Author: John Putnam How can front-line property/casualty agents address the problem of underinsurance? As a beginning point, what does the Marshall Fire and its aftermath teach us? Like the previous fires with which the author served as an ombudsman to the afflicted homeowners, the lessons are many but, as it relates to underinsurance, let’s focus on several challenges confronting insurance consumers. - Underinsurance is a major factor slowing the recovery from any natural catastrophe. As of December 2023, almost two years after the Colorado Marshall fire, construction has been completed on only 25% of the homes compared to almost 75% in the same time period after the Colorado Waldo Canyon Fires. Rebuild timeframes have two impacts: They cause more “pain” for the affected homeowners and more costs to all parties for the final rebuild costs.
- How does anyone know how much insurance is enough? In the first place, the fire burned in an area that no one considered to be wildfire prone. Secondly, the impacts of higher inflation and supply-chain shortages were not expected nor foreseen. Third, recovery delays can add significant increases in the costs to reconstruct their homes and money needs for their additional living expenses (ALE). Finally, long recoveries raise the claims expenses associated with the adjustment and closing of these claims.
- In natural catastrophe prone areas, many insurers do not offer guaranteed replacement cost (GRC) coverage to their customers. Our team met with about 150 homeowners who had either lost their homes or incurred smoke damage and only about five had GRC protection, which certainly helped them recover faster. Our team was amazed at the “underinsurance” gap (difference between rebuild cost and Coverage A limit of liability), even on these GRC claims. Since the fire and the onset of the hard market, the availability of GRC is largely nil in the state. Some carriers offered higher extended replacement cost (ERC) endorsements, but even at the 50% level most were still underinsured.
Legislative HO coverage mandates that followed the Waldo Canyon Fire were still woefully inadequate to close the underinsured gaps. Some states like CO have mandated that companies offer higher options for extended replacement and O&L. Insureds can opt-out from these additional charges based upon affordability which creates a potential for future under-insurance should there be a catastrophic loss. These mandates were: 20% ERC, 10% law and ordinance, and two years actual loss sustained ALE, Despite recent legislative attempts to mandate higher limits, more homeowners will find “fully insured” to be cost prohibitive. This will require agents to communicate carefully why the cost has escalated. These evolving realities will initially impact agents who do business in catastrophe states, but they will likely spread to other states as the various impacts of climate change and extreme weather impact more states. What about agents living in non-catastrophe states? You will likely be less impacted initially; however, you need to stay vigilant to three realities. - Most studies regarding insurance to value (ITV) assert the underinsurance of most personal and commercial properties.
- Extreme weather conditions are causing ever increasing damages to all properties, so agents need to stay vigilant on keeping limits to value for total losses from tornadoes and derechos. Be sure to offer flood insurance to all customers.
- Natural catastrophe frequencies and severities are ever-increasing everywhere.
As if underinsurance isn’t a tough enough challenge to resolve, agents are now confronted with likely the worst hard market in the author’s 55-year insurance career. Pricing has increased significantly, underwriting has become more restrictive, and insurers have restricted the availability of this coverage in many places in the country. It is just amazing to hear the stories in the press and on TV about the growing numbers of folks who are foregoing insurance due to its expense. The New Year will likely bring more press, regulatory oversight, and continual confusion to this already confusing dilemma as the insurance stakeholders seek better products and processes for dealing with this issue. Admittedly, these problems are bigger than any one agent or company, so front-line agents’ have few options to “fix” the problems. As a call to action, this is a great opportunity for independent agents to rise to the challenge. Here are some action steps that will help your customers and you to cope with these current market realities:
- Make certain to provide your customers with options to fully-insure their exposures, recognizing that in some cases they may opt for the lower “price” option rather than the “protection” paradigm. Let them decide what coverage options they wish to purchase. Document their buying decisions.
- Stay current on the many issues surrounding the hard market, the growing frequency and severity of natural disasters, new risk exposures, new methods for determining replacement values, etc. This way, you become a trusted source of information for your customers.
- Remain vigilant of current legislative and regulatory issues in your state to address these issues. Consider more involvement in these important processes to better advocate on behalf of our industry but also doing what is right for your customers. Also, consider educating these tough challenges to community groups too.
- Keep an open mind on “change.” Challenge your past “assumptions,” and adopt those changes that make sense for you and your customers to provide better service and protection; and
- Finally, maintain resilience in these tough times!
As we agents know, many things do not change quickly in our vocation. These issues will get better in some way as we continue forward. In the meantime, we play an important front-line communication role for the insurers we represent as well as problem solvers for assisting our customers to better insure themselves and to understand our complex products. As always, the author appreciates your feedback at jeputnam@aol.com. Publication Date: March 8, 2024
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