Agents and Homebuyers Need the Right Clues to Make Smart Decisions

Many recent media accounts would have us believe that prior loss history reports have single-handedly caused an availability crisis and have halted the sale of existing homes.

One of the most contentious issues surrounding homeowners insurance this year is insurer use of prior loss-history databases. Although spurned in the press as the “new database used to cancel policies” or the “secret insurer database,” these databases are neither new nor secret, and have been used by many personal lines insurers as new business underwriting tools for several years.

CLUE reports (Comprehensive Loss Underwriting Exchange), a product of ChoicePoint Asset Co., and A-PLUS (Automobile-Property Loss Underwriting Service), a product of Insurance Services Office Inc. provide loss information reported by participating insurers. The reports may include prior losses reported by the applicant, or in the case of property, prior losses reported on the insured dwelling address.

Many recent media accounts would have us believe that prior loss history reports have single-handedly caused an availability crisis and have halted the sale of existing homes. But if this were true, wouldn’t FAIR plan populations be exploding? And insurers are in the business of writing policies. They aren’t looking to avoid business or cancel a policy without good reason.

The National Association of Realtors (NAR) has been a vocal critic, charging that “CLUE” reports are leading to an availability problem. They contend many homebuyers have trouble getting insurance on a new home purchase because the insurer may review the loss history database not only for the customer, but also for the property to be covered. They also contend that the industry frequently denies coverage to individuals based on claims made by the previous owner of the property to be covered, and that this practice has seriously affected existing home sales. In reality, there is no problem. The NAR’s own statistics show that “the level of home-sales activity over the last six months has been the strongest on record.”

NAR has also claimed that most insurers will reject prospective insureds if they have two or more claims within three years, or existing policyholders if there have been “as few as one or two legitimate water-based claims.” On this charge, I might have to agree with NAR, because, statistically speaking, “two or more claims within three years,” and multiple “legitimate water-related claims,” actually represent extraordinarily high loss frequencies. A homeowner with a frequency of prior losses may, in fact, have to shop a little harder for coverage—coverage that, in every state, is available.

Several regulators have joined efforts to control what insurers report to databases, and how they use information from those databases. Unfortunately, many are also looking to tack on additional cancellation restrictions, including restrictions on consideration of claim frequency. Some are also trying to reduce the initial statutory timeframes allowed for underwriting new business and placing restrictions against canceling binders.

Both realtors and regulators have raised concerns that insurers should not hesitate to answer. However, it appears that in many states we are seeing a knee-jerk reaction to media reports and a limited number of consumer complaints. No fewer than 25 states have taken up the issue of insurer use of loss-history databases.

Let’s slow down and consider the facts. 1) Insurers actually reject very few applications. 2) In the majority of situations, a report of damage to property must necessarily be considered a “claim” even if, for any number of reasons, no payment is made to the policyholder. 3) Prior losses to the dwelling are relevant to consider since the policy covers both the dwelling and the policyholder. 4) Insurers need to know what they are insuring. It is inappropriate for legislation or regulation to aid in concealing prior loss information from the insurer.

Recent actions by ChoicePoint have provided an interesting alternative for realtors and insurers. The company is making CLUE reports available to some insurance agents in at least two states on a pilot project basis. The agents can work with a realtor to provide the loss history of a home to the seller or buyer as a service to the customer. After all, shouldn’t the history of the dwelling be disclosed to the buyer in advance?

While creative alternatives like these will benefit consumers in the long run, what impact will regulatory or legislative restrictions have on consumers? If insurers are not allowed to underwrite risks that are often insured for hundreds of thousand of dollars in combined coverage, by necessity, they must be far more cautious in accepting risks. And if insurers cannot underwrite a risk after issuing a binder, the solution seems simple. Risks might need to be “submitted for approval” and binders would become a thing of the past. That won’t exactly make it easier for a prospective homebuyer to secure coverage on short notice before a closing date.

In other words, in an effort to solve perceived availability problems some states might just create them.

Lynn Knauf is a policy manager in the Personal Lines and Research Division of the Property Casualty Insurers Association of America (PCI).

Topics Carriers Agencies Legislation Profit Loss Underwriting Property