Archives for July, 2017

Determining Apartment Building Risk

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

That’s why we evaluate the side-effects before trying out a new medication, check online reviews before eating at a restaurant or check a vehicle’s motor history before purchasing a used car. It’s safe to say that knowing certain information pertaining to risk helps 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 when unexpected events occur. Historically, commercial underwriters have approached the problem of assessing risk with a mixture of tactics such as: Examining prior losses, reviewing ownership information, and weighing historical property characteristics in addition to other external risk factors that may play a role, such as local crime rates.

An underwriter may review the property using an internet search for pictures of the property and by obtaining residents’ reviews or complaints about property management. Underwriters may also issue a loss control inspection to review the roof, property maintenance and other potential hazards to assist in the overall property risk assessment.

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

The Current Process

Some insurers will manually review rental rates to determine the quality of the resident risk. However, rental rates do not give a clear picture because they can vary significantly by region and do not precisely assess the residents’ overall risk profile. Reliance on benchmark pricing to determine an overall rate also requires understanding an area’s price points.

Next Steps

Today’s habitational insurance market is similar to the 1980s homeowners’ market when the industry relied on property characteristics and inspections for pricing and underwriting information. The homeowners’ industry learned that one of the most important underwriting factors, the resident owner, was missing from their pricing and underwriting process. As a result, the industry made huge segmentation gains from the creation of insurance scores based on the resident (or owner’s) credit.

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

Determining Insurance Risk

A property usually displays a complex combination of insurance risks. A multi-resident property can include good insurance risks, poor insurance risks, or any mix of the two. Unlike personal credit lines that rely on a single report, the system must account for the overall mix of residents in determining the insurance risk. For example, 90% of the residents in an apartment building could have excellent credit-based insurance scores and 10% could have poor credit-based insurance scores compared to a property where all residents produce average scores. When comparing the risk factors for both, the question becomes – which of these apartments is riskier? A habitational risk score can segment these two different properties and provide a clear assessment of the insurance risk.

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

A habitational risk score is most effective at pricing for what appears to be similar properties on the outside but have wholly different risk factors on the inside.

An Example Of Hidden Risk

While the apartments pictured on the previous page appear to be very similar in age, construction and rental value, they present very different risks based on the resident data. The apartment that scored 840 has the best risk and could qualify for the best rate. If all three apartments were rated about the same, the insurer using the habitational risk score would be able to better price these risks, particularly if the benchmark pricing was being used previously. The insurer not using the habitational risk would write the insurance for the poor insurer scores, resulting in adverse selection.

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

A Comprehensive Picture Of Risk

Commercial residential property insurers have attempted to use loss control inspections as a means to assess risk caused by the behavior of occupants, but inspections are ineffective at measuring the total insurance loss potential. Residential data, flowing from improved technology tools, has a significant impact in the commercial residential market, in line with the impact that insurance scores had on personal lines in an earlier era. This trend allows insurers to more accurately price commercial risk, a substantial win for the industry and the customers they serve.


Source: Property Casualty 360

A New Era In Commercial And Specialty Insurance

When people hear about property and casualty (P&C) insurance, they often think of the highly-marketed personal lines brands like State Farm, Geico, Allstate or Progressive.

The reality is that commercial lines have the edge in P&C dominance. In the U.S. Market, 2015 P&C commercial lines direct written premium (DWP) was $295B, representing 50.6% of the total P&C market. The Insurance Information Institute expects overall personal and commercial exposures to increase in the 4.0% to 4.5% range in 2017, but cautioned that continued soft rates in commercial lines could cause overall P&C premium growth to lag behind economic growth. These numbers reflect to a great extent the range of “traditional” P&C products that have been in the market for years or decades.

But disruption and change is reshaping industries and the businesses within them that use “traditional” P&C products. It is creating both challenges and opportunities. As a challenge, just consider insurers with personal and commercial auto. Pundits are predicting a rapid decline in personal auto premiums and questioning the viability of both personal and commercial auto due to the emergence and adoption of autonomous technologies and driverless vehicles, as well as the increasing use of alternative options (ride-sharing, public transportation, and so on).

Finding alternative growth strategies is “top of mind” for CEOs. Opportunities for alternative growth strategies can be captured from the disruption and change within commercial and specialty insurance. New risks, new markets, new customers, and the demand for new products and services may fill the gaps for those who are prepared.

Majesco‘s new research, A New Age of Insurance: Growth Opportunities for Commercial and Specialty Insurance at a Time of Market Disruption, highlights how changing trends in demographics, customer behaviors, technology, data and market boundaries are creating a dramatic shift from traditional commercial and specialty products to the new, post-digital age products redefining the market of the future.

