CoMeta Enhanced SME Modeling: Right-sizing casualty risk metrics for SME underwriting

Author: Adam Grossman, Director - Product Management, Moody's

Speed and consistency are essential for underwriting small and mid-sized enterprises (SMEs) and middle-market casualty business, ideally streamlining the submission and analysis process down to a few key variables.

For SME casualty underwriting, the two widely used key variables are: a company’s industry classification code, like NAICS or NACE, and its revenue or turnover.

A common challenge for our casualty underwriting partners is that submissions often lack reliable information of this kind, as most SMEs don’t publicly disclose it.

Without the necessary metrics to validate a submission, for example, industry codes, you don’t know the specific risks that a company is exposed to. And without revenue, you don’t know how much of a target they could be if litigation emerges, meaning you are forced to rely on an average loss across all company sizes within an industry, potentially overestimating the loss to a smaller company. 

Historically, if an SME wasn’t included in the CoMeta® business inventory, company size was not counted, and modeled losses were provided based on the industry’s average casualty catastrophe losses for general liability. This approach, while allowing for better loss estimation, could generate over- or underestimates of potential losses for SMEs, as it focuses on average industry losses rather than tailoring to business size.

Introducing Enhanced SME Modeling for underwriting and portfolio management

Building on 10 years of innovation in delivering probabilistic casualty catastrophe models, Enhanced SME Modeling, our latest CoMeta release, offers SME underwriters and portfolio managers the ability to incorporate both these key variables and generate detailed exposure and modeled loss metrics for any SME casualty submission using only an industry code and company revenue.

This breakthrough for SME casualty underwriters is made possible in CoMeta on the cloud-native Moody’s Intelligent Risk Platform™. With Enhanced SME Modeling, users specify the NAICS industry code and the company’s revenue, and CoMeta estimates model losses for the industry and the company size. Where revenue data is available, this helps deliver more accurate, tailored results for SMEs.

It can also help at the portfolio level. Using a combination of Enhanced SME Modeling and regular CoMeta inventory-based company modeling helps generate more consistent results, higher-resolution views of accumulation hotspots, and exposure to potential liability events. 

It can also help strengthen portfolio insight by grounding modeled loss in industry revenue distributions rather than lumping SMEs in as ‘average’ industry members.

Enhanced SME Modeling will offer underwriters a straightforward choice. If company revenue data are available, underwriters can better distinguish risks within the same industry by incorporating a company size ‘signal’ directly into the modeling workflow. Where company revenue data is not available, underwriters can use CoMeta’s prior ‘industry average’ baseline approach.

Some carriers may have their own company industry and revenue data; if not, Moody’s can provide data from the extensive Moody’s Orbis company database, one of the most powerful comparable data resources on private companies, which your Moody’s account manager can help you use.

Under the hood: Turning industry revenue into loss potential

Enhanced SME Modeling uses a company’s revenue—either as a point estimate or a range—to produce a consistent and accurate loss estimate within its industry classification. It draws on detailed industry composition data from the five-yearly U.S. Economic Census, which organizes companies into up to 18 revenue bands per industry.

Within each band, the model uses the number of companies, aggregate annual revenue, and other firmographics to estimate loss shares for the revenue data you provide. When the Economic Census data are incomplete, alternative sources, such as the U.S. Census of Agriculture, are used to fill in missing data. We then combine this information with CoMeta-modeled loss figures to fine-tune the results for SME policies.

What to do next

Enhanced SME Modeling is only available on CoMeta on the Moody’s Intelligent Risk Platform—contact your customer service representative for access, or visit the Moody's casualty insurance solutions web page here.