Ten things a commercial property underwriter needs to knowBy Peter de Freitas | September 26, 2017
Commercial property insurers know there are many important factors to consider when underwriting and rating a property. Verisk Insurance Solutions has developed a Top 10 list based on more than 45 years of experience surveying buildings and sites. The list helps you mitigate hazards, reduce deficiencies, and improve your bottom line. Here’s a brief overview:
The Top 10
10. Maintenance and repair standards
The status of maintenance, repair, and upkeep of a commercial building is an indicator of management’s commitment and the resources available to sustain the building’s condition over time. Understanding maintenance practices is an important part of the risk selection process for a commercial property underwriter.
9. High-risk notifications
A high-risk notification lets you know immediately when a survey uncovers a serious hazard on a property. With our High-Risk Notification Service, a field analyst calls you at once when hazards or conditions are discovered that present immediate potential for loss. Next, the field analyst follows up with a detailed e-mail and photographs to document the hazardous conditions. That allows you to take prompt action, which may include making recommendations to the property owner to eliminate the hazards.
8. Adjacent exposure data and related general liability exposures
Data on adjacent buildings, including exposed walls, hazards, construction, and distance, provides an underwriter with critical information. For example, a property near a high-hazard operation or next to a storage tank with flammable liquids can present serious potential risks. Underwriters should also know about additional exposures, such as:
- local wildfire risk
- possibility for damaging winds and/or flood waters
- the buildings proximity to a flood or earthquake zone
Information on liability exposures can be of assistance to a commercial underwriter’s assessment of risk at properties they’re insuring. Premises exposures—such as storage areas, balconies, stairs, and handrails—can play a significant role in underwriting decisions. You also need accurate information on other premises exposures, such as swimming pools, animals, lighting, fire escapes, and elevators.
7. Loss estimates
Understanding scenarios for loss and their potential for economic loss is a critical assessment every underwriter makes. Verisk offers two definitions of loss estimates: Type 1 is an estimate of the maximum expected loss in a single fire, expressed as a percentage of the building’s value, when critical protection systems are functioning as expected. Type 2 is an estimate of the largest fire loss likely to occur if a key loss-mitigation system, such as automatic sprinkler protection, fails. The two measures can help you understand the extent of the risk and manage it better through hazard and loss analyses. You can assess economic loss to the property and determine the amount of reinsurance you need.
6. Estimated replacement costs
Industry studies show that 75 percent of commercial buildings are underinsured. Insurers need accurate assessments of replacement costs in case of an event. The estimate will improve your ability to charge premiums appropriate to your risk, better quantify exposure, and help you inform your customers on adequate policy limits.
5. Risk improvement recommendations
It’s important to have reliable information on observed building and occupancy hazards and fire protection features for underwriting and pricing. By obtaining a recommendation, you’ll get the information on the building and each occupant. A recommendation should include specific information to identify hazardous conditions, highlight fire protection measures, and suggest modifications for both. The information can help you price coverage more accurately and provide a valuable cost-benefit analysis for suggested improvements.
Determining a fire risk is an underwriting necessity for a property insurance policy. One of the main considerations in making that determination is assigning the proper construction class: What are the materials? What percentage of the structure consists of each? And how much damage will the building sustain when exposed to fire? Properly identifying the construction class can help the underwriter rate the risk more accurately. Verisk defines six primary construction classes for commercial buildings. (FYI: We define nine primary and 49 subclasses for wind.) You can find detailed information on our website.
- Construction Class 1 — Frame
- Construction Class 2 — Joisted Masonry
- Construction Class 3 — Noncombustible
- Construction Class 4 — Masonry Noncombustible
- Construction Class 5 — Modified Fire Resistive
- Construction Class 6 — Fire Resistive
Occupancy data considers the following information about a business being conducted in a building. Verisk and ISO measure information in the following ways:
- numerical ranking of combustibility of contents, which measures their effect on the structure under fire conditions
- numerical ranking of susceptibility of contents, which measures potential damage to materials or merchandise from the effects of fire, smoke, and water
- square footage for each floor level
- sprinkler and extinguisher protection credits
2. Fire protection
There are two broad segments of fire protection, public and private. Our Public Protection Classification (PPC™), for instance, evaluates a community’s public fire protection services, including the fire department, water supply, emergency communications, and community risk reduction programs. In general, we assign a PPC from 1 to 10, with Class 1 representing exemplary protection and Class 10 indicating that the fire suppression program doesn’t meet minimum criteria. Better PPC ratings mean better community fire protection and translate to lower fire losses. For more details, visit the PPC section of our Community Hazard Mitigation website.
Private fire protection systems are fire safeguards at the property and include extinguishers, alarms, and automatic sprinkler systems. Automatic sprinklers are the most reliable and effective fire protection devices available today, provided they operate correctly. Underwriters need to know if they will operate when needed and to make sure risks get full credit for such systems. Our field analysts conduct sprinkler assessments that include the design and intended use of the system, scoring the expected overall effectiveness of the installation on a score of 0 to 100 based on a schedule of deficiency points. A working sprinkler system is critical for insurance rating and prevention of extensive property damage.
1. Common and special hazards
Every underwriter should have a good understanding of both common and special hazards. If you’re underwriting a commercial property, everyone benefits when you give your insured recommendations for reducing hazards and improving protection deficiencies at the property. Knowing the hazards lets you adequately price the risk based on current conditions. Common hazards include deficiencies in electrical components, heating systems, and housekeeping. Special hazards include flammable and combustible liquids, spray-painting operations, commercial cooking, welding, and cutting.
You may have dozens of factors to consider when you’re underwriting a building or occupancy. We’ve focused on ten essential pieces of information—to help you make the right business decisions. For more information on Verisk’s commercial property tools, please visit our Commercial Lines Underwriting website.
Peter de Freitas is vice president-ProMetrix® and Consulting, Verisk Insurance Solutions. You can contact Peter at PDeFreitas@Verisk.com.