Geocoding is a fundamental part of the property insurance workflow, but its implications and impacts are not always well understood. While most insurers use geocoding at some point in the policy life cycle, many may not geocode at point-of-quote, and those that do may not properly vet their results or realize the full potential use of granular location information in their underwriting, pricing, or analytical workflows. This is the first of a series of articles discussing how the geocoding process works, potential pitfalls and issues to be aware of, the importance of location information in natural catastrophe pricing, and the potential pricing impacts geocoding can have for highly localized perils such as flood.

What is geocoding?

Geocoding is a process that takes information like street addresses or place names and matches them to geographic latitude and longitude coordinates. The geocoding workflow is typically comprised of three phases:

1. Reviewing and cleaning input addresses
2. Running addresses through a locator
3. Reviewing the output and rerunning the process as needed

A breakdown of geocoding steps for property insurers

What does it mean to “clean” an address? Not only can the formatting of input addresses vary, but address information may also be incomplete. For example, the input address can include the unit number, street number, street name, city name, state name, ZIP Code, descriptive information, or any combination of them, and not necessarily in the same order. Therefore, the necessary first step must be reviewing and reformatting the address information as needed so that it is fed to the geocoding application in a standardized, predictable format.

The next step is to geocode the addresses using a geocoding application, which typically employs a feature called a locator. The locator is essentially a database or an algorithmic tool that compares the input address with stored address and geospatial data to find the best match and retrieve the associated coordinates. For a given input address, a geocoding application typically returns the matched address and matched coordinates, along with additional information about the precision and/or quality of the match.

Once addresses have been geocoded, it is the responsibility of the user to review the results and interpret any output information related to the level of accuracy and precision with which the addresses have been matched to geographic coordinates. The match quality can vary on a spectrum from both accurate and precise (i.e., the locator was able to find the full input address in the database and provide coordinates specific to that property) to inaccurate and imprecise (i.e., the locator could only match pieces of the input address to database records and therefore the provided coordinates may represent, for example, an interpolated street address or ZIP Code centroid). Without proper review, low-quality matches could be mistakenly used in downstream analysis.

What are the benefits of geocoding in insurance?

The importance of geocoding to property insurance is twofold: first, it validates and standardizes input addresses, increasing the certainty and accuracy of the input data; secondly, it converts property information to spatial data, which can then be analyzed using geographic information systems (GIS) to examine location-based risk factors. It can be challenging to incorporate geocoding into an insurer’s underwriting process, due to the need to train staff and/or to license new software tools, but the benefits can vastly outweigh the costs.

The ability to match addresses to property locations enhances an insurer’s ability to identify, assess, and price risk at a more granular level compared to traditional models based on county or ZIP Code. By unlocking a property’s location, the use of geocoding and GIS in insurance allows for the development of refined geospatial underwriting rules, division of regions into more credible and homogenous territories,¹ development of dynamic concentration-based underwriting or pricing rules, or identifying property-specific risks from flooding, wildfire, and other natural hazards. The first step to evaluating risk in property insurance is geocoding.

¹ Chamberlain, M. (September 10, 2012). Rating Hurricane Risk in Florida: How Using Geocoding Can Lead to More Accurate Pricing. Retrieved July 18, 2023, from https://www.milliman.com/en/insight/rating-hurricane-risk-in-florida-how-using-geocoding-can-lead-to-more-accurate-pricing.