Ideally we all would like to know the amount of risk involvedbefore making a decision.

That's why we evaluate the side-effects before trying out a newmedication, check online reviews before eating at a restaurant orcheck a vehicle's motor history before purchasing a used car. It'ssafe to say that knowing certain information pertaining to riskhelps us to understand what we're really getting ourselves into,especially as it pertains to investing in rental property.

Knowing the true risk of a rental property reduces losses even whenunexpected events occur. Historically, commercial underwriters haveapproached the problem of assessing risk with a mixture of tacticssuch as: Examining prior losses, reviewing ownership information,and weighing historical property characteristics in addition toother external risk factors that may play a role, such as localcrime rates.

An underwriter may review the property using an internet searchfor pictures of the property and by obtaining residents' reviews orcomplaints about property management. Underwriters may also issue aloss control inspection to review the roof, property maintenance and other potentialhazards to assist in the overall property risk assessment.

However, without incorporating resident data into theunderwriting process, it's hard to paint a comprehensive picture.That said, insurers can gain valuable insight to assess the riskfor every property by using predictive analytics. Here are sometips to consider during the underwriting process.

The current process

Some insurers will manually review rental rates to determine thequality of the resident risk. However, rental rates do not give aclear picture because they can vary significantly by region and donot precisely assess the residents' overall risk profile. Relianceon benchmark pricing to determine an overall rate also requiresunderstanding an area's price points.

Next steps

Today's habitational insurance market is similar to the 1980shomeowners' market when the industry relied on propertycharacteristics and inspections for pricing and underwritinginformation. The homeowners' industry learned that one of the mostimportant underwriting factors, the resident owner, was missingfrom their pricing and underwriting process. As a result, theindustry made huge segmentation gains from the creation ofinsurance scores based on the resident (or owner's) credit.

New technology and real-time resident data can help commercialresidential insurers aggregate information such as the occupants'ages, the age distribution for the entire property and the averageoccupant tenure. Then, a tenure distribution can be performed toidentify residents at a given address, enabling commercialunderwriters to obtain a single aggregated risk profile of theresidents. Now the insurer has the entire picture, which includes arisk score, average age and tenure to weigh into the model.

Related: Protecting clients who participate in the sharingeconomy

Residents offer different levels of risk to a property.(Photo: Shutterstock)

Determining insurance risk

A property usually displays a complex combination of insurancerisks. A multi-resident property can include good insurance risks,poor insurance risks, or any mix of the two. Unlike personal creditlines that rely on a single report, the system must account for theoverall mix of residents in determining the insurance risk. Forexample, 90% of the residents in an apartment building could haveexcellent credit-based insurance scores and 10% could have poorcredit-based insurance scores compared to a property where allresidents produce average scores. When comparing the risk factorsfor both, the question becomes – which of these apartments isriskier? A habitational risk score can segment these two differentproperties and provide a clear assessment of the insurance risk.

Based upon an internal analysis, policies scoring in theriskiest 10% score group have loss ratios approximately 50% higherthan an average loss ratio, and they are two to three times higherthan policies scoring in the best 10% score segment. The loss ratioresults will vary by region and carrier depending on their overallrate adequacy and loss peril mix.

A habitational risk score is most effective at pricing for whatappears to be similar properties on the outside but have whollydifferent risk factors on the inside.

An example of hidden risk

While the apartments pictured on the previous page appear to bevery similar in age, construction and rental value, they presentvery different risks based on the resident data. The apartment thatscored 840 has the best risk and could qualify for the best rate.If all three apartments were rated about the same, the insurerusing the habitational risk score would be able to better pricethese risks, particularly if the benchmark pricing was being usedpreviously. The insurer not using the habitational risk would writethe insurance for the poor insurer scores, resulting in adverseselection.

How often do scores change? For renewal scores, three in fourproperties do not change radically year over year. The propertiesthat are more likely to be subject to changes in scores aregenerally smaller properties.

A comprehensive picture of risk

Commercial residential property insurers have attempted to useloss control inspections as a means to assess risk caused by thebehavior of occupants, but inspections are ineffective at measuringthe total insurance loss potential. Residential data, flowing fromimproved technology tools, has a significant impact in thecommercial residential market, in line with the impact thatinsurance scores had on personal lines in an earlier era. Thistrend allows insurers to more accurately price commercial risk, asubstantial win for the industry and the customers they serve.

Anthony Sullins ([email protected]) is a director forTransUnion Insurance with approximately 20 years of experience inthe insurance industry. He is responsible for designingTransUnion's commercial insurance products and focuses ondeveloping new innovative solutions to meet the needs of thecommercial insurance industry.

Related: The top 10 cities people are movinginto