Getting to the bottom of underinsured homes

Underinsurance not only leaves policyholders vulnerable, it impacts the profitability of most insurers. Recent high profile events, such as the 2004 and 2005 hurricanes and the 2003 Southern California wildfires, have brought to national attention the problem of underinsurance. Unfortunately, it often takes the tragedy of a total loss before the insurer and homeowner discovers that a property was underinsured.

Independent agents play a key role in making sure homes are insured to full replacement cost. It’s a role that is growing in importance as insurance policies offering guaranteed replacement cost coverage are becoming increasingly scarce. In addition to protecting their clients in the event of a total loss, agents want to protect themselves. In cases of insufficient coverage, not only will the homeowner be liable for the additional cost to rebuild, but agents may face a challenge from the policyholder.

Fortunately, new technologies are becoming available to help insurers and agents make more reliable estimates of replacement values. Web-based replacement cost estimation tools that rely on component-based methodologies are becoming the standard technology in many independent insurance agencies. In addition to increased confidence in replacement cost estimates, Web-based technology has enabled tremendous increases in business process efficiency for both agents and insurers.

Those efficiencies, combined with improved replacement cost estimates, are providing opportunities to improve the bottom line. For insurers, a portfolio that is insured to value will ensure that premium revenues are maximized. For agents, it means increased commission revenues.

Success stories about the use of Web-based replacement valuation systems from both insurers and agents abound. AIR Worldwide has identified two such stories that exemplify how these new technologies are helping to solve the problem of underinsurance. One focuses on a year-long effort to improve insurance-to-value of the insurer’s in-force book of business, while the other looks at how an independent agent is using new technology to address underinsurance on a daily basis.

Updating values for existing policies
It is often a challenge for insurers and agents to engage their policyholders in discussions about property replacement values. Bunker Hill Insurance, a regional carrier based in Boston, Mass., decided to address the matter head on, but armed with information. The company conducted an insurance-to-value analysis of its entire in-force book of business. Bunker Hill’s analysis indicated that more than 25 percent of properties in its portfolio were underinsured — some by 50 percent or more.

Bunker Hill compiled the results of the analysis, identifying all underinsured properties to each policyholder’s agent. Agents were provided with a comparison between current Coverage A values and those generated by the analysis. Bunker Hill’s agents were encouraged to embark on their own campaigns to alert their policyholders of any discrepancies.

Bunker Hill provided agents with the revised replacement cost estimate, along with a summary of the public records data on which the analysis was based in a single spreadsheet. In most cases, the information was relayed directly to clients at renewal time, though for homes that were significantly underinsured, agents contacted policyholders immediately, not waiting for the next renewal.

In one case, an agent inserted all relevant material into personalized letters to each customer and mailed them 60 days prior to renewal. Policyholders were encouraged to contact the agent with any questions and, if no objection was voiced from the homeowner, the new policy with the revised replacement value automatically took effect at renewal.

The proactive efforts of both Bunker Hill and agents resulted in streamlined communications between homeowner, agent and insurer and enhanced relationships between all parties.

Bunker Hill has been very pleased with the results. Not only did they provide their policyholders with more adequate coverage to replace their property in the event of a total loss, but Bunker Hill’s 2005 revenues increased 6 percent net of all costs associated with the analysis–without the need for a rate increase.

Insuring-to-value: the agent perspective
Geoff Gordon, president of Gordon Agency based in Norwell, Mass., understands the importance of insuring to value. However, he also is mindful of the time required of both his staff and clients to conduct property inspections and fill out the requisite paperwork. The implementation of a new Web-based replacement cost estimation system, provided by his carriers, was a boon for his business.

Gordon’s relationships with his customers have benefited now that Web-based replacement valuations are part of his standard business processes. Policies are now solidly grounded on objective, verifiable estimates of replacement value–estimates that can be generated quickly, typically without having to inconvenience customers with a walk-through of their homes.

Because Gordon and his agents can conduct more business in less time, they are able to provide an elevated level of service to current customers and have more time to market to new customers. Furthermore, agents play a critical role in helping insurers curb underinsurance for an in-force book of business. This provides independent agents with the opportunity to work better with their insurers, improve customer relationships, and increase revenues.

Addressing the problem of underinsurance with his customers provides Gordon the assurance that he is protecting them and himself. It also enables him to maintain desired revenue levels since premiums will keep up with labor and materials costs in his area.

Increasing efficiency
Insurers that provide their independent agents with access to Web-based replacement cost estimation technology are virtually guaranteed to reap business process efficiencies. Agents are using the new applications not only to determine replacement values, but also to share results with the insurers’ underwriters with the click of the mouse. Web-based replacement cost estimation technology help insurers strengthen agency relationships by providing agents with a more accurate, efficient, and easy-to-use tool for determining replacement values.

George Davis is an actuarial consultant with ISO subsidiary AIR Worldwide, developer of Web-based replacement cost estimator ISO HomeValue. www.isohomevalue.com