Author: Chris Boggs
Commercial property underwriters have utilized essentially the same information for nearly 400 years: Construction, Occupancy, Protection and Exposure. Known to us mortals as COPE."
COPE has been addressed by the Virtual University (VU) on previous occasions. For an more detailed review of COPE, read The Unseen 'Magic' Behind Commercial Property Underwriting" and even, RCP: What Does That Little Code Mean?"
When the correct COPE information is provided, the insurance mechanism performs as intended. However, ISO estimates that approximately 50 percent of commercial properties are incorrectly rated" from a COPE perspective. The result, $4.5 Billion in commercial property premium leakage over four years.
Premium leakage was addressed by the VU in early 2019 (What is Premium Leakage"), but commercial property was not the focus. The focus of this report is solely commercial property.
ISO published the article, $4.5 Billion in Commercial Property Premium Leakage due to Misclassification," in 2017. ISO's Rick Stoll effectively explained in this article the cost to the industry of incorrect COPE information. Not only is this a cost to the carrier, incorrect COPE data is an agency cost that ultimately results in higher premiums for your client. How does incorrect COPE data trickle down to the client? Let's follow the money:
- Carriers aren't provided the correct data, so they don't charge the correct premium (a temporary win" for the client). Loss ratios are higher than they should be.
- Agents lose commission income; approximately $195 million per year. Also, because loss ratios are higher than they should be, contingent income is lower.
- Reinsurance carriers don't fully trust the COPE and other underwriting information received from primary carriers. This results in higher property reinsurance costs than would result if proper COPE data was provided. Higher reinsurance costs ultimately result in higher rates for your clients (a long-term loss").
Is there proof that reinsurance premiums are higher in part because COPE is incorrect? Yes.
In 2015, an international working party undertook to explore the effect of improper data on property reinsurance pricing. The final product, Analyzing the Disconnect Between the Reinsurance Submission and Global Underwriters' Needs," clearly showed that property reinsurance pricing is negatively affected by the assumptions reinsurance underwriters must make. One of these assumptions involves COPE data.
In 2017, the Institute and Faculty of Actuaries (IFoA) awarded this white paper the Brian Hey Prize. And recently, the Casualty Actuarial Society awarded this research the Hachemeister Prize. I'm proud to say I had the opportunity to play a role in this two-time-award-winning research. My contribution focused on presenting COPE (Chapter 10) and as an editor of the finished work.
COPE data is more important to our insureds than many realize. As the front line of the insurance industry, agents must learn how to property recognize and rate COPE information for the good of the client, the carrier and the reinsurer.
Last Updated: April 26, 2019