What to do about the crisis of underinsurance

The insurance industry sells peace of mind. But for many business owners, the events of the past few years have left them feeling anything but tranquil. The COVID-19 crisis and its ongoing fallout have exposed and exacerbated several weaknesses in their insurance coverage. Whether it’s issues with business interruption, the global supply chain, the scourge of ransomware and cybersecurity attacks, wildfires or increasingly severe weather, it’s clear insureds are facing threats from many directions.

The most frightening part is commercial policyholders are often woefully and chronically underinsured, the result of a confluence of drivers. A hardening market means carriers are likely narrowing coverage as rates increase. Buyers have become habituated to shopping for insurance at the lowest cost possible, and agents are hesitant to contradict them. Producers themselves often lack the technical acumen to fully understand the coverages they sell and may bind policies without even reading them. And finally, there’s the complacency that comes with increasing revenues thanks to a hard market (which won’t last forever), and from the fact that client turnover is extremely low. Renewals are, in a very real sense, theirs to lose.

At the same time, agents and brokers are under threat. They’ve become pushers of an increasingly commoditized product. They face unprecedented competition from insurtech companies with online, self-service business models that bypass agents entirely, as well as from increasingly ambitious large agency consolidators.

To combat these challenges, agents and brokers must rethink their roles. Rather than following along with a client’s request, agents must take the lead with a risk management approach that guides insurance buyers toward self-discovery of the risks they face. Accomplishing this requires a two-pronged strategy: Agents must become more technically proficient to confront an increasingly complex market, and they must develop stronger leadership and sales skills.

Business and personal costs of underinsurance

Does underinsurance truly rise to the level of crisis? Let’s look at the numbers: Insurer Gen Re found 40% of actual insured personal and commercial property value falls beyond quoted sums in the U.S. On the personal property insurance side alone, three out of five homes in the U.S. are underinsured by an average of 20% below full value, according to a citation from the property data aggregator CoreLogic in a 2019 report published by Rutgers Center for Risk and Responsibility. And risk assessment firm AIR Worldwide reports that 34.6% of insurable North American average annual loss (AAL) is uninsured, resulting in an estimated $32.7 billion in unreimbursed cost to policyholders.

Think for a moment what this means to a homeowner or business owner. They sleep soundly at night, assured by their agent that their $1 million investment was fully covered, only to learn after a catastrophe that they will have to spend anywhere between $200,000 and $400,000 out of pocket to rebuild. That agent hasn’t just failed to serve their client well. He or she has also cut the agency’s commission revenue by the same 20% to 40%. For an agency with $5 million in revenue, that’s at least a cool million left on the table, and potentially double that amount.

This creates obvious risks not only for policyholders but for agencies and carriers as well.

Policyholders: Any one of the above oversights — or a myriad of others — can result in denial of a claim, leading to a common refrain from policyholders: “How did this happen? I thought we were covered.” The fault here rests squarely on the agent, who did not fully consider the risk of adverse financial events that could change the lives of policyholders, their employees, customers, and communities.

Agencies: Agencies, too, lose out when their customers are underinsured. Not only are they failing policyholders, but they’re also leaving money on the table. Insurance agencies should assist their clients in making intelligent and intentional risk management and risk transfer decisions. With the right risk assessment process, clients will likely purchase more policies and coverage, aligning policyholder interests with the agency, which will see increased revenue.

Carriers: By failing to invest in agent education and training, carriers are leaving money on the table as well. Rather than spending thousands of dollars sending high performers on junkets, why not invest those resources into helping them sell more coverage and diversify their risks across lines of business? In addition, carriers take on a huge reputational risk whenever they deny claims — even legitimately. The frequency and severity of natural catastrophes, such as fires, hurricanes, and tornadoes, leads to rising payouts, as does social inflation resulting from an increase in litigation and legal costs, including so-called nuclear verdicts: massive judgments by juries (exceeding $10 million), that usually arise from auto accidents or product injuries.

