Getting the right value: insurance to value is a fundamental tenet of good underwriting and should not be subject to changes in cycles. (Property/Casualty: Underwriting Insight).
This is analogous to the way the insurance industry shortchanges itself every day by not getting appropriate insurance to value on insured properties. When we fail to do this on property risks, we are like the grocer selling the eggs. By providing coverage for less than the correct values, we are effectively giving away free limits. Or from another angle, we are selling our coverage at a reduced rate. Either way, we lose.
A leading valuation company estimated in 2001 that more that 75% of all commercial businesses are underinsured. In addition, it estimated that these businesses are underinsured by figures that approach 40% per building.
The heartening news is that the insurance industry has made good strides to improve this situation. The emergence of a hard market is allowing carriers to insist upon adequate valuation of properties. Still, we are not at 100% and as the hard market apparently plateaus, we are in danger of heading in the other direction.
Proper insurance to value has an obvious impact on the bottom line of an insurer when it's recognized that property rates are promulgated based on the full value of the property. In dealing with the slim profit margins of the insurance industry, implementing a quality insurance-to-value program could significantly improve a company's bottom line. A sloppy or inconsistent approach greatly reduces an insurer's ability to profitably write property business.
When we fail to get proper insurance to value, no one wins. Consider the insureds. While they may be paying less for coverage, they are inadequately covering their needs. In the event of a total loss, the lack of proper limits could make it difficult for the insureds to get their businesses back. Think about your homeowners policy. Would you want to run the risk of insuring your home for less than its actual cost to replace?
The issue of proper insurance to value is often overlooked for a variety of reasons, not least of which is that most policyholders do not suffer losses. As such, they go year to year without addressing the valuation issues. Their agents often do not want to press the issue because increasing the values will likely result in an increase in the price. Underwriters often fall into the same trap, pushing automatic, minimal increases or nothing at all.
Partial losses pose the same issues. Studies have shown that more than 98% of all property losses are not total losses. In the event of these partial claims, the insurance company is permitted to enact the coinsurance clause. However, for a variety of reasons, coinsurance penalties are poorly enforced.
So the cycle continues. The insured is not pressed to accept proper limits and usually isn't penalized for inadequate limits. The result is the insurer develops a book of business that is underpriced. And with each account written at values less than the actual worth of the property, the profit possibilities for the book get slimmer.
On the other hand, think about this example: A prudent carrier insisted on implementation of a strict insurance-to-value program. It worked to ensure that each account was properly valued and it found that, on average, it increased the values by 25% across its book of business.
Concurrently, the carrier got some pushback from its agents and from the insureds who did not want the price increases that went with an increase in limits. As a result, the insurer lost 20% of its accounts. At the end of the program, it maintained its total premium, but it now had a significantly reduced exposure base.
The challenge we face is to set up a consistent program for insurance to value, to train our people in how to use it, and to maintain the program through the market cycles. Insurance to value is a fundamental tenet of good underwriting and, as such, should not be subject to changes in cycles. It is like going to the grocer for a dozen eggs. The price of eggs may go up or the price may go down, but you still expect 12 eggs.
Michael P. Egan, a Best's Review columnist, is a property officer with Swiss Reinsurance Co., Philadelphia. He can be reached at email@example.com.
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|Author:||Egan, Michael P.|
|Date:||Jul 1, 2003|
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