Tackling commercial underinsurance: Harnessing the power of data, education and collaboration

5 November 2024 / 5 min read

As the insurance industry confronts rising rates and increasing insolvencies, underinsurance of commercial businesses is a key challenge. Data, education, and collaboration among insurers, brokers and policyholders can help bridge the protection gap.

Amid a period of higher interest rates, stubborn inflation, and increasing insolvencies, commercial insurers find themselves grappling with the growing challenge of underinsurance.

Street-in-city-of-London-financial-district-with-commercial-buildings

80% of commercial properties were underinsured in 2023

These situations—when customers purchase insufficient insurance cover to meet their needs in the event of a claim—can be severe. In fact, some 80% of commercial properties in the UK were underinsured in 2023, according to quantity surveyor Charterfields, with around 40% of those underinsured by more than 50%.

For insurers, underinsurance presents several risks. It harms the customer experience, as policyholders believe themselves to be more protected than they truly are, and it means the pool of premiums is not sufficient against the actual exposures.

As the industry strives to meet the challenge, a multifaceted approach is essential. At the Verisk Insurance Conference 2024, an expert panel explored how data can help insurers tackle underinsurance in commercial underwriting and close the protection gap.

The role of data

The first step in this journey is to empower brokers with data-driven insights and real-world case studies to help their clients understand the risks they face and the benefits of adequate coverage.

Dan Berry, chief underwriting officer at Brown & Brown, highlighted the importance of collaboration between insurers and brokers to help educate clients and support regular assessment of their exposures at risk.

“As an industry, we have a lot of the data we need. If we look at the most impacted parts of the industry for underinsurance, such as commercial property, insurers can help identify potentially inadequate sums insured. This insight can be used to help educate brokers and clients,” Berry said.

While the insurance industry has vast amounts of data at its disposal, third-party data is increasingly key. Hannah Wilde, schemes portfolio manager at Hiscox UK, noted the challenges faced by small- and medium-sized enterprises in reassessing their insurance needs amid frequent changes in business stature, both good and bad.

Wilde said: “There is a huge role for third-party data, helping to highlight business changes that might prompt both insurers and brokers to initiate a conversation with that customer and ensure their policies meet their needs.”

AI and employee upskilling

As data management improves, artificial intelligence (AI) shows real potential to enhance risk assessments and customer education. Ania Collins, AI Development Lead at Zurich, emphasised the need for an insurer or broker to have structured, replicable data to effectively deploy an AI solution.

Collins explained that structured data simplifies preprocessing, allowing AI systems to make accurate predictions by relying on consistent inputs. This reduces the likelihood of errors during decision-making. Conversely, unstructured data—such as free text, images, and video—requires much more complex preprocessing. This includes techniques such as natural language processing and image recognition, which increase the complexity and resources needed for effective deployment.

To ensure a smooth transition to AI-driven processes, insurers and brokers must prioritize employee upskilling, particularly in data management. “It’s not enough for data experts alone to know how to analyse data,” Collins said. “It’s a skill that everyone will need to have now that data is so easily accessible. Simply having data isn’t enough; you need to know how to utilise it.”

Collins advocates building a solid foundation for upskilling underwriters in data management, such as transitioning to cloud technologies, before deploying AI. “AI can help with data acquisition and cleansing, meaning decision-making gets easier,” she added, reinforcing the critical role of good quality data in scaling AI solutions effectively.

The industry’s collective responsibility

Addressing underinsurance isn’t solely insurers’ responsibility; it requires a collective effort that includes brokers and policyholders, too.

A deeper understanding of customer profiles and exposures is essential for delivering tailored advice and coverage—a picture that becomes far clearer when all parties play an active role.

Berry highlighted the difficulty brokers face in conversations about having adequate sums insured when premiums have been increasing significantly due to rate and index linking. However, he emphasised the importance of educating clients about the benefits of having adequate coverage rather than a difficult conversation in the event of a claim.

Without adequate coverage, policyholders might pay slightly less upfront but risk being thousands of pounds out-of-pocket even when suffering a partial loss. "That is a case that needs to be put forward to people more often and more effectively,” he said.

Demystifying insurance

While the risks of underinsurance may be clear to those in the industry, a fundamental challenge remains: helping consumers grasp these risks in the context of their own lives.

For example, many consumers are unaware of how average clauses operate—common clauses in insurance policies that can lead to reduced claim payouts where there is underinsurance. This knowledge gap can lead to misunderstandings and, in turn, costly claims disputes.

Education should be a core component of training for brokers and underwriters to close these knowledge gaps, enabling insurance professionals to guide policyholders effectively. However, underwriters and brokers may benefit from data to support their education efforts as well as regular valuations to encourage sufficient coverage. Simplified policy language can help prevent unintentional underinsurance.

“We have an obligation to make insurance easier for people to understand and navigate,” Wilde said.

“Many don’t intentionally underinsure—they simply don’t understand the complex language.”

A path forward: Collaboration and innovation

The path forward to reducing underinsurance lies not in any single solution but in a combination of efforts: leveraging data to guide decisions, employing AI to enhance risk management, simplifying communication, and collaborating to educate and guide policyholders. These tools and strategies, deployed by stakeholders across the industry, will be essential to close the underinsurance gap.

As the industry faces rising pressures and claims costs, there is an increasing imperative to build a more resilient system—one that ensures businesses have adequate protection when they need it.

Discover Verisk's commercial underwriting solutions.