Dormant claims: the blind spot in Commercial Lines P&C

In 2024, commercial property and casualty insurance (covering business premises, equipment and operations) accounted for €9.4 billion in premiums in France, with €6.9 billion in claims paid and provisioned. Meanwhile, the number of major claims exceeding €2 million rose by 13.8 per cent.

In short, France Assureurs’ message is clear: technical profitability is never a given, especially not in commercial P&C. Whilst the market is bearing the full brunt of the rising frequency of major climate-related claims, another danger is growing silently: the quiet, invisible drift of risks lying dormant in our portfolios.

The problem stems from a clash of time horizons. We continue to apply annual management methods to exposures that are long-term and constantly changing. Each financial year, we analyse past claims experience to adjust underwriting rules, review premium scales and prepare the renewal campaign. Yet the bulk of the risk lies and matures beneath the surface.

What we are seeing is that focusing solely on the tip of the iceberg can prove costly.

The business fundamental: few touchpoints, few audits, drifting exposure

A commercial P&C insurance policy (comprehensive business cover, industrial risk, public liability, ten-year structural warranty) is a complex product. Faced with this technical complexity, the policyholder, whether a tradesperson, retailer or SME director, devotes little time to their policies. They take out cover at a given point in time without revisiting it.

From the moment the policy is taken out, competitive pressure and high-reactivity expectancies stemming from intermediaries can lead to discrepancies between the actual risk and the insured risk. This initial bias is then reinforced by the distance that settles in between the policyholder and the insurer: points of contact remain rare, limiting opportunities to reassess the risk and adjust the cover. In most cases, the insurer only comes to terms with the true extent of the risk once a claim is made.

Nevertheless, the insurer remains accountable for every policy in its portfolio. This includes its expected loss, i.e. the average cost of claims that it can statistically anticipate for this profile. The rule applies to all policies, particularly those tacitly renewed, which account for 70 to 80 per cent of policies.

Therein lies the problem: by allowing risks to drift without visibility, a vicious circle takes hold:

• Good risks leave, lured by more aggressive offers from competitors.
• Poor-quality or poorly underwritten risks remain. Their profile has shifted or deteriorated, but their premium remains the same: they retain a pricing advantage disconnected from their reality.

Tackling this silent drift requires a change in perspective.

The illusion of the S/P ratio: what the annual figures do not show

The S/P ratio compares claims incurred in a given year to premiums collected in the same year. It is, of course, a useful benchmark for reporting purposes. However, it says nothing about the future trajectory of liabilities, particularly in long-tail lines of business.

Admittedly, actuaries analyse claims experience by cohort to adjust their provisions, but the problem remains: we base our analyses solely on claims that have already occurred, with no regard for dormant or aggravated risks.

We are convinced that it is impossible to manage risk over the long term without analysing the underwriting quality of the portfolio and adjusting the corresponding technical provisions.

However, this means changing our diagnostic tools and metrics. Much like a ‘Customer Lifetime Value’ indicator, the insurance industry needs a dynamic view of the technical value of a generation of policies over their entire lifetime, rather than just the current financial year. Without it, we will continue to operate reactively, with a lack of visibility.

Indeed, standard management indicators shed light only on the tip of the iceberg: claims that have already occurred and are already known. The submerged mass, however, remains out of sight: the risks that have drifted without our knowledge, and the claims yet to come on policies that the insurer continues to cover.

Insurance is a stock business: the policy’s lifespan and its unknowns

This blind spot is all the more worrying given that risks are, by their very nature, as fluid as our economy.

To imagine that a risk remains stable throughout the duration of an exposure is, at best, illusory; yet the pricing actually applied generally follows this principle. Events occur invariably under the radar of management systems: a change of business activity on the premises, an unreported increase in turnover, the addition of a construction activity that has gone unreported.

These unknowns are the inevitable consequence of a policy that lives without ever being technically reviewed. A risk that was correctly underwritten at the outset can turn into a technical time bomb, without any annual indicator allowing it to be anticipated and therefore covered.

The longer the remaining term of the contract and the commitments (as in the ten-year structural warranty, where the liability extends over ten years), the higher the probability that a discrepancy will arise, and the greater its financial impact.

