Why has the hard market created a homeowners insurance affordability and availability problem for so many consumers? Homeowners insurance policies are too broad, deductibles are too small, and insurers don’t do enough loss-control, according to a new report issued by a unit of the Alexandria, Va.-based Independent Insurance Agents and Brokers of America.
“Years of underpriced and overly generous homeowners’ policies, coupled with miniscule deductibles and increasing claims largely attributable to water damage and mold, have tightened the marketplace,” according to Bill Wilson, director of the IIABA’s Virtual University. “Homeowners who report just water damage claims are increasingly finding themselves facing nonrenewal.”
In the report, How to Solve the HO Availability/Affordability Crisis, Wilson argues that homeowners insurance policies are too broad. The Insurance Information Institute says 80 percent of all homeowners’ losses are caused by fire, lightning, windstorms and hail, water damage and freezing, or theft. In addition to these perils, as well as earthquakes, flooding and normal wear and tear, Wilson says other unusual occurrences cause relatively few losses but result in voluminous, complicated claims that often require litigation and generate claims expenses disproportionate to the exposure.
Another problem, according to Wilson’s report, is that homeowners insurance deductibles are too small. Wilson argues that the typical insurance deductible of $250 does nothing to encourage homeowners to practice loss-prevention measures, such as using smoke alarms or surge protectors on major appliances.
“Car owners often have $500 deductibles for their automobiles, while the ‘standard’ homeowners’ insurance deductible is usually $250. It doesn’t make any sense for a car to have a higher deductible than a home,” Wilson said in a statement. “This does nothing to encourage loss prevention, which is one of the principal purposes of a deductible.”
Along those same lines, Wilson argues that another problem is the lack of loss-control services or measures provided by insurers. Wilson points out that in some cases, compliance with loss- control recommendations is mandatory in the commercial-lines market to make a risk acceptable to the underwriter, and that non-compliance is often grounds for cancellation.
“A risk-management approach to controlling personal-lines losses is an idea whose time has come,” Wilson said.
To combat these problems, Wilson offers a variety of suggestions:
—Return to a “named perils” and “open perils” approach and apply homeowners’ coverage on a two-tiered basis. Specifically, use the “named perils” designation for common losses—fire, windstorm and water damage—and use “all risks” when referring to “unknown” but potentially catastrophic situations. Separate deductibles, depending on the circumstances, should apply as well with a significantly higher one for catastrophic losses;
—Raise the typical homeowners’ deductible to 1 percent to 2 percent of the value of the home or institute a flat-rate deductible; the VU report recommends $2,500;
—Apply a risk-management approach to controlling personal-lines losses. The VU provides home-loss prevention checklists for insurance agents and their clients.
The report is available to IIABA members only.
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