Commercial property underwriting embraces new tools and players through automation

Have you seen a similar email lately? If you're a commercial property underwriter, the chances are high. And you're certainly not alone. New competition is entering an already heated marketplace as carriers look to diversify their risk portfolio and hedge against other tepid-performing revenue streams. The increased competition has pushed leading carriers to up their investments in underwriting technology and to revisit and reimagine strategies and resources. 

Recent reporting from ISO's Market Watch indicates that commercial lines property premiums have increased every month since May 2011. This pricing trend has attracted new carriers to the arena looking to develop new product offerings while existing players set their sights on expanding existing portfolios. Recent catastrophe losses and tepid investment returns have added additional incentives to grow. III reports the commercial property market experienced 8.7 and a record 8.9 combined ratio points from catastrophe losses in 2011 and 2012, respectively. During the same period, insurance return on equity (ROE) hovered around 5 percent, performing well below other financial industries. Despite such factors, policyholder surplus is at record highs, pushing carriers to look for ways to grow inorganically and diversify risk portfolios.

Not for the Faint of Heart (or Wallet)

Commercial property underwriting presents unmatched complexity, unlike its more homogeneous cousins, personal property and auto coverage. We're not likely to see Walmart marketing multiperil coverage on a stand-alone restaurant anytime soon. And with complexity comes cost. A recent report from Strategy Meets Action (SMA) indicates that 85% of commercial property respondents plan on increasing their data and analytics expenditure in the coming 18 months. Additionally, more than 66% of companies have apportioned 10% or more of their IT budget specifically for underwriting purposes, with 20% of companies dedicating more than 30%. It's clear that the industry is betting its hand on success via data and analytics.

Those carriers leading the charge have become early adopters of automated decision support (ADS) strategies. The days of a policy application sitting idle on the underwriter's desk (or in their inbox) have passed. Today, "speed to market" is the name of the game.  But only recently have advancements in computing power and process development allowed carriers to integrate valuable data resources and sophisticated analytics down to the point of sale.

The insurance industry is arguably the earliest adopter of big data concepts and practices. Underwriters are realizing even greater rating accuracy through the use of third-party licensed data, with information on crime, structural integrity, catastrophic risk, and building code grading (to name a few), which helps build more robust rating structures. Industry innovators have already developed and actively integrated web-based servicing and application programming interface (API) calls to populate and validate risk information for policy rating on the fly. A recent ISO report noted 91% of carriers licensing external data, ranging from credit scoring to geo-demographics to telematics. With ADS, underwriters are no longer bogged down with tedious data gathering responsibilities. Instead, they're able to populate and, just as important, validate multiple risk data fields instantly. Such capabilities significantly increase the speed, volume, and consistency of reviewed applications.  

This is especially critical for those insurers operating through independent agents. Carriers can no longer rely solely on relationships to build and maintain business. Ease of doing business was identified as a critical aspect of the business model by more than 995 of polled independent agencies. ADS strategies enable carriers to produce quick responses and turnaround times. Independent agents don't mind a declination—as long as it's a timely declination.

Quality through Targeted Resources

ADS practitioners benefit in not only speed and quantity but also quality. These systems provide clear, consistent, and efficient processing of policy submissions while freeing up underwriters to focus on those exposures that require the most attention—where risk and opportunity are the greatest. Via API and web-calls, underwriters are utilizing additional data points in the binding process to hone in on the most accurate rating of properties. The increased rating segmentation is extremely advantageous when pricing complex risks with precision and confidence. Risk segmentation increases competitive standing through reduced premium overage for better pricing and marketability while limiting uncertainty and potential premium leakage.

With confidence in pricing, management can set clearly defined goals and guidelines to target and expand exposure portfolios. Additionally, ADS systems enable managers to take performance snap-shots and make strategy adjustments on the fly. Such feedback and reporting features are critical for modern business operations.

The End of the Underwriter?

Increased computing speed and power, along with improved user interfaces, have streamlined the underwriting process. However, said tools do not compromise desk underwriters; quite the opposite, in fact. Commercial property risk is highly unique and complex in nature. Experienced and seasoned underwriters are more valuable today than ever. By shifting data responsibilities to ADS systems, underwriters can focus on exercising specific risk insight. Carriers are looking more and more to utilize the talent and skills of experienced underwriters not only to tackle operational responsibilities but also to train new talent as the industry faces an aging workforce nearing retirement. Defining strategies to support talent retention and knowledge sharing is essential to succeed.

Commercial property carriers today are seeing new faces and renewed vigor on the playing field. And those players aren't just looking to participate — they want to succeed. Companies are investing and actively integrating sophisticated analytics, automating data analysis, and better leveraging seasoned underwriting talent. The best-armed carriers are able to create separation from opponents via competitive pricing and more precise risk segmentation, building strong agency relationships and winning the speed-to-market race.