Improving property coverage and endorsement determination
Dwelling coverage, or Coverage A, is arguably the most important feature of homeowners insurance. If a policy does not include enough coverage to rebuild after a total loss, the homeowner will be left paying any remaining costs out of pocket. The difference between coverage purchased and coverage needed can create substantial issues if a loss is incurred. At the same time, you as a carrier may not be collecting enough premium to cover your exposure for Guaranteed Replacement Cost. A great way to avoid coverage issues and protect your business is to cross-reference your Coverage A quote with LexisNexis® Current Carrier® Property.
Determining Coverage A is complex
Home insurance carriers must be able to defend to both consumers and regulators that Coverage A limits are appropriate, not excessively high nor excessively low. If you give an initial quote that is too high, you can scare away your customer. Too low, and you risk upsetting your customer when the actual price is different. Determining the amount of coverage needed is a complex formula. Factors influencing the cost to rebuild a home include the roof type, style of the home, square footage, whether parts of the home were custom-built, inflation, local labor and construction costs. Also, Coverage A limit typically drives Coverage B – F limit levels, potentially causing policy coverage limit concerns for a variety of exposures. To figure the amount of Coverage A needed, you must take into account numerous factors, including:
- having enough coverage to cover the total cost to rebuild the home, which is becoming more frequent due to the increased number of catastrophes,
- inflationary increases in the total costs to rebuild a house, and
- the relationship to any underlying mortgage or liens as it relates to moral hazard.
An additional problem in determining Coverage A is that the market value of a home is not equivalent to the dwelling’s replacement cost. Your policyholders probably don’t understand that difference. A good best practice for your business would be to help them better understand the coverage history of their home.
Replacement cost calculators that apply similar factors can be utilized to determine Coverage A when writing a new policy. There are several calculators used widely across the industry, and you may have your own proprietary calculator. To improve upon the speed of coverage calculation and/or accuracy, new data and novel approaches will be required.
The “Quick estimate” option: leveraging existing coverage limits to estimate new policy coverage
You may consider using Current Carrier Property data for estimated Coverage A limits used to produce a quick quote for consumers looking to explore new homeowner policies and offerings. Contributing carriers provide their current Coverage A amount that you can leverage for an estimate of the new business Coverage A limit.
Using the previous Coverage A limit – as well as other coverage limits – provides an enhanced shopper experience, by providing an almost immediate initial estimated quote and coverage offering. Granted, this initial quote will need to be verified through agent discussion or additional structure clarifying questions to assure an appropriate coverage level. However, that initial estimated quote will provide, in many cases, an instant quote estimate that shoppers are seeking.
“Triangulate” option: leveraging existing coverage limits with the Replacement Cost estimate
Using Current Carrier Property at point of quote and factoring the previous historical Coverage A for both the applicant and the prior owners into the quote calculation can be beneficial to improving Coverage A accuracy. Using both the applicant and the prior owners’ historical Coverage A to complement the calculated replacement cost provides carriers the means to triangulate Coverage A to a new level of accuracy. For example, is the calculated replacement cost statistically similar to prior Coverage A limits? If not, then further review might be needed for square footage, number of rooms, number of bathrooms, finished basement and other renovation related data. Current Carrier Property review of Coverage A shows that there are statistically different levels prior to current coverage on over 10% of home policies.
Even when the calculated replacement cost is statistically similar to prior Coverage A limits, Current Carrier Property can be used to triangulate other Coverage levels and endorsements. The applicant’s history of purchasing increased limits for Coverage B-F could be used to inform coverage preferences. The prior owner’s endorsement selection, such as a Water Backup endorsement, could be used to inform coverage needs for that given location.
Conclusion
For either of these options, you can speed up the time to quote substantially, improve overall coverage accuracy and close coverage gaps. You can spend more time on consulting with an applicant on coverages, rather than tedious information collection. Applicants will not have to research their coverage and mortgage information resulting in a better customer experience.
Establishing policy coverage limits and endorsements continue to evolve by incorporating historically utilized reconstruction factors and new data sources including contributory data from Current Carrier Property. Carriers that adopt this process early will enjoy advantages over their competitors, including potential for superior financial results and customer experience. For more on how Current Carrier Property can help you get the quote right, visit our website or contact us at 800.869.0751.