National Underwriter - 04/29/14
By Mark Galante
Whenever a natural catastrophe occurs, the issue of underinsurance is illuminated in the mainstream press. Once again, everyone is reminded of the crippling financial effect that being underinsured can have, not only on a household, but on a community. Avoiding underinsurance requires the right coverage combined with the right limits. In exchange for providing generous coverage like guaranteed replacement cost, specialist insurers invest heavily on appraisal services to determine the appropriate coverage limit: insurance to value. Those of us who live in this niche know that determining the right limit is hard, and that the process can create great policyholder frustration, even distrust. Nonetheless, the process is critically important. Embracing the following principles allows carriers to manage valuations prudently, collect the appropriate premiums for the risks assumed, and delight their policyholders in the process.
A well-constructed insurance program blends smart, comprehensive coverage options with appropriate coverage limits. Successful individuals and families with significant assets are best protected by the coverage options offered by high net worth specialist insurers like PURE and the personal insurance divisions of ACE, AIG, Chubb, & Fireman’s Fund. There are many examples of how the specialists’ coverage forms are more generous than those offered by more mainstream providers, but one of the most common features cited as a differentiator on the homeowners form is guaranteed replacement cost, or extended replacement cost when an uncapped guarantee is replaced by a hefty extension of coverage. Guaranteed replacement cost provides tremendous peace of mind to consumers—particularly owners of custom homes with unique features—as it promises to repair or replace a covered home in “like, kind, and quality,” even if the cost vastly exceeds the applicable coverage limit purchased.
Providing this coverage comes at a cost to insurers, so they seek an appropriate premium to reflect the risk, and to find ways to help the client prevent losses from occurring. As a result, when a consumer is offered guaranteed replacement cost, it is in exchange for insuring the home for what the insurer believes is the appropriate coverage amount: the cost to rebuild the home, often referred to as the home’s replacement cost.
There has been plenty of discussion about the importance and challenges of educating and convincing clients to insure their home for its replacement cost rather than its market value. An executive for a specialist insurer recently wrote, “Insurance agents often have a tough time convincing customers that they need to insure their homes based on the cost to rebuild them as opposed to the market value.” Although I’m certain those conversations occur frequently and can be quite challenging, the smart, sophisticated clients served in our niche tend to grasp the difference between market value and replacement cost quite quickly. What many fail to grasp—and what creates frustration that can alienate the client—is why the replacement cost estimate of their home seems inflated by factors that are nebulous, unpredictable, and seemingly unfair.
Reducing friction and building enthusiasm starts with defining what replacement cost is—and is not.
A replacement cost estimate should reflect the cost to build the home at the same location on the date of the appraisal with comparable quality of design, materials and workmanship. It should include profit and overhead for the contractors that will build the home; it should also include fees for architects, engineers, designers, and other specialists required to build the home; and it should assume whatever costs are needed for the finished home to comply withcurrent building codes.
I have seen other costs creep into appraisals in recent years that don’t seem to belong there and contribute to friction and consumer skepticism. These can usually be grouped into one of two categories: “impossible to predict” and “covered elsewhere.” Agents and consumers should beware if their appraisal is inflated by costs in either of these categories.
The impossible to predict. Three examples of charges I’ve observed in this category include:
- A factor for anticipated demand surge following a catastrophe that will push up labor and material charges;
- A factor for potential overtime charges in case the client seeks to accelerate construction following a loss; and,
- A factor for construction upgrades required to comply with future building codes which may or may not change.
All of these scenarios are impossible to properly estimate or to predict for a single risk. Further, guaranteed replacement cost is designed to deal with unpredictable changes in construction like these following a loss.
Covered elsewhere. A factor or charge for debris removal is perhaps the most common example in this category. Specialists provide a generous amount of coverage for debris removal in addition to (separate from) Coverage A. For example, one leading specialist provides a seemingly unlimited amount of coverage (reasonable expenses) for debris removal in the Extra Coverages section of the policy:
Unless covered elsewhere under this policy, we cover the reasonable expenses you incur made necessary by a covered loss to demolish damaged covered property, if necessary, and remove debris of the covered loss including the property that caused a covered loss.
Others specify that that this coverage is afforded up to an additional 5% or 10% of Coverage A. Regardless, debris removal is covered elsewhere on the policy.
Inflating replacement cost estimates with charges in either of these categories is inappropriate and will only contribute to consumer skepticism and friction. Further, doing so ultimately could compel more consumers to revert to obtaining a lower limit of coverage in the standard insurance market, sacrificing the superior protection afforded by the specialists and risking underinsurance.
Infusing empathy into the appraisal process will earn customer trust and loyalty.
Unfortunately, the appraisal can become a regimented event: appraisal completed and returned to underwriter, results shared with agent, report sent to client, client receives notice of / invoice for premium increase. Too often, sensitivity to the client is sacrificed in the quest for productivity and “backlog management.” I’ve seen first-hand how infusing empathy into the process can produce tremendous results. Here are a few ways to do so.
Encourage risk managers to pick up the phone. If the risk manager’s initial estimate of the home’s replacement cost is coming in higher than the dwelling limit purchased, have them call the client to discuss it. Sharing the status of the appraisal, confirming assumptions made about rare building materials and techniques, and even discussing square footage calculated all allow the client to participate in the process and correct errors before they go to print. PURE began implementing “fact check phone calls” last year and realized a tremendous increase in satisfaction, finding that even clients who believed their replacement cost estimate was excessive felt more informed and enthusiastic about the company following the appraisal because they were given a voice and treated like adults.
Offer a simple appeals process. Despite best efforts, disputes will continue to arise. Forge consumer confidence and trust by using a formal appeals process in which the consumer can have their appraisal (and any other documentation or sources they wish to provide) reviewed by a qualified, independent expert or panel.
Help with the fulfilment of “recommendations.” Successful high net worth people arebusy people. Sending them a report with recommendations or requirements to reduce risk in their home often creates frustration, as their compliance time is limited. Assigning a resource to help the client implement those recommendations, from finding and vetting contractors to scheduling appointments, creates unexpected joy.
The home appraisal process is valuable for both client and insurer. Although the expert risk managers and appraisal consultants in our niche regularly contribute to client enthusiasm and loyalty, the process often creates friction, frustration, and distrust. If we want to attract and retain more HNW clients that are currently served in the mass market, specialists should eliminate conflict in the valuation process. That means being more consistent, more transparent, and more empathetic.
Mark Galante is the Chief Marketing Officer with The PURE Group of Insurance Companies. To learn how PURE is tackling this challenging topic, visit pureinsurance.com/pure360.