The way insurers assess commercial property risks and respond to claims is constantly improving. Many new technologies and data sets not only improve the understanding of risk, but also enable insurers to make more accurate, informed decisions with less effort.
While residential property data is abundant and can provide insurers with all sorts of useful information about building characteristics, rebuild value, exposure to hazards, etc., commercial property is often full of complexities and nuances that make accurate risk assessments much more difficult to carry out.
From a small mom-and-pop shop to a large factory or commercial office space, the insurance requirements for each business can vary greatly. That's why it's important for underwriters to use more advanced datasets and tools to understand not only commercial buildings and their associated hazard exposures, but also the risks associated with business activity, other site addresses, operating information, credit scores, and other financial data. Here are five examples of how commercial real estate data is becoming more sophisticated.
Many insurers are increasingly relying on third-party data to enhance their underwriting decisions.
1. Address-level data
In the insurance industry, a property's ZIP code has long been used to get a rough idea of the number of insurance claims in that particular area, a property's exposure to weather hazards and crime, and other risk factors that can be inferred from the area as a whole.
While there is clear value in using zip code-level data, some underwriters may find the data is not as accurate or relevant as they would like. This is especially true for commercial properties. A particular zip code may contain a high concentration of commercial properties that have little similarity in terms of building type or exposure. Certain properties may be more susceptible to burst pipe claims than others, while another group of properties may be at higher risk of fire.
Address-level data provides both insurers and their customers with a more bespoke feel. Access to address-level data for major insured perils such as flood, theft and fire, as well as individual property details, greatly improves insurers' ability to accurately gauge risk and pricing.
2. Periodically updated rebuild values
Depending on when your insurance policy was taken out, the cost of materials and labor needed to make a claim may have changed significantly. Brexit, the costs of the COVID-19 pandemic, and other inflationary pressures have often increased the prices of goods and services needed to repair or replace property damage or loss.
The impact of these increased costs is that many commercial properties, often insured based on market value, are no longer insured based on their true value and are likely not adequately covered at the time of claim.
Ideally, replacement cost should quantify both the property characteristics and the building components needed to rebuild, taking into account the prices of labor, materials, contractor overhead, and profit. Calculating these costs can be difficult, so many insurers currently rely on external data sources that can provide this information quickly.
3. Building use and occupancy
Whether you are insuring an office building, a warehouse, a gas station, or any type of entertainment facility, understanding the building's original use can help underwriters understand how it was constructed and what materials were used.
An industrial classification (for example, the Standard Industrial Classification) tells the insurer about typical characteristics within a building, such as how many walls there are, how many kitchens there are, how many utility rooms there are, and so on. Office buildings have many interior walls, whereas large warehouses have very few interior walls. Storage warehouses also tend to use lower quality materials and less sophisticated construction methods than office buildings.
Occupancy information is extremely important when underwriting a commercial building as it can indicate the type of activities taking place in the building, the number of people in the building, and the type of contents stored in the building, such as machinery or chemicals.
4. Business Statistics, Management, Finance, Credit Score
When insuring a business, underwriters need to understand not only the building the business is in but also how well the business is run relative to its peers.
Many aspects of a company's management, including credit scores, financial condition, director status, and past adverse events, are indicators of how exposed a company is to commercial liability risk. Failure to understand the true nature of a company and how well it is managed can have significant consequences for a commercial underwriter.
One of the challenges in obtaining this data is that without third-party data, it would take a lot of time and effort to research the businesses associated with the commercial property, their activities, financial condition, management, etc. Thankfully, it is now much easier to obtain this information without the need for an expanded set of underwriting questions.
5. Real-time data at the time of quotation
Time and resource constraints are two of the biggest challenges underwriters face when assessing risk. Insurers are already under immense pressure to provide customers with fast, tailored coverage decisions in a competitive marketplace.
Many insurers are increasingly relying on third-party data to help improve underwriting decisions, speed up the application process, and validate information provided by customers.
When this data is provided in real time and can be pre-populated during the quote process, insurance companies can not only offer more competitive prices, but also handle more customers while providing high-quality service.
When you rely on multiple providers and systems, the process of managing all these third-party data sources can become a bit daunting, a challenge that Verisk solves with its Data Insight Hub.
If you would like to learn more about how Verisk can enhance the tools and data available to commercial real estate underwriters, feel free to contact us.