most comprehensive source of risk data in the world - the Insurance Services Office (ISO). With a database that can hold the Library of Congress five times over, and more than seven billion transactions stored within its system, ISO has an enviable data reservoir, and actively uses it to develop products aimed at improving the underwriting process.

ISO heritage
ISO's roots can be mapped back for more than a century, according to ISO president and CEO, Frank Coyne. "ISO traces its beginnings to a rating bureau system for property which began in the mid 1800s. Through the years, it grew up across the country and expanded to other lines of business, for example, auto." ISO itself came into being in 1971, when various rating bureaus across the US came together to form a not-for-profit organisation. The rationale behind the merger was efficiency, explained Mr Coyne. "There were a lot of bureaus doing the same thing over the country," he said. In addition, the merger enabled a standardisation of processes across different states, again improving efficiency. Previously, he said, it had been "very difficult to manage a national company in that fashion."

ISO's original remit - as that of its predecessor bureaus - was twofold. Firstly, it collected statistical data and set reporting standards, significantly improving actuarial analysis and future loss projection. "Essentially, the organisation was advising the insurance industry on the cost of products," explained Mr Coyne, at the same time reporting certain data to state regulators. "ISO was the largest statistical agency," he said. Secondly, by providing policy forms and endorsements, ISO offered "tremendous economies of scale... It is almost hard to imagine the cost to the industry, if every company had to do what we do," he said. By harvesting the stats, ISO "makes it easier for regulators to monitor the adequacy of insurers' rates."

Mr Coyne identified several other benefits which spring from ISO's operations:

  • consumers are able to compare different insurers' offerings through the policy forms and endorsements;

  • the standard coverage is "useful," he said;

  • the data helps primary insurers share risks with reinsurers;

  • standard coverage helps reduce litigation; and

  • the loss cost analysis and policy forms enable companies to enter the insurance sector, and existing companies to extend their operations into new lines.

    In addition, companies looking at extending their operations into new states or other facets of strategic planning can be helped by ISO's information, he said.

    Landmark event
    The next milestone in ISO's development took place in 1997, when it converted from a not-for-profit organisation to a for profit business, partly in response to a complaint filed by state attorney generals that alleged that insurers had colluded on providing general liability insurance. That case, said Mr Coyne, "encouraged the industry to move away from an organisation controlled by the industry, to make it independent." From the beginning of the new ISO era, insurers were given the option to become shareholders, but were no longer allowed to control the organisation. ISO is now headed by a twelve member board of directors, three of whom come from insurance companies and rotate regularly, and the balance of whom are independent directors, representing all ISO's shareholders.

    The change in ISO's ownership has been mirrored by a change in its offerings. "The company has evolved from its core products of advisory loss cost and product forms, to a whole set of products," said Mr Coyne. Now, the ISO portfolio is wide-ranging, particularly following the acquisition trail it has been blazing since 1997. Following the change in ownership, ISO has been actively expanding. In May 1997, it announced its acquisition of American Insurance Services Group Inc (AISG), which comprised:

  • two primary databases, an integrated all claims database, and the Automated Property Loss Underwriting System, used in risk evaluation;

  • an engineering and safety service, providing loss control information;

  • the premium audit advisory service, providing information and training for insurers in using detailed customer audits; and

  • Property Claims Service (PCS), an organisation tracking and reporting catastrophes, which also provides estimates of insurance losses from catastrophes.

    This latter function, PCS, is one of the best-known loss advisory services in the world, and its initial estimates for US catastrophe losses are almost unerringly close to the final insured loss figure. This is a consequence of the huge amount of data held within ISO, said Mr Coyne.

    Hot on the heels of the AISG acquisition, ISO started working with the National Insurance Crime Bureau (NICB) to build an all-claims database for the property/casualty insurance industry. At the time, it was estimated that insurance fraud was costing the US industry around $20bn per year, and it was foreseen that the consolidated database would be used by the NICB, the insurance industry and by law enforcement agencies both to identify fraudulent claims and speed up valid claims payment.

