GIGO — garbage in, garbage out — is a term computer scientists use to describe how the quality of data input affects the quality of data output. In commercial property insurance, the most important data input in the underwriting process is the value of the property. Without an accurate evaluation, the output can be nothing but inaccurate as well.
For several years, underinsured property has been the scourge of the commercial property insurance market. With inflation running at 7% as of December 2021 — its highest level since June 1982 — the gap between what a property is insured for and the cost to rebuild it could grow significantly in 2022.
"The methodology underwriters use to establish replacement cost is decades old," said James Rozzi, area executive vice president, Risk Placement Services. "For example, the assessment tools have not kept up with rising labor costs. This discrepancy can add up quickly, even during periods of relatively low inflation. The assessment tools also don't take into account statutory changes that could affect replacement costs when code upgrades are triggered."
With rising commercial property values predicted for 2022, this trend will continue, even if inflation does moderate as many predict. Underwriters will increasingly ask for justification, such as an appraisal, for properties where values have remained static for several years.
The Data that Matters
As underwriters continue to embrace technology, artificial intelligence data — particularly third-party data — is playing a larger role than ever before in evaluating risks and making pricing decisions. Satellite and drone imagery, public records and natural hazard data are just a few of the data sets carriers frequently employ in their underwriting decisions.
The use of artificial intelligence and external data hasn't turned out to be the magic bullet that many believed it would be, as evidenced by many excess and surplus (E&S) commercial property insurers struggling to be profitable. The more unpredictable losses are, the less useful this data becomes.
Information that is specific to an insured may prove to be the path to better underwriting decisions. But relevancy is key.
Useful information includes how often a roof is inspected, maintenance protocols and year-over-year capital expenditures on maintenance and loss control.
The Impact of Late Reporting
Late claim reporting has an impact on the accuracy of underwriting process as well. Late reporting is particularly problematic when a claim is filed after a policy has been renewed, as the new rates won't truly reflect the insured's loss history.
Late reporting often occurs when there's property damage that the insured hasn't yet discovered — often roof damage from hail — or doesn't realize is covered by their commercial property insurance. When they find out it's a covered loss, they file a claim.
In another common late-reporting scenario, insureds don't file a claim because they think that the repair costs will be less than their deductible. But then they learn the repair is more costly than anticipated and exceeds the deductible. This scenario often happens when the cost of labor and materials is rising rapidly. In this case, the claim is filed weeks or even months after the property damage occurred.
Learn more about the underwriting challenges for commercial property insurance in the 2022 U.S. Property Market Outlook.
