Why Complex is Better
The property insurance situation in some coastal states is in a crisis. With another big hail season and/or fire season, much of the South and Intermountain West may see the property market freeze. For those in more northern climates, the property market is comparatively much better.
Many of these problems are self-inflicted and the solutions can be provided by the industry. The self-inflicted part is that the industry has made too much insurance look easy, and appearances in this case are absolutely deceiving. If anyone thinks anything about insurance coverage is easy, they should not be trusted.
A Business Owners Policy (BOP) is a great example of making insurance coverage seem easy. The net result is agents don't think they need to understand what they are selling because the BOP has made thinking irrelevant and has placed the focus on the price. Just focus on the price. One simple example of why hard thinking is mandatory when selling even BOPS involves the business income portion. Somewhere between 98% and 99% of the producers I meet think the Actual Loss Sustained (ALS) clause is perfect because it pays for the actual loss sustained. This thought process simply proves they don't know what they are selling.
ALS does not unconditionally pay for the actual loss sustained. It has many limitations. A quite pertinent limitation is the time factor. With all the supply chain disruptions we're experiencing, many businesses will exceed the time factors built into the ALS coverage. ALS only provides coverage for actual losses sustained within specific parameters. Failure to understand those limitations is a major failure of professional advice.
Homeowners is another example. Insurance people are not at a high enough percentage thinking through the coverage issues. I once completed a study of the basic ISO homeowners endorsements (25 or so basic ISO endorsements exist) to calculate how many combinations of coverage exist at a most basic level. The number was around 33.5 million. Nothing simple exists when 33.5 million coverage combinations exist, but insureds do not know this, and I find most agency people don’t either. To slap a commodity label on an HO-3 with the same set of endorsements and treat every homeowner to the same coverage, only differentiating the Coverage A amounts, is to neglect the actual coverages most homeowners actually need. This also fails to provide many homeowners with options provided by more robust policies.
A client told me we should go back to the days of professionalism when agents had to build the policy. A history lesson is that agents literally had to find different coverages and build a complete homeowners policy. They had to integrate the coverages. All the ease and packaging taken for granted today did not exist.
Going back to that model, without going backwards, is probably the solution to many of the property insurance issues that exist today. People that do not know what they are selling and don't stop to think through the coverages people actually need, will not understand the following. For all the others, a solution is to split property coverages apart into different policies. Many aspects of property are not difficult to insure. Fire coverage is a major issue in California, but it is not an issue in Little Rock. In Little Rock, wind and hail are the major issues, and these are not that important in California. So split the policies into two. One policy is for the easy coverages in that geography and the hard coverages are placed on another policy. These are Difference in Condition (DIC) policies. These policies have been in existence forever, but I find few people with less than twenty years of experience know anything about them. They've never seen anything but package this and package that.
A newer form of insurance is an elaborate DIC in many ways, and this is parametric insurance. Parametric insurance is in its infancy and many limits being offered are too small to be relevant, but large limits are being written for governmental entities.
The benefit is that to do this, agents must become more professional because they must know what they are doing. They must understand insurance and they must understand their clients' specific needs, not generic needs.
Is it more complicated? Absolutely. A homeowner might need a policy excluding wind/hail, a wind/hail policy, and a flood policy (or maybe an earthquake policy or both). They would need three policies and intuitively one would think this should all be wrapped into one. But that makes an inaccurate assumption because insurance carriers don’t want to insure all the perils for which the insured needs coverage. What the insured needs and the market is willing to provide are two different things. Pretending to make insurance simple, with one policy where carriers are not interested in covering specific perils, is a huge mistake. Even now where wind/hail deductibles may be 10%+ in places and ACV on roofs over seven years, pretending to sell a simple policy only for the insured to discover a huge deductible after the fact, is a huge mistake. When carriers put those deductibles on property, they are not interested in insuring the peril/property. It is impressive in some cases they even try to find a meet-in-the-middle solution by offering limited coverage.
The property problem is unlikely to fix itself soon. Smart people willing to invest in complex solutions that are specific to their clients and their carriers, and other alternative markets, even DICs, is how an agent takes control of the situation. This is how you protect yourself and your clients, gaining a competitive advantage in the process.
Complex is better. Excessive simplification does not benefit clients. If all this is new to you and you are interested in learning more, I applaud you. Considerable resources, some dating back decades exist that you can read and study. The newer solutions are exciting and given how new the solutions are, quick search engine searches will generate tens of thousands of hits. The material exists from which to learn.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.