Growth Opportunities

New technologies, demographics, behaviors, and more, will fuel the growth of new businesses and industries over the next 10 years. Many of these businesses will grow within completely new industry types, setting the stage for new insurance market expansion. Commercial and specialty insurance provides a critical role to these businesses and the economy — protecting them from failure by assuming the risks inherent in the production and delivery of goods and services.

Industry statistics for the “traditional” commercial marketplace don’t yet reflect the potential growth from these new markets that may still need tra­ditional insurance, but also may need new types of insurance. It is a diverse group that embraces new technologies, social shifts, demo­graphic shifts, new economies, and more, focused on narrow segments that will increasingly demand niche, personalized products and services. Many do not fit neatly within pre-defined categories of risk and products for insur­ance, creating opportunities for new commercial insurance products and services.

Small and medium businesses are uniquely at the forefront of this change and at the center of new business creation, business transformation and growth in the economy.

By 2020, more than 60% of small businesses in the US will be owned by Millennials and Gen Xers — two groups that prefer to do as much as possible digitally. Furthermore, their views, behaviors and expectations are different than those of previous generations, and will be influenced by their own personal digital experiences.

The sharing/gig/on-demand economy is an example of the significant digitally-enabled changes in people’s behaviors and expectations that are redefining the nature of work, business models and risk profiles.

The rapid emergence of new technologies and the explosion of data are combining to create a magnified impact. Technology and data are making it easier and more profitable to reach, underwrite and service commercial and specialty market segments. In particular, insurers can narrow and specialize various segments into new niches.  In addition, the combination of technology and data is disrupting other industries, changing existing business models, and creating new businesses and risks that need new types of insurance.

New products can be deployed on demand, and industry boundaries are blurring. Traditional insurance or new forms of insurance may be embedded in the purchase of products and services.

InsurTech is re-shaping this new digital world and disrupting the traditional insurance value chain for commercial and specialty insurance — fostering the creation of new products and new channels. They are already helping small business owners to find and purchase unique, specialty protection for a new era of business.  Just consider InsurTech Startups like Embroker, Next Insurance, Ask Kodiak, CoverWallet, Splice, and others.  Not being left behind, traditional insurers are creating innovative business models for commercial and specialty insurance like Berkshire Hathaway with biBERK for direct to small business owners; Hiscox, which offers SBI products directly from its website; or American Family, which invested in AssureStart, now part of Homesite, a direct writer of SBI.

The Domino Effect

We all likely played with dominoes in our childhood, setting them up in a row and seeing ‘hands on’ how we could orchestrate a chain reaction. Now, as adults, we are seeing and playing with dominoes at a much higher level. The domino effect, or chain reaction between events, is being played out in today’s fast-paced, ever-changing world.  Every business has or will likely be impacted by a domino effect.

What is different in today’s business era, as opposed to even a decade ago, is that disruption in one industry has a much broader ripple effect that disrupts the risk landscape of multiple other industries and creates additional new risks. We are compelled to watch the chains created from inside and outside of insurance. Recognizing that this domino effect occurs is critical to developing appropriate new product plans that align to these shifts.

Just consider the following disrupted industries and then think about the disrupters and their casualties: Taxis and ridesharing (Lyft, Uber), movie rentals (Blockbuster) and streaming video (NetFlix), traditional retail (Sears and Macys) and online retail, enterprise systems (Siebel, Oracle) and cloud platforms (Salesforce and Workday), and book stores (Borders) and Amazon. And consider the continuing impact of Amazon with their announcement of acquiring Whole Foods last week and the significant drop in stock prices for traditional grocers. Many analysts noted that this is a game changer with massive innovative opportunities.

The transportation industry is at the front end of a massive domino-toppling event. A report from RethinkXThe Disruption of Transportation and the Collapse of the Internal-Combustion Vehicle and Oil Industries, notes that by 2030 (within 10 years of regulatory approval of autonomous vehicles (AVs)), 95% of U.S. passenger miles traveled will be served by on-demand autonomous electric vehicles owned by fleets, not individuals, in a new business model called “transport-as-a-service” (TaaS). The TaaS disruption will have enormous implications across the automotive industry, but also many other industries including public transportation, oil, auto repair shops, gas stations, and many others. The result is that not just one industry could be disrupted … many could be affected by just one domino … autonomous vehicles. Auto insurance is in this chain of disruption.

And commercial insurance, because it is used by all businesses to provide risk protection, is also in the chain of all those businesses affected — a decline in number of business, decline in risk products needed, and decline in revenue.  It will decimate traditional business, product and revenue models, while creating new growth opportunities for those bold enough to begin preparing for it today with different, unique risk products.

