Policy Issues: Stalled economy is perfect time to start your engines

Welcome to the merry merry month of May, when spring is in full bloom, baseball in full swing and opportunities for helping clients in full flower! Because these articles are written several weeks in advance of publication, as you read this article the economy may or may not have bottomed out, and the attitude of consumers may or may not be improving. But regardless, as my friend Peter van Aartrijk is wont to say, “a crisis is a terrible thing to waste.” So may I suggest a possible silver lining to this dark cloud, a way to make lemonade from these lemons? Now is the perfect time to build/rebuild/reinforce those great relationships you always have wanted with your clients. Time to forever bury being a mere product provider and let that inner trusted advisor shine forth! An avalanche of surveys and research are telling us that folks are confused, adrift and desperately trying to decide the best course through this financial minefield, insurance included. Now, when folks need sage advice and counsel to rise above the endless droning and often conflicting advice from media “analysts” and “experts,” you have the opportunity to demonstrate you truly are on their sides, and looking out for their best interests–not just trying to sell them more of what they believe they can no longer afford. Ah, grasshopper, but how to begin? Herewith are but three of a veritable plethora of possible coverage-based conversation starters. 1. Down with guesstimates; up with accuracy Housing and Wall Street aren’t the only areas subject to irrational exuberance. When the economy was booming, so did payrolls, receipts and other variable bases of premium. Now retrenching has hit with a vengeance, but the answer is not to drive estimated rate bases so low that advance premiums will lay the same traps as “interest only” or “teaser” ARM mortgage payments: deluding those with ability to pay, while luring others in far over their heads by committing to vastly more coverage than what they can afford. Policy audits then become the equivalent of a principal balloon coming due or an extreme ARM reset: The insured can’t pay and the carrier can’t collect. It is far better in these tough times to have the most accurate estimates possible going in. While the insured may have to pay a bit more up front, options for dealing with this “known” cost are far superior to the potentially debilitating blow struck by a large, unexpected final audit. Bonus relationship builder: If the economy is too uncertain to reach a comfortable estimate, what better time to offer your clients possibilities such as more frequent audits (monthly or quarterly) or more frequent visits on your part to check patterns, making midcourse corrections as needed. Key goal: lots of great communication, with minimal surprises. 2 Establish “true” insurance to value When our property tax estimate came from the county a few weeks ago, my wife showed me the tax assessor’s latest appraisal and said, “Wow, the value of our house has dropped by a ton!” Yes, grasshopper, even within the homes of the enlightened dwell mere mortals. I successfully beat back the urge to correct her (generally a good idea in all things marital, not just insurance) to the more accurate observation “our real estate value may have dropped, but that is not the same as replacement or rebuilding value.” In fact, due to various changes in building supply costs, zoning and diminished number of residential contractors hereabouts, our cost to rebuild has gone up. For many folks, the past few years already have seen those numbers diverge radically. While the real estate bubble was expanding to unprecedented proportions, our home’s estimated sales value raced far past the actual replacement cost. Now they have reversed course, and, like that whale and potted plant in “Hitchhiker’s Guide to the Galaxy,” have passed each other on the fly, going in exactly opposite directions. Result? Insurance confusion, as confirmed by a recent study released by the IIABA. Although the study found that “Construction costs rose by more than 4 percent between 2007 and 2008,” according to a report in Best’s Review magazine citing Reed Construction Data figures, the included consumer survey revealed “Nearly one in four households already have changed their insurance coverage in the past year to reduce costs.” Do you doubt the vast majority of those did so by lowering their limits? Many still consider sales price the true “value” of property, and insure accordingly. The delusion is not restricted to homeowners. Many commercial insureds, seeing the real estate value of their properties dropping even faster than some homes, have decided one great way to cut costs is to reduce those now higher-than-necessary coverage limits. In the commercial case, the disparity between sales value and replacement cost may be even wider. Insureds aren’t the only ones thinking about lowered policy limits. Despite possessing the “secret knowledge of the insurance sages” of the difference between sales and replacement cost, some insurance company underwriters are starting to move to the same response as insureds, but for wholly different reasons. Whereas insureds are shooting too low to cover full replacement cost, carriers are worried they are still shooting too high. While good agents may recommend that property insurance limits in beaten-down real estate markets stay high to accurately reflect true replacement cost, carriers see “moral hazard.” Quite a few suspicious fires have allowed strapped property owners to literally cash out of slumping investments, and there will no doubt be more. While many states have valued property laws to address such situations, that is small comfort to many carriers. In their minds, policyholders who lower insured values are actually lowering the carrier’s exposure to fraudulent loss. And the astute agent who properly recommends adequate replacement cost limits may now be the messenger who gets shot–from both sides.

So what is a good agent to do? Build that client relationship. This is the perfect time to discuss those changing valuations and determine, maybe for the first time, a truly accurate estimate of true replacement cost. For those insureds (or carriers) who cringe at the number, discuss options such as insuring for ACV, functional replacement cost or agreed amount. Be clear as to the pluses and minuses of each possible approach, and let the insured make an educated choice. Then seal the deal by making sure you address all the insurance mechanics to putting the chosen path in place–particularly coinsurance and/or insurance-to-value clauses, coordination with other policies, and insurance specs required of your client by other entities.