Underinsurance Problem Improves, Says MS/B

October 5, 2004

Undervaluation statistics for U.S. homeowners business continue to improve, according to Peter M. Wells, senior vice president of Marshall & Swift / Boeckh (MS/B).

MS/B, a provider of building cost data and estimating technology to the property insurance industry, has been tracking this statistic since the early 1990s and reports it as the MS/B ITV Quality Index.

“The newest MS/B ITV Quality Index research shows the percentage of undervalued U.S. homes has dropped from 64 percent to 61 percent, and the average percentage of undervaluation has improved from 27 percent to 25 percent across the industry,” Wells said at the Property Insurance Report 2004 National Conference in Newport Beach, Calif. “This is especially good news in light of the catastrophic losses associated with this year’s unprecedented hurricane activity and the wildfires that plagued the Western states in 2003 and 2004”

“The main reason for the improvement remains the industry’s adoption of component-based or ‘total component’ estimating,” Wells said. According to Wells, total component estimating technology uses individual building characteristics to calculate reconstruction costs unique to each structure, in lieu of square foot methods. “Our research shows that those books of business where carriers have not adopted component estimating tend to show a higher level of underinsurance; the trend can be as high as 73 percent of homes undervalued by an average of 35 percent.”

According to Wells, other important reasons for undervaluation improvements include increased emphasis by insurers on re-valuation programs, adoption of reconstruction costs as the new valuation standard, and adoption of fully automated valuation technologies that also archive data so policy information can be kept current.

The net impact of the improvement in undervaluation has been substantial ever since the conversion from square foot to total component estimating methodologies began, according to MS/B. Prior to 2000 when the insurance industry began adopting component estimating, it was estimated that undervaluation could cost the U.S. property industry nearly $8 billion in lost premium revenues. As component estimating proliferated, this number improved. Nearly $4 billion of these lost premiums have been collected as policy coverage has been more properly aligned to each individual home.

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