Transformation Plus Creativity Equals Opportunity

Opportunity in insurance starts with transformation. New technologies will be enablers on the path to innovative ideas. As the new age of insurance unfolds, insurers must recommit to their business transformation journey and avoid falling into an operational trap or resorting to traditional thinking. In this changing insurance market, new competitors don’t play by the traditional rules of the past. Insurers need to be a part of rewriting the rules for the future, because there is less risk when you write the new rules. One of those rules is diversification. Diversification is about building new products, exploring new markets, and taking new risks. The cost of ignoring this can be brutal. Insurers that can see the change and opportunity for commercial and specialty lines will set themselves apart from those that do not.

For a greater in-depth look at the implications of commercial insurance shifts, be sure to download, A New Age of Insurance: Growth Opportunities for Commercial and Specialty Insurance at a Time of Market Disruption.


Source: Property Casualty 360

Three Insurance Coverages You Shouldn’t Overlook

With hurricane season upon us, property managers should sit down with their agents and review each policy. So says Jason Wolf, a shareholder at Koch Parafinczuk Wolf Susen in Fort Lauderdale.

Specifically, he says, property managers and insurance professionals should total the dollar amounts on the main policy and other policies that address windstorm, flood, storm surge and wind-driven rain. caught up with Wolf to get his take on these facets of commercial real estate insurance. When it comes to policies, are flood, storm surge and wind-driven rain the same?

Jason Wolf: No. They are treated differently. The distinctions become important when a property owner or manager files a claim. (Here’s how you can prepare for the next Hurricane Wilma before it hits).

When Hurricane Katrina hit and litigation ensued, a federal appeals court ruled that the flood exclusion in insurance policies applied. That cost owners billions and billions of dollars. By excluding flood damage, owners were hit with astronomical costs in reparation.

Insurers put storm surge, which is water pushed ashore by hurricane winds, into another category. Wind-driven rain isn’t covered unless the property suffers damage that is already covered, which gets to two important points: proper maintenance and impeccable recordkeeping. Why are these coverages so important?

Wolf: An insurer can push back on a claim if there’s evidence that the property wasn’t kept up. For example, if wind-driven rain comes through a building opening that could have been sealed, an adjuster can argue that the damage resulted from inadequate maintenance and shouldn’t be covered. Property owners that skimp on maintenance to cut costs will find that the next hurricane will cost them a lot more than the bill for sealing windows and doors. And the recordkeeping?

Wolf: It’s critical to document improvements and renovations. Many developers and managers don’t know when their roof was last replaced or repaired.

When a claim is filed, the insurance company can say that a roof was in bad shape before the storm and therefore it won’t pay for a new one. Without proof, the insured will have a difficult time collecting the full amount.

Before a named storm makes TV news, property owners and managers should inventory everything, create diagrams, and take lots of video and photographs. To file an effective claim, they must be able to re-create the condition of the property before the hurricane hit.


Source: GlobeSt.

Cyberattacks Seek Industrial Targets

The malicious actors behind recent cyberattacks are increasingly targeting industrial companies, rather than individual users, according to a recent Kapersky Lab analysis.

The Kapersky Lab analysis shows supply chains will be increasingly threatened by cyber risk, as its logistics partners, suppliers and internal operations are threatened by malicious attacks. In fact, if the data suggests a trend, the recent cyberattack is unlikely to be the last roiling global logistics.

Such a pivot presents an increased threat to companies as a hack can affect not just systems and operations, but also human safety.  An analysis of the most recent attack shows at least 50% of the companies attacked last week were either manufacturing or oil and gas companies (which includes A.P. Moller-Maersk for its energy division).

 A look at the disruptions to A.P. Moller-Maersk shows how dependent global trade is on information systems. At the TOC Europe conference, Lars Jensen of cybersecurity firm CyberKeel told attendees he calculated the shipping line would suffer $2.7 million every hour its booking system was shut down. Even aside from lost revenue, which could amount to more than $60 million dollars, the disruption to Maersk also affects other lines with boxes on Maersk vessels, which remain unloaded as the Danish shipper seeks to right itself.

To date, Maersk continues its path to recovery and has only fully reopened 6(of 17) terminals that were affected by the June 27 cyberattack, reports. However, associated terminals and truck drivers are also being impacted by the fallout of the attack, according to the Miami Herald.

Ultimately, Jensen hopes the attack serves as an object lesson for the industry, which he believes is woefully unprepared and has an inherent digital weakness. Building resilience into digital products must occur at the time of construction to be truly effective. Though costly, the method of building in security from the ground up has proven more reliable, according to Jensen.

In the meantime, supply chain managers can add cyberattacks to their growing list of risks capable of disrupting operations.


Source: SupplyChainDIVE