Insurance Academy

What is the Underwriter Thinking?

By Patrick Wraight | June 5, 2019

Got a really interesting question this week. The essence of it is that the agent has a customer with a homeowners’ policy. The company is planning to renew coverage with the house on Actual Cash Value (ACV), rather than Replacement Cost (RC). The company has asked for a specific repair that the customer just doesn’t see as necessary. The agent wanted to know what they should do about this.

By now, you’ve already started to form opinions and you don’t even have all of the details yet. That’s cool. I do it, too. But let me give you a few thoughts on this topic from an underwriter’s perspective by answering a few questions that might already be on your mind.

Why ACV?

Actual Cash Value is a method of valuing property that attempts to estimate what the property is worth at the time of loss. I see property valuation methods as estimates at best. There are many variables that can go into estimating the replacement cost value of a piece of property and even more when you estimate the ACV.

ACV is calculated by first estimating the replacement cost of the piece of property. Depending on the property, there are several ways of doing that. For buildings, there is building valuation software. You could use that same software to estimate the replacement cost of personal property. You could also have receipts that detail the cost of the items new or go to a retail store and find out what the items actually cost today.

ACV is the replacement cost with a deduction for depreciation. Now that we have an estimate of the replacement cost, we have to figure out how to depreciate it. One simple method of calculating depreciation is by finding (or estimating) the effective useful life of the property, subtract the amount of time the item has been in service (how long ago it was bought), and then divide the remaining useful life by the effective useful life. Multiply that number by the replacement cost. All good? Here’s what that looks like.

useful life – time in use = remaining useful life

replacement cost x remaining useful life / useful life = ACV

There are other methods of finding ACV, but this will do for now.

Back to the question: why did the underwriter decide that the risk was going to be written on ACV? What we know so far is that the underwriter has identified some repairs that they deem as necessary and there is at least one of them that the insured has decided is unnecessary and doesn’t want to do it.

My underwriter mind reading implant tells me that it is likely that the company has written this risk for at least 3-4 years and there is some history. It feels likely that there is some small claims activity. From what we know, there is some issue with repairs that need to be made.

An underwriter shouldn’t have an issue with one small repair. In fact, I have seen underwriters approve risks conditionally with necessary repairs on the promise that the insured was planning to work on them over the policy year. These could be things like some obvious wood rot at a window or door, or some soffits that need to be repaired or replaced.

The problem is that there appear to be several of these repairs, and we know of one repair that the insured doesn’t want to make. That kind of push back is a problem for underwriters. It tells them that the insured either cannot afford to make the repairs (not a statement about the character of the insured), that the insured doesn’t want to make the repairs (a potential statement about the character of the insured), or that the insured is waiting for something to happen so that the insurance policy will repair the existing damage (a definite statement about the character of the insured).

Again, my underwriter mind reading implant tells me that the existing damage, and the attitude of the insured worked together to create increased risk in the underwriter. That, and the existing relationship with the insured, is why they decided to renew with an ACV valuation. The underwriter actually wished that this was new business so that they could decline it and be done with it.

Why the repair requirements?

This goes back to the last question. Why does the insured have to make these repairs? Why can’t they just wait for something to happen so that the insurance policy pays for it?

That’s not what insurance is for. A homeowners’ policy is not designed to provide for the regular required maintenance of the dwelling. It’s meant when something unexpected happens, like a hurricane, a fire, or Godzilla shows up.

As to the repairs themselves, existing damage to a building increases the probability of loss to the dwelling from different causes. No. the maintenance of a dwelling can’t change the probability of hurricane, flood, or Godzilla. On the other hand, the existing damage does create some additional thoughts for the underwriter.

My underwriter mind reading implant tells me that the underwriter wonders about what damage they can’t see. Existing visible damage is an indicator of the presence of damage that can’t be seen. I once tried to renovate a bathroom and when I got all of the tile out of the shower, I discovered water and mold damage to the wood frame. That was extra work and extra money.

Any damage that you can see from outside the house, whether it’s a cracked window, or a missing soffit, means that it’s possible that something that’s outside the house can get inside the house. A small piece of missing soffit is an invitation for squirrels, mice, rats, and bats. A small crack in a window is an invitation for water to enter the dwelling. Water

Why the repair requirements? It’s because the damage that we can see makes us concerned that there is more that we can’t see, and the probability is higher that future damage is coming.

What is the underwriter really trying to do here?

Let me check with my underwriter mind reading implant one more time and see what really might be going on in the mind of the underwriter. The underwriter’s primary goal is to write profitable business. My guess is that the underwriter either knows that they have written the risk for some time without many issues, or that they have a relationship with the agent that needs to be maintained. These two factors can cause an underwriter to be reluctant to nonrenew a risk.

From what we’ve seen of the risk, it looks like the underwriter wouldn’t have approved this risk if it was new business. It has too many potential issues. So, what is the underwriter trying to do? They could be trying to help the agent by offering a quote. It’s not the quote that the agent would prefer, and it’s not necessarily something that the insured wants. It puts the insured in the position to look for their coverage somewhere else.

That might be exactly what the underwriter is looking to do.

About Patrick Wraight

Patrick Wraight, CIC, CRM, AU, is director of Insurance Journal's Academy of Insurance. He can be reached at

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