Using a Geographic Information System to Identify Territory Boundaries

The location of a risk is an important rating variable in most lines of insurance. The aggregate loss experience of similarly located risks is needed in order to determine an appropriate rate for a particular area. A geographic information system (GIS) can be used to estimate the geographic component of insurance risk at any location. Exposures and losses at nearby locations can be aggregated by a GIS without being constrained by predetermined boundaries. After geographic risk has been estimated for each location, GIS can draw a topographic risk map for an entire state. Risk terraces, created by rounding off the risk estimates to several discrete values, can be shaded according to relative risk, like elevation on a standard topographic map. New territory boundaries could be drawn along the boundaries of the risk terraces. When contrasted with the results of traditional territory rating, our new methodology creates a more detailed and representative picture of geographic risk.