Redefining ‘avoidance value’

Identifying and rectifying a deteriorated policy cannot be measured simply by the savings on one year’s premium. It involves optimising the technical margin over several years, achieved by eliminating an expected future liability.

If we assume that attritional risk is largely unaffected, the majority of the avoidance gain can be worked out based on three simple factors:

• the probability that a serious claim will affect the profile in question, each year;
• the estimated average cost of such a claim;
• the remaining term during which the policy would have continued to expose the insurer to risk.

Let us imagine a serious claim exceeding €500k on a policy with five years remaining.

For a healthy profile, the probability of such a loss occurring is very low (less than 0.03 per cent each year). Let us assume that it is 20 to 30 times higher for a severely aggravated profile, representing a cumulative occurrence rate of nearly 3 per cent over these five years.

The expected loss from major claims alone thus stands at around €15,000 for this policy, compared with a premium of a few thousand euros that must also cover attritional losses.

The policy continues to be priced as an ordinary risk, even though it doesn’t match the contract anymore. It is this imbalance that is rectified through remediation (cancellations, prevention, changes to cover, clauses, etc.).

Here are three common examples to illustrate this point:

• The unreported danger order: A building is subject to a danger order. Although the aggravation is a matter of public record and has been officially recognised, the information is not passed on to the insurer. Result: the risk of collapse is not anticipated.
• Business activity divergence: A restaurant is converted into a night bar or nightclub without declaration from the policyholder. The actual activity, and therefore the exposure to fire and public liability risks, bears no relation to the original policy.
• Incorrect classification: A recycling facility is insured as an “office” on the grounds whilst it houses administrative staff, and is surrounded by industrial machinery and stocks of waste with a high calorific value.

(You can find more common examples here)

Admittedly, the regulator theoretically protects the insurer when a policyholder has failed to declare a situation or a change. However, invoking this protection at the time of a claim opens a Pandora’s box. Triggering a pro rata rule, a forfeiture of cover or a voidance of the contract shifts the case from the technical realm to the legal one. And the cost is heavy: years of legal proceedings, soaring administrative costs, and a customer relationship and brand reputation destroyed in an instant.

Avoidance value lies precisely in anticipating this overall cost before the claim arises, for the benefit of both the insurer and the policyholder.

To estimate it, one step is essential: measuring the technical and underwriting quality of the portfolio (overall, by generation, by region, by intermediary). This is the only way to project the excess claims that this discrepancy will generate. The solution then lies in focusing advisory and re-underwriting efforts on the segments that have drifted the furthest, by rebuilding the relationship there: reassessing risks, preventing claims and securing the portfolio.

Managing our portfolios as an asset

We can only manage and improve what we measure. The annual S/P ratio or CoR are short-term, passive indicators that are structurally incomplete for a business where each policy continues to run for several years.

This does not mean abandoning accounting indicators, but rather supplementing them with a more stable, asset-based and predictive analysis, treating the portfolio as a living entity and an asset whose value must be protected over time. This is the prerequisite for finally reconciling the commercial management of underwriting with the long-term reality of the insurer’s commitments.

As you will have realised, current indicators do not detect hidden future claims, which are nevertheless the most costly. As re-analysing every policy every year takes too much time and energy from underwriting and risk prevention experts who are already tied up with incoming business, priorities must be targeted whilst balancing portfolio growth and profitability.

This is where Continuity’s hyperspecialised AI comes in:

• Prioritising the human element: The aim is not to automate underwriting or re-underwriting, but to guide underwriters towards the cases and policies that require urgent and significant action. A sound existing policy in the portfolio is just as valuable as a well-underwritten new business.
• Anticipating risks: By cross-referencing underwriting rules, internal customer knowledge and claims data, and external information, the AI can identify anomalies and likely future claims before they occur.
• Optimising the portfolio: This analysis enables you to see the ‘true’ future claims burden and take effective action to prevent or cover it, where it is most worthwhile.

Looking forward to hearing your comments and discussing this further!

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Thibaut Le Mons is Head of Customer Success at Continuity, a platform for the continuous monitoring of commercial P&C insurance portfolios. Graduated from Centrale Lyon and ISFA (econometrics and risk management), he previously worked in strategy at Groupama and in consultancy at ARES & COMPANY, as well as at Mazars as a financial auditor.