Commercial Underwriting: Risk Factors That Matter

Understanding the complex landscape requires both foresight into identifying the right risk variables and a modern technology stack.

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Businesses are undergoing unforeseen global shifts, and the commercial underwriting process is more intricate than ever. Understanding the complex commercial landscape requires both foresight into identifying the right risk variables and a modern technology stack to handle data efficiently.

Let’s start with the most influential risk factors in underwriting. 

The Prevailing Challenge in Commercial Underwriting: Fast, Accurate Classification Details

Supporting a profitable commercial insurance product starts with an underwriting process that captures accurate details of the business, including industry-specific information as well as the uniqueness of its operations. There are many factors that go into a business’s operations beyond when it started, what licenses it holds and the services it provides. The size of the business is not just about the revenue, but the number of employees, size of its physical occupancy and the types of products being offered. Smaller businesses might not have the resources to adapt to changes within the marketplace, which can cause them to become riskier by expecting employees to take on additional responsibilities or even broaden their offerings to attract and retain customers. This is why understanding what a business is doing matters more now than ever.

A business’s environment, quality of services and cleanliness also matter in underwriting. Review sites and social media channels can help form a complete picture of what the business is doing beyond how it is marketed by the owners, giving underwriters details that are authentic and current. This customer feedback can shed light on potential causes of loss that may not be evident through traditional channels. However, manually researching these clues for every business in your book is a time-consuming process, and when your underwriting team is already short-staffed, they need immediate insights, not additional homework.

As each industry has its unique types of risks, insurers need to adapt their risk assessment for different sectors. Some businesses offer a wide range of services or have unconventional models. For instance, a Mexican restaurant with a dance floor and a full bar faces different risks than one that does not offer alcoholic beverages. Similarly, a florist shop that has an expanded delivery radius introduces risks that must be considered. 

By leveraging advanced analytics and social listening tools, you can find valuable insights into such anomalies and complex businesses. This will help insurers identify businesses that may be expanding into new services or facing changes in their operations.

See also: The Defining Factor in Underwriting Success

Complex Businesses and Emerging Factors to Consider

In addition to traditional risk variables, there are emerging factors to consider. Businesses now pivot at a lightning pace due to economic conditions and technological advancements. Companies are implementing new technology that can change the dynamics of their operations and potentially open them up to cyber vulnerabilities. 

On top of this, diversification of services is becoming more common, as business owners seek to increase profits and grow their businesses. This introduces challenges of finding the changes when they happen. For example, a plumber who expands into roofing or other construction services presents another layer of complexity – especially if they lack proper training – and that information can be difficult to track down. Discovering these changes at scale requires automation, while using the data in new and renewal business workflows requires data integration to maximize the value of understanding these new operational risks.

Lastly, there has been a shift in risk priorities due to a heightened concern about catastrophes escalated by the impacts of climate change. Intense fires, floods, hurricanes and other natural disasters are a pressing issue at a macro-level that organizations have to navigate, and we’ve seen catastrophe risk take priority over risks such as social inflation. 

Such frequent pivoting profoundly affects underwriting, as traditional methods struggle to keep up. Furthermore, layoffs and staff changes at insurance companies are causing insurers to lose manpower and industry expertise, which can have significant consequences on the underwriting process.

See also: From Risk Transfer to Risk Prevention

Technology’s Role in Addressing Underwriting Factors

A lot of business activity can change during a policy term, leaving insurers without pertinent information for a comprehensive review of the businesses for renewals or new policy underwriting. In a post-COVID world where small businesses must adapt rapidly to survive, underwriters need tools that keep pace with modern businesses and provide the full picture, as the technology they've traditionally relied on no longer does the job. 

It's important to address the challenges in data consistency, as well. Each business, with its unique characteristics, may generate data of varying accuracy and consistency, so it’s imperative to adapt by using analytics tools to standardize, aggregate and cross-reference data from multiple sources. Another critical aspect is data integration. Comprehensive databases are paramount to successful underwriting, as they help insurers unearth hard-to-find information they might not have been aware of otherwise. Tapping into a variety of data sources enhances the understanding of businesses to make more informed decisions regarding coverage. 

With the use of predictive models and comparative analysis, insurers can easily translate this data into custom risk index scores. These scores play a crucial role in conducting a thorough evaluation of the risks associated with those businesses to help underwriters accurately forecast the likelihood of risks becoming issues. By converting complex data into actionable insights, insurers can make more informed decisions and better adapt to the dynamic nature of the business world. 

Streamlining the underwriting process is essential for adapting to a rapidly changing business environment, especially as shrinking underwriting workforces are burdened with the same workloads. With the right technology in place, insurers can garner a comprehensive view of a business by transforming complex data into actionable insights, streamlining the process and making informed decisions to best support the businesses they are underwriting for.

Scot Barton

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Scot Barton

Scot Barton is chief product officer at Carpe Data.

Barton spent the first decade of his career learning technology and its benefits to insurance operation efficiency as a consultant for PwC and IBM. He spent 11 years at Farmers Insurance, including as the head of commercial advanced analytics.

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