One problem: Agent-customer relationships

While a lack of technical acumen is a contributing factor in the underinsurance crisis, it is not the only one. The second factor is the agent-customer relationship. In an effort, perhaps, to close sales, producers typically follow direction from prospects and customers when they should be taking the lead. Here are just a few traps that agents fall into that reduce their influence over customer decision-making:

• The myth of apples-to-apples comparisons. Often, a buyer will tell an agent they want the best price because they assume policies with the same coverage are identical. And yes, coverage limits can appear the same. But those comparisons are meaningless without understanding the coverage form, which dictates exactly what’s covered and what’s not. In worst cases, producers renew policies as-is without reviewing changes to the policyholder’s business and assets in the preceding year as well as changes to the policy itself.
• The E&O paradox. Agency errors and omissions (E&O) workshops may advise agents not to delve too much into the details of a policy, believing that this will minimize the possibility of misinterpretation. Yet, failing to identify an exposure and recommend a solution is also one of the most frequent sources of E&O claims. Producers need a more balanced approach to liability that empowers them to provide the context their clients need to make informed decisions.
• Following the path of least resistance. Instead of following a policyholder’s lead during sales or renewal, agents should be executing leadership. The problem is that policyholders rarely have a full grasp of the risks they face. If a policyholder hasn’t had a loss in thirty years, then they assume they won’t have a loss in the future. This assumption is simply not true. Insurance protects against events that are, by definition, rare but devastating. So, when a client says, “I’m only interested in the best price,” it’s likely because they are discounting the very real risks they are assuming.

The complexity issue

No question about it, insurance is complex, and policy forms and endorsements are a tangle of legal details that can obscure high levels of risk if not reviewed carefully. Neither the buyer nor the agent should make assumptions about exactly what a policy contains, lest they receive some very nasty surprises in the event of a claim

Here are just a few examples of oversights and incorrect assumptions we’ve come across among clients:

• Getting the name of the insured entity wrong
• Underestimating building replacement costs
• Failing to address demolition of unaffected structures with an ordinance or law coverage policy
• Underestimating how long an insured will suffer loss of income
• Overlooking the consequences of off-premises power loss
• Failing to establish ownership of and insure property in transit or stored off-premises
• Not listing all autos with Symbol 7 coverage
• Assuming that property outside a designated flood zone is immune to flooding
• Overlooking “other states” coverage for workers’ compensation
• Ignoring US Longshore & Harbor (USL&H) coverage

A new paradigm: Agents as leaders

What if that same agent took the lead and elevated the conversation by telling their client: “Listen, cost is one factor to consider. But you also need to contemplate the 150 employees here that are depending upon you. You’re part of the community. You have a family that might take over this business one day, and certainly depend on it as a going concern. Isn’t it fair to assume you care about a whole lot more than just the price? If something tragic were to happen, would you even be thinking about your insurance premium?”

After listening to their response, they’ll then ask, “What if we took a different approach? What if you told me more about your business so that together we can better understand the risks you face, and which ones make sense to transfer to insurance?” The process must be collaborative, involving a structured dialogue with the client about every aspect of their business. Without that leadership skill set, all the technical acumen in the world will not solve the problem of underinsurance.

Staying ahead of the game

How do we get producers to become leaders and practice specialists? It requires an ongoing process of training, self-driven learning, and mentoring. Typically, agencies send producers to one source for sales training, to another for technical training, and to yet another for prospecting training. They may even engage outsourced coaching. All these training components must work together to be successful. The message you use to get in the door has to align with the experience your prospects receive once you engage with them. The skills needed to elevate the conversation and to help buyers make more informed decisions must be taught in a way that also leverages technical capabilities. Look for a training professional whose approach toward prospecting, sales, producer development, and coaching is intended to work together to differentiate and elevate the conversation while technically assessing and reducing risks for clients.

Despite the many challenges facing insurance agencies and their producers, we believe that today is a great time to be an agent, albeit a new kind of agent. The future is bright for those who elevate the client conversation with knowledgeable, intelligent service leadership. This kind of agent leads clients toward informed decisions that ensure they understand the risks they face and know the extent of the insurance coverage they purchase to mitigate them. These agents are not box checkers, nor can they be easily replaced by an AI algorithm. They are the future of our industry.

Frank Pennachio (fpennachio@resourcepro.com) has spent more than 30 years in the insurance industry as an agent and producer. He now serves as Practice Leader, Growth Solutions at ReSource Pro, helping independent insurance agents and insurance carriers develop risk management expertise and drive new business.

See also:

• The home-based business boom has an underinsurance problem
• Embedded insurance: A potential solution for the underinsured
• How to fix the widespread underinsured-home problem