    Other acquisitions following the conversion included Claims Outcome Advisor, a bodily injury claims management system, bought from Computer Science Corp and Mynd Corp in 2000, and Applied Insurance Research (AIR) two years later. This latter acquisition pushed ISO's international reach; AIR assesses and models catastrophic risk exposures around the world. At the time, Mr Coyne commented, "I cannot overstate the value this acquisition brings to the property/casualty industry and many other businesses that need to anticipate and prepare for natural hazards and man-made catastrophes... AIR stands out because its topflight people make it extremely successful in a business of growing complexity and importance."

    AIR was, in fact, the first of the cat risk modeling companies, and remains a leader in its field. After the acquisition, AIR founder Karen Clarke remained as president and CEO of the modeling company, which continued as a stand-alone operation, with offices in Boston, London, San Francisco and Hyderabad in India. In part, the aggregation of losses across numerous lines of business had triggered the acquisition, said Mr Coyne, adding "AIR's widely recognised expertise in risk assessment and risk management technology and ISO's strength in the property/casualty market, its resources and extensive databases are an ideal combination."

    Commenting at the announcement of the acquisition, Ms Clarke said: "Property/casualty insurers, reinsurers, risk managers and financial services entities have come to rely on catastrophe modeling technology to manage extreme event risk due to natural hazards. September 11 made it painfully clear that lines of business other than commercial and personal property need to be managed with the same sophisticated, scientific technology that companies now use for property business."

    These acquisitions and others are indicative of the new direction ISO has taken. There are, explained Mr Coyne, three areas on which ISO is now focusing; data, analytics and support. Before 1997, ISO was essentially an industry cost centre, which responded to industry demands. "We didn't provide a value proposition," he said. Following the "cultural revolution" of transforming into a for profit company, the focus changed to maximising efficiencies and providing strong value. "This led to the mindset of developing products in advance of when the customer needs them," he said. To this end, ISO has "tremendous intellectual capital," said Mr Coyne, including more than 125 CPCUs, about 50 Fellows or Associates of the Actuarial Society, and about the same number of PhDs. In addition, there is a strong emphasis on data professionals, as well as economists, weather experts, seismologists and the like. That level of intellectual capital is key to the ISO offering. As Mr Coyne explained, "it is not really the data that makes the difference, but what we do with that data."

    ISO's remit, he said, is to analyse where the opportunities are for its clients, looking at the whole value chain for the property/casualty industry. "Our products are based off data, analytics and decision support we can provide," said Mr Coyne. "We look at that and come up with the products."

    Extensive menu
    The ISO menu is extensive and growing all the time. As well as the core services, ISO is constantly looking at developing new products, and entering new strategic alliances. Last year's agreement with LexisNexis to distribute ISO policy forms to its clients, which are mainly law firms and therefore non-insurance clients, marked the first time ISO had extended its offerings beyond the traditional insurance market. "Our alliance with ISO will result in a tremendous time saving for customers by enabling them to link to key insurance forms directly from the LexisNexis service," commented Leigh Sempeles, a vice presidect at LexisNexis, at the time. Previously, lawyers had found it difficult to get ISO policy forms, and the new distribution has opened up the potential ISO client base. In recent months, it has been focusing more on the corporate risk management community, as well as other markets such as mortgage lenders. In addition, it has worked with the Federal Emergency Management Agency (FEMA) on floodplain exposures, conducted fieldwork for Housing and Urban Development, and worked with Homeland Security. In addition, its joint venture with Intel Corp last year has led to ISO holding the largest criminal records database in US, as well as the largest claims database in the industry, which Mr Coyne said, receives claims data from more than 90% of the industry on a daily basis.

    ISO's continued trusted relationship with the industry is a factor of its previous history as an intermediary within the property/casualty industry. "Such a high degree of trust has been earned over the decades," said Mr Coyne. "We would not release individual company data to anyone, and would resist a sub poena. No one could buy the ISO information." And that makes the business invaluable, if not priceless, to the industry as a whole.

    By Sarah Goddard
    Sarah Goddard is the editor of Global Reinsurance.