AU 301 - Analyzing Commercial Accounts
AU 301 examines account-level analysis: understanding the operation, reading its financials, choosing the right exposure base, and interpreting loss history. The exam favors underwriters who can explain what an account's numbers mean.
Read the business before the form
Operations, products, subcontracting, geography, seasonality and contractual transfers (leases, additional insured requirements, indemnity) define the exposure. Financial statements test resilience: current ratio, debt-to-equity, margin trend. A shrinking business defers maintenance; a leveraged one may not fund a large deductible.
Exposure bases matter
- Sales for products liability and business income
- Payroll for workers compensation and general liability
- Square footage or unit count for property
- Receipts, gallons, miles or occupancy for specialty lines
A loss ratio uses earned premium; loss costs per exposure unit compare far better across accounts of different size.
Loss history discipline
Develop losses to an ultimate basis. Label whether figures are paid or incurred, and at what deductible and valuation. Separate per-occurrence from aggregate limits. Give more weight to many losses at modest size than to one anomaly.
Worked example
A franchise restaurant shows $3.1M sales and $950,000 payroll; four years of general liability losses are $0, $14,000, $0, and $186,000, including a slip-and-fall with a $120,000 reserve and $40,000 defense. The naive four-year ratio is 130%. Adjust: the reserve may still develop, the exposure driver is customer traffic and floor condition, and alcohol service would compound it. Actions: verify reserve adequacy, compare to peer loss costs, require documented incident reporting and matting, raise the deductible to $10,000, hold rate, and add a liquor sublimit if alcohol is served.
Traps
Comparing a $5,000-deductible loss ratio to a $25,000-deductible one; using undeveloped reserves as final; ignoring 20% revenue growth that inflates the exposure base; overlooking additional-insured and contractual exposures; applying property COPE logic to a liability account.