Potential Pitfalls for Commercial Insurance Underwriters

Underwriters play a crucial role in the success of the insurance industry. However, it often requires a great deal of time, effort, and precision for underwriters to reach the desired results. As a seasoned specialist in the commercial insurance space, I would like to shed light on some of the catches every underwriter should look out for. Additionally, I will explain how technological advancements can augment the underwriting process by minimizing the potential complications which may arise.


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Proper Coding

Often, applications are submitted to an underwriter using a more generalized NCCI or NAICS classification code. For example, an agent may use the very broad workers’ compensation class code (8810) “Clerical – Not Otherwise Classified”; when, based on an employee’s actual duties, the salesperson class code (8742) “Salesperson, Collectors, or Messengers” is a more accurate application of both the work performed and rate. One reason an agent may intentionally use an incorrect code is to potentially avoid higher rate when calculating the initial premium for a more attractive quote or indication. The drive behind these attempts to obtain a lower quote may be motivated by an agent’s desire to retain a current account, or (more commonly) to land a new account.

In order to illustrate providing a rather simplistic example below:


Code:              Rate:               Payroll:                       Premium:

8810                0.21                 $100,000                     $210

8742                0.47                 $100,000                     $470


The variance of rates* in the described scenario amounts to a difference of 0.26 per $100 of remuneration (payroll) for the state of Illinois in calendar year 2014. However, the workers’ compensation premium results in approximately a 124% difference in premium (in absence of any subject credit or debit premium modifications).

One problem that ultimately surfaces with the application of an incorrect classification and lower rate, is that the insured’s account is audited at the end of the policy term based on actual exposures, and rules will be applied to ensure appropriate classification for the work duties performed by subject employees. The generation of potentially expensive additional premium charges for the insured is the result of the misapplied class code.

What to do about it?

New technologies are available to assist in the application of appropriate classifications and rates by returning modeling recommendations for NCCI and NAICS codes. Using third-party data and data science, automated validation can be applied to help ensure the risk is classified correctly. This allows for a more accurate initial rating and ideally avoids costly and challenging additional premium audits.

Cyber Insurance

In a growing technological environment, a large and increasing number of companies are taking their business and services online. Small businesses have a higher risk of being targeted by cyber criminals. Since a smaller operation often lacks the IT resources to devote to securing against such threats, it makes these ventures an extremely vulnerable target for a breach. Many of these businesses are often unable to resume operations or recover from the losses of a data breach; as the uninsured cost of notification alone may be enough to completely bankrupt a company. For this reason, underwriters should encourage companies with cyber exposures to consider stand-alone cyber security liability or an endorsement to an existing liability policy by mentioning the consequences of not covering this risk.

What to do about it?

Modern technology can provide a snapshot of the customer’s online presence and related exposures. When an underwriter understands the goods and services being offered online by a potential insured, this knowledge supports initiating the conversation to offer cyber insurance coverage.


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Physical Location

When liability coverage is calculated, there are more risks that need to be examined than just the exposures located inside of the physical structure of a building. Potential risks tie to the location of the business as well as the external factors which may pose a threat to the successful operation of that business. Does the surrounding neighborhood experience a high rate of crime? Are there other businesses engaged in high-hazard operations nearby? Is the business located in new development surrounded by an abundance of vacant land? Are there any ponds or small bodies of water on the property?  These are just a few of the questions that ought to be posed by an underwriter to determine the risk posed by external factors in a business’s location.

What to do about it?

Leverage maps with data overlays to visualize the surrounding area of the risk and gain insights such as its proximity to surrounding businesses, notable landmarks, or other attractive nuisances.

Business Names

A business may operate using several different names, all of which should be scheduled under a liability policy. This includes any associated business names that are actively being used, AND any inactive names that may have been used in the past. It is a vital step for the underwriter to request a schedule of all active or inactive business entities and/or DBA’s. One reason for this is that in the case of a lawsuit, historical or “operating” names of the same business may potentially be named in a conjunction with active names in a legal demand. In the event a business name is not included on the policy as an additional named insured, no liability coverage will apply for the entity. Inactive names should also be scheduled under the liability coverage in the event a claim is filed in the future – especially prudent under a claims-made policy.

What to do about it?

Leverage analytical tools to help you access a business graph, showing key relationships across entities as well as insights on ownership and operational activities.

Residential Work Liability Exclusions

Residential work is often excluded from commercial general liability policies. General contractors or subcontractors are typically required to obtain a building permit in order to start residential work. While engaging in residential projects, insureds may remain unaware that contracting in this type of work could leave them uninsured in the event of a loss or claim.

What to do about it?

Insights from the aforementioned business graph tools can expose work permits that were applied for by an insured. This will assist the underwriters in determining if a risk has engaged in any residential construction and open the conversation for the necessary endorsements or coverage to be placed.


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Take Advantage of the Insurtech Movement

These are just a sampling of the diverse catches that every underwriter should look out for when underwriting a potential insured for commercial coverage. I believe deeply that the advanced technologies mentioned, built on artificial intelligence and third-party data, are facilitating a significantly more efficient underwriting process. This leads to building stronger relationships among commercial insurance carriers and their insureds. The best part is, it’s all happening now! We see it every day here at DataCubes. Have you seen it yet?


*[source: “Oregon Workers’ Compensation Premium Rate Ranking Calendar Year 2014” https://www.oregon.gov/DCBS/reports/Documents/general/prem-rpt/14-2083.pdf].