Automated underwriting helps Safeco rate commercial risks.

Safeco Corp. has taken a lesson from the personal lines and is using automated underwriting for commercial business.

Mike Hughes, senior vice president of Safeco Business Insurance, recently spoke to Best's Review about the company's goal to become the top writer of small and midmarket business and how the company is using automated underwriting for its business owner policy business.

What sorts of variables are used in your automated model to assess commercial risks?

With every risk, our platform looks at all of those things that act as influences on that risk, and we also use external variables, and we rate each of those variables so that quickly, all in a nanosecond, we come up based on the weight--the profits against losses, good or bad--whether we will accept the risk, how will we price the risk and whatever other underwriting conditions would be part of that.

Take a business owner's policy, which we have on our automated underwriting platform. Key variables would be the location of risk, construction of risk, occupancy of risk, frequency of loss, severity of loss, financial or insurance score. Those would be about six or seven key variables that we have out of maybe 30 or 40 for a BOP [business owner's policy] that our automated underwriting platform would look at, and based on the attractiveness of each of the variables, they would be segmented to conform with our standards for acceptance, our pricing and our underwriting. We think the power of the platform is that it provides consistency of pricing, it gives our best price the first time, and it gives us the best possibility for higher renewal retentions and higher hit ratios or close ratios because we're getting the right rate for the right risk.

But the point I really want to make clear is that the automated underwriting platform isn't just about automation. It's backed up with a specific underwriter for the agency, so when the agent receives a new piece of business through the automated underwriting platform, and he thinks something's off, he has the ability to talk to our underwriter, or our sales pro ASAP. They're essentially taking feedback from our agents and recalibrating our automated underwriting platform as we learn things through them. Our underwriters do, through referrals or exceptions, see the business when they need to see it.

How does the rate-setting component work once the decision on whether or not to accept the risk is made?

We develop our base rates in conformance with individual state law. Then the multivariate model--the segmentation, the predictive model--will determine whether there should be experience rating, schedule rating, based on the individual characteristics of the risk.

What lines of commercial business are on the platform?

In 2003, we put both new and renewal business on [the platform] with our business owners policy. We started with renewals and then we went to new business, and almost all of our BOP line of business went onto the automated underwriting platform.