Introduction:
After years of decreasing crime rates, recent years brought a surge in crime rates within the United States’ main urban centers, igniting a complex web of challenges, with repercussions reaching far beyond the realms of law enforcement and public safety. FBI research is estimating the total losses caused by “Property crimes” (burglary, larceny-theft, motor vehicle theft excluding arson) in the US at $17.5B. As we delve into the multifaceted impacts of the phenomena, it’s crucial to explore the reasons behind the rising crime rates. Factors such as economic inequality, social unrest, and demographic shifts contribute to the intricate tapestry of crime in general and urban crime in particular. Understanding these drivers is pivotal as we examine how this surge affects the Property and Casualty (P&C) insurance landscape and even more importantly, what measures should be taken to minimize its impact on the industry.
Importance of urban landscape to the economy:
The urban landscape is the beating heart of the American economy, serving as hubs for commerce, innovation, and cultural exchange. As 80% of the US population currently live in these urban centers, they not only house thriving businesses but also foster diverse communities, contributing significantly to the nation’s economic growth. Therefore, an uptick in crime rates, especially when happening across crime categories (Property crime, Violent crime, etc.) poses a substantial threat to the economic vitality of these urban areas. As crime rates rise, real estate prices are impacted, businesses may face increased operational risks, and consequently demographic patterns change are inevitable, hampering overall economic prosperity.
Challenges for P&C insurers:
Within the dynamic urban environment, P&C insurers find themselves at the forefront of adapting to the evolving risk landscape. As most insured entities (Houses, Vehicles, Businesses and even people) spend most of their time in an urban setting, most insurance exposure is highly impacted by changes in our urban fabric and hence the surge in crime translates into a spike in insurance claims, prompting insurers to reassess their underwriting strategies. This not only influences the cost of coverage but also raises questions around insurability for businesses and residents in ultra high crime areas. Crime represents a set of incidents that are impacting various insurance perils, such as:
- Theft [Incidents such as: property theft, Auto theft and Cargo theft].
- Vandalism and malicious mischief.
- Fire [Arson incidents].
- Bodily injury [Incidents such as: Homicides, Assaults, Robberies, Pass-by shootings, etc.].
This wide array of different incidents are impacting most P&C products, both personal (Auto and Homeowners) and commercial and are widely impacting the industry.
Mitigating risk through novel data sources & advanced analytics:
In response to the challenges posed by rising crime rates, insurers are not only leveraging traditional data sources but are also exploring innovative ways to access new, untapped data streams. The utilization of predictive modeling and data analytics has expanded far beyond conventional datasets, incorporating a diverse range of data points and analytics techniques to provide a comprehensive understanding of the evolving urban risk landscape.
In the case of crime prediction, one such example for a high impact data stream is geospatial urban data, obtained through multiple devices (Satellite/aerial imagery, IoT devices and other data collection methods), offers a far more granular view of urban areas, helping insurers pinpoint high-risk zones with unprecedented accuracy.
One of the main sources for valuable, geo-spatial urban data that has shown significant impact is local gov’ts data. Due to the governmental structure in the US, local authorities hold a wide array of services they provide and as a by-product a lot of unique data assets that are generated to support these services (Law enforcement, Fire fighting, Inspections activity, Transportation and many more). These unique points of information hold unprecedented ability to refine the resolution through which carriers understand, assess, price and underwrite many associated risks.
Searching for non-traditional data sources extends to partnerships either with community organizations and technology companies specializing in crime prediction algorithms. By incorporating cutting-edge AI technologies, such as machine learning, GenAI, AI agents and GNNs, insurers can harness the power of real-time data analysis to identify patterns and trends, allowing for high personalization of the risk assessment process and tailoring the insurance offering to the needs of each policyholder, both from a coverage and pricing standpoints.
The exploration and utilization of new and untapped data sources of coupled with incorporating advanced analytics techniques, provides P&C insurers with an unprecedented opportunity to stay ahead of the curve, understand risks before they emerge, mitigate and prevent them from happening and sustainably grow their market share while aligning their interest with their policyholders. As technology continues to advance, the ability to integrate diverse datasets will empower P&C insurers to stay ahead of emerging risks, maintain profitable loss ratios and improve their customers’ experience. This granular approach to risk assessment combined with a dynamic point of view not only enhances the industry’s ability to navigate the complexities of urban crime but also underscores the importance of staying adaptive in the face of evolving risk challenges, whether or not they are urban or crime related.
Conclusion:
The surge in crime rates across the main US urban centers presents a multifaceted challenge for P&C insurers. As they grapple with spiking claims and the need to reassess their risk models, insurers are embracing advanced analytics, novel data sources and new technologies to navigate this complex and ever-changing landscape. Insurance is a low-margin business model that is highly skewed by individual events. As only 5% of policies would file a claim during their policy’s term and only 5% of them are “ultra-severe” claims – The 0.25% riskiest policies () are responsible for ~30% of the loss. Therefore, the implications of this new paradigm shift in insurance that embraces new data sources to personalize the insurance offering on the policy’s level, extend far beyond crime-related perils, it’s fundamentally impacting the industry’s bottom line results.
Additional references:
- Cohen, M.A. (2020). The Costs of Crime and Justice (2nd ed.). Routledge.
- https://www.iii.org/sites/default/files/docs/pdf/insurance_factbook_2021.pdf.
