Aligning a small commercial insurance book with reality — and strategy
Small commercial data challenges could leave millions of small businesses with inadequate or misaligned coverage.
While small commercial insurers focus on landing new business and hitting growth targets in a fast-paced market, unknown risks can quietly emerge in their renewal book.
First, the initial underwriting submission data may not have been fully vetted and verified. Then, an evolving business may outgrow or drift from the profile that shaped the original policy written, making the initial data go stale by renewal. Finally, auto-renew criteria may lead to loosened underwriting review for several years. For example, a building supply store may diversify its business to include installing hardwood floors, and obsolete data could miss the new risk until it emerges in the form of a claim.
Small commercial data challenges could leave millions of small businesses with inadequate or misaligned coverage. Subsequently, carriers may be collecting too little premium for the risk. Premium leakage on business owners policies driven by misclassification of risk or missing information on the full scope of insureds’ business is a major driver for adverse selection. These downstream effects could even spill over to reinsurance programs, as an aggregate portfolio can be exposed to more risk than expected.
Capturing the real risk
Aligning an insurer’s portfolio and risk appetite begins with understanding what’s already in the book of business. A small commercial portfolio analysis could uncover new risks, reveal opportunities to true up coverages, and show where rate adjustments may be warranted.
Structured, actionable portfolio can help insurers:
- Find misclassified risks;
- Identify policies that don’t fit with an insurer’s risk appetite; and
- Pinpoint industry-specific hazards all the way to the policy level.
Using technology to analyze a portfolio
Technology that combines robust analytics and automation can be used to help an insurer perform a portfolio analysis.
Using artificial intelligence (AI) and machine-learning, the software can look at a list of customers and analyze public and private data sources, websites, and social media profiles to uncover new risks in the portfolio. An insurer can then use that information to better align its coverage and pricing with its exposures and balance its book of business.
Calling on the right data
To audit a portfolio effectively, the solution needs to be able to draw on a variety of data, including:
Industry-specific risk exposures and hazards: The risks faced by businesses can vary significantly, depending on the industry. To gain an accurate view of a portfolio, it’s critical that each risk is analyzed and placed in the appropriate industry.
For example, many businesses use the North American Industry Classification System (NAICS) to classify businesses. Granular hazard information beyond a generic NAICS code holds important pricing information. A contractor who also offers asbestos removal services or demolition services may have premium-bearing consequences when making underwriting decisions at the point of quote.
Verified business firmographics: Small and medium-sized businesses are constantly changing. Insurers need the latest information on a company’s location, operations, and markets to gain a true understanding of its risk.
For instance, a restaurant that has added alcoholic drinks and dancing at night may have a new risk profile that needs to be considered. A contractor that was primarily painting might face new risks if it takes on plumbing and electrical work.
Site-verified and/or modeled commercial property data: Commercial properties and structures are also evolving regularly. For properties with complex or high levels of risk, that data may need to be collected and verified by an on-site visit. In other cases, the information may come from models fueled by on-site and tax assessor property data. It’s important insurers obtain the most up-to-date property information to align the price with the risk.
Social media intelligence: Social media can be a window into how a business is evolving. With AI, solutions can analyze posts and updates to reveal exposure information that might otherwise be missed.
The benefits of reviewing a sample
In many cases, insurers don’t have the time or desire to review their entire portfolio. That doesn’t mean they can’t reap benefits from auditing a portion of their book.
With just a sample, a book review can identify scores of businesses that may be outside of the company’s underwriting appetite and guidelines. At renewal, the insurer can then either adjust pricing for an outside-of-appetite business to cover the exposure or non-renew the business to eliminate the risk.
It can be the first step in an ongoing journey towards more precise underwriting and improved profitability.
Eric Schmidt (Eric.Schmidt@verisk.com) is product manager, Small Commercial Underwriting, Verisk.
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