When assessing a commercial property’s construction, key attributes underwriters focus on include construction class, building area (square footage), and year built.
But obtaining accurate information on each attribute can be a major challenge. Imprecise data can hurt both insurers and policyholders. While direct written premiums for commercial property total $55 billion, industry studies have found 75 percent of commercial buildings are underinsured.
This focuses on what kind of material the building is constructed from, in order to predict how a building will perform in a fire. Structures made of combustible materials such as wood are rated differently, for example, from those made primarily of brick or concrete.
Assigning a building to the right class is crucial, given that it implicates exposure, potential of risk, and pricing. Such assignments can be difficult to nail down. A Verisk analysis found commercial properties are assigned the wrong construction class nearly one-third of the time and misclassified 37 percent of the time for fire protection purposes, resulting in $4.5 billion in premium leakage that also leaves insurers vulnerable to unforeseen risk (read more about misclassification).1
The larger the building, the less likely it is to be destroyed in a noncatastrophic event such as a fire.
Some inspection companies might take information from public records, which may enumerate usable area and not the total square footage to be insured. Discrepancies can also arise with mezzanines. Sometimes they are counted in square feet or counted as floors by inspectors. Other times, they may be omitted. The same scenario can occur for basements.
Here are some other situations that can lead to square footage being miscalculated:
- Accuracy of building area calculated using aerial imagery can be challenging and is a function of the resolution of the image and the program used to interpret the measurements, as well as the skill of the analyst.
- Measurements can be affected by lack of access to all four sides of a structure, such as row buildings in a city.
- Buildings with large atriums can make it difficult to develop accurate area measurements.
Insurers also look at a building’s age. This can provide insight into the level of building code that was in force at the time of construction. As an example, the International Building Code, which is prevalent in many areas of the country, made major changes to seismic requirements in its 1992 Edition. Absent a retrofit, an insurer would likely treat differently any structure built before that code’s adoption.
The age of a building can also provide insight into issues related to its major systems’ infrastructure when detailed specifics aren’t readily available. Considerations include:
- Electrical systems, particularly the age and type of wiring
- Plumbing, especially the age and type of piping material used
- Heating, ventilation and air conditioning control systems, primarily their age and type
- Age, cover material, and condition of the roof
- Fire protection systems, especially their age
It’s important in older buildings to determine whether or when renovations have been made to such systems. The extent of any modifications or updates can have a significant impact on the potential for loss.
The importance of robust data
How can insurers obtain accurate data about commercial properties? Below are a few suggestions:
Consider the source: Insurers may want to consider where they’re obtaining the data. Is it from a single provider you know and trust? Or does it come from multiple providers, some of which you may have never worked with before?
Understand data-collection methods: Is the data based solely on public records that may be outdated? Or is it also based on private databases that are updated regularly?
Know the team behind the data: It’s also critical to know who’s responsible for the data. Does the team include professionals with experience inspecting commercial properties? If so, how well are they represented on the team?
Getting the right answers to these questions can go a long way toward obtaining accurate and reliable data on commercial properties, stopping premium leakage, and ensuring that policyholders have the amount of coverage they need.
Verisk’s ProMetrix Suite provides robust data on more than 12.2 million commercial properties (including more than 4 million site-verified by Verisk staff) and 7.5 million related aerial images.
- Verisk, $4.5 billion in commercial property premium leakage due to misclassification, June 1, 2017