Are You Stuck with Your Head in the Sand’

You have probably seen property values in your community rise considerably over the last several years. As a seasoned insurance agent you know that market value is different than replacement value, but you still have an unsettled feeling about the commitment you made to your homeowners customers. Unfortunately, that queasy feeling is justified.

Along with real estate prices, a variety of market forces have also pushed construction costs higher across the country—quite significantly in some areas. We are often reminded that two out of three homeowners are substantially underinsured. This statistic was reinforced in headlines from last fall’s California wildfires, and further evidence will undoubtedly emerge in the aftermath of Hurricane Charley.

Rather than ignoring the problem or being reactive to your carriers’ whims from year to year, your agency has the power to tackle this insurance to value (ITV) issue head-on. After all, it is in both your customers’ interests as well as your agency’s interest to have a properly valued book.

You know more than you realize
Although you are not a construction expert, your personal, professional and local experiences have most likely provided you with a fair grasp of your local construction market. Additionally, many of you probably know (or even insure) local contractors and claims adjusters who have first-hand experience of real costs in your area. A good underwriter or replacement cost provider should welcome your input on local cost trends. That said, bear in mind that those underwriters and replacement cost providers also have something valuable to contribute to our overall understanding of replacement cost:

Reconstruction vs. new construction: It is always more expensive to rebuild a home after a loss as compared to building a similar new home not associated with a claim. The biggest reason is economies of scale, but many other factors also contribute.

Older homes: Most old homes (typically defined as pre-1945) were built with custom craftsmanship and materials that are very labor-intensive and expensive to replace today.

Quality of materials & workmanship vary: Although you may have a solid grasp of average building costs in your area, keep in mind that not all homes are the same. Costs increase exponentially with high quality materials and workmanship.

Lunch with your contractor friend may give you a sense of what the average new home is going for in your community, but that elusive replacement cost figure is usually quite a bit higher.

Focusing your attention
Your local knowledge has confirmed that your property book is probably quite undervalued and you have made a commitment to change this, but how do you now go about remedying the problem?

The first step is to make it a priority to set the proper coverage amount on all new business. An agent or broker should never blindly trust the coverage limits established from a previous carrier or agent. Remember, most homes are already underinsured!

Occasionally you will compete against an agent who quoted a lower premium by undervaluing the prospect’s house. In these situations, discuss the home with the prospect, ask them their opinion and validate your position with a trusted cost estimating tool. These tactics, your local knowledge and of course that winning sales charm should assure the homeowner that you are a principled professional looking out for his or her best interest.

Without an accurate renewal adjustment, that initial up-front work may have been futile. Be sure that you have a mechanism in place for updating your policies annually. Challenge your carrier if their inflation guards are insufficient based on what you are hearing in your local market. It is also important for you to review coverage limits regularly with your customers and encourage them to advise you of renovations or additions to their homes.

What about those older policies on your book that are giving you that unsettled feeling? If you are concerned, let your carriers know! There are several solutions out there including computer programs that can analyze your book to identify underinsured policies.

Did you know that ostriches actually do not stick their heads in the sand to hide from problems? Neither should you. A good faith effort and systematic approach to ITV will get you, and more importantly, your customers where they need to be.

Craig Locante has been with Castle Data Services since 1994 and was appointed president of its parent company, ITV Solutions, in 2003. Locante personally designed and developed Rapid Calc, Castle’s state of the art replacement cost estimator. His philosophy of giving agents a voice and his commitment to technology has placed ITV Solutions among the most accurate and technologically advanced replacement cost providers in the nation. For more information visit: http://www.itsolutions.net.

Topics Agencies Construction