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Risk Insider: Ernie Feirer

Top 4 Commercial Underwriting Blind Spots

By: | May 14, 2018 • 4 min read
Ernie Feirer, CPCU, is Vice President and General Manager, Commercial Insurance, at LexisNexis Risk Solutions, where he is responsible for developing a suite of solutions for the commercial insurance market. He can be reached at [email protected]

Prior losses can be a strong indicator of future risk. Yet many commercial carriers lack access to prior loss history, making them vulnerable to “blind spots” that can negatively impact the profitability of their books of business. They believe gathering and analyzing the data can be simply too costly and cumbersome.

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However, research shows that 78 percent of commercial carriers feel that automated loss runs would go a long way toward solving this problem[i]. Yet few carriers currently employ some kind automated loss run solution to address this deficit.

The disconnect is surprising considering proven technology is now available that makes pricing risk easier than ever. Maybe it’s because they are skeptical, or perhaps simply unaware of the advances in automated loss run solutions.

Understanding the underwriting blind spots that mask risks might help commercial carriers better understand the intrinsic value of the technology. The following are the top four blind spots that can be illuminated with automated loss runs.

These findings are based on the results of separate tests with seven commercial carriers in which searches uncovered prior losses on risks which the carriers had previously bound.

Blind Spot #1: Moving bad risks across the carrier’s own companies

Many carriers have multiple underwriting companies with separate policy processing systems that don’t talk to each other. Consequently, bad risks often “boomerang” undetected between the carrier’s different underwriting companies. The test revealed multiple instances where an insured had a poor loss history with one of the underwriting companies, then moved to a second underwriting company within the carrier’s group as a claim-free risk. Without easy-to-access visibility in previous losses, the “new” insured looked clean.

These “boomerang” policies can create expensive losses. In one case, 64 percent of a carrier’s total prior losses (costing $57 million) were from customers who left the carrier and later returned, undetected. Automated loss runs can shed light on policies as they move across the carrier’s underwriting companies.

Blind Spot #2: Assuming “clean” risks

Carriers may assume all of the policies in their book of business are “clean,” meaning free of prior losses. This may be due partly to the fact that many carriers do not believe there is an efficient and reliable way to actually verify whether or not a policy has a prior loss.

Automated loss runs can unearth prior losses simply and accurately, leading to better-informed underwriting. To validate this premise, analysts ran automated loss runs on 5,800 supposedly clean policies belonging to a single carrier. It revealed that 15 percent of the carrier’s policies did indeed have prior losses.

Blind Spot #3: Missing risks with large loss history

Effective commercial underwriting is able to identify policies with risks that will generate future losses and, more importantly, avoid those risks that are destined to create large losses. Tests performed on automated loss runs of seven commercial carriers revealed that:

  • Small claims less than $10,000 accounted for 85 percent of the total claim count, and 20 percent of the total incurred losses.
  • Claims between $10,000 and $100,000 accounted to 14 percent of total claim count, and 36 percent of total incurred losses.
  • Claims over $100,000 accounted for just 1 percent of total claim count, but a whopping 44 percent (worth $180 million) of total incurred losses.
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Clearly, finding those potential large loss risks through automated loss runs can make commercial underwriting much more effective.

Blind Spot #4: Searching only on business claims history

Carriers typically perform loss runs only on searches of businesses’ loss histories. The approach used to be effective. However, the tests found that adding a driver claims history search to the mix creates a much more comprehensive view of potential risk.

Automated loss runs can unearth prior losses simply and accurately, leading to better-informed underwriting

Multiple automated loss run tests identified $123 million in commercial auto incurred losses when researchers searched for business losses. They unearthed an additional $25 million when they searched on individual commercial driver claims history. This incremental $25 million represents a 17 percent lift in new claims found by adding a driver search to the loss run analysis.

The value of automated loss runs

These research findings underscore the important insights automated loss runs provide when they bring to light previously unseen blind spots in a carrier’s book of business. With this fresh view of data, carriers’ visibility improves, leading to better underwriting decisions, less risk exposure and a better bottom line.

For more information on the test results, download the Blind Spots Case Study.

[i] LexisNexis Risk Solutions proprietary data

More from Risk & Insurance

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The Profession

Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

R&I: How did you come to work in risk management?

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

R&I: What is the risk management community doing right?

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I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

R&I: What could the risk management community be doing a better job of?

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

R&I: What was the best location and year for the RIMS conference and why?

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

R&I: What emerging commercial risk most concerns you?

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

R&I: What insurance carrier do you have the highest opinion of?

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Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

R&I: What have you accomplished that you are proudest of?

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

R&I: What is your favorite book or movie?

Favorite movie is definitely “Good Will Hunting.”

R&I: What’s the best restaurant you’ve ever eaten at?

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

R&I: What is the most unusual/interesting place you have ever visited?

The Grand Canyon. It is just so vast. A close second is Stonehenge.

R&I: What is the riskiest activity you ever engaged in?

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A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

R&I: If the world has a modern hero, who is it and why?

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

R&I: What about this work do you find the most fulfilling or rewarding?

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

R&I: What do your friends and family think you do?

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]