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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

More from Risk & Insurance

High Net Worth

Your High Net Worth Client Wants to Live in the Danger Zone? Here’s What Your Resiliency Plan Should Look Like.

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]