Top 4 Commercial Underwriting Blind Spots
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.
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 36 percent of the total incurred losses.
- Claims between $10,000 and $100,000 accounted to 13 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.
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