Establishing ITV Best Practices

It seems no one in the Canadian insurance industry has a vessel that is fully waterproof in this particular whirlpool that is insurance to value (ITV). Many different currents have swirled around the ITV question — the estimation of replacement cost for rebuilding after a loss — and now threaten to twist the issue into a truly destructive vortex.

Insurers, cornered between deteriorating property results and a hardening market, struggle to balance the need for accurate ITV against the potentially negative market reactions associated with its achievement. Vendors of replacement cost calculator software, within their own competitive environment, have found themselves newly challenged to account for the figures that their tools generate. And brokers, working with their clients, are increasingly frustrated by conflicting information, time-consuming processes, sometimes illogical results and a general inability to provide clear answers when it comes to addressing consumer dissatisfaction.

Economic fluctuations, especially amplified in certain regions, have served only to intensify the controversy. Last summer, brokers from across the country, meeting within the forum of the Insurance Brokers Association of Canada (IBAC), agreed action was required; one of IBAC’s standing committees was asked to consider the ITV issue in detail. The dialogue within that group formed the basis for a recently released discussion paper, now being shared with insurer partners and Insurance Bureau of Canada (IBC).

IBAC committee members realized that insurers are definitely interested in achieving premium adequacy for the risks they have assumed, but they are very often, especially with older portfolios, still labouring to calculate what their real total exposures are. Due to legacy computer systems and a protracted soft market, a lot of data held by insurers regarding existing risks may be incomplete or simply out of date. In those areas in which rebuilding costs have changed rapidly, the dislocation between insurers’ information and reality may be even greater. The challenge, however, is pinpointing which properties are not accurately valued and then finding a fair means to correct the problem.

Brokers are not, and can never represent themselves to be, professional appraisers. It is, however, the broker’s responsibility to assist clients in finding their best possible protection. The conundrum for brokers is this: using the available tools, how do brokers know for certain what the correct number is?

Recent changes in calculator software, both in the tools’ operation and in the figures they generate, have left some unsure about their use and lacking confidence in the results. All of the tools are promoted as producing an accurate replacement cost figure. At the same time, data from the same home, entered into different calculators, can produce radically different answers. Individual experts offer up different (sometimes contradictory) instructions for the application of features or options, even within the same tools. Insurers and brokers alike are frustrated by the inconsistencies and the difficulty of finding explanations for the discrepancies.

The process of working through an ITV calculation can in itself be an arduous process, for which some customers may have limited patience. As well, clients may not always possess 100% accurate information even about their own homes, increasing the margin of error in a given calculation. Service problems can be further compounded if brokers’ competitors aren’t diligent about making sure the customer carries adequate limits; if that happens, brokers must work that much harder in their role to educate clients about the need for the right protection.

As insurers act to rehabilitate their portfolios, the potential exists for further friction to arise if corrective programs are not discussed and agreed upon in advance. Brokers have found themselves frequently caught between insurers and consumers. Brokers are frustrated by requirements that narrow the brokers’ range of options for ITV tools, and by discounts that appear to favour one tool over another. In some areas, insurers’ direct approaches to clients, made without brokers’ explanations and agreement, have been perceived as eroding the client-broker relationship and compromising the trust and confidence vested there by customer.

Ultimately, the entire industry’s image is tarnished when consumers experience — and start to resent — processes that seem inconsistent or illogical to them. At the end of its survey, IBAC’s committee concluded no one player within the insurance chain can or should shoulder sole responsibility for solving the ITV question. Given the variety of different factors driving the issue, insurers, software vendors, brokers and consumers all share some obligations. In accepting this realization, the broker group defined the following list of recommendations that together would involve all partners in contributing to some resolution.

1) The lead responsibility for ensuring that replacement cost is calculated will remain with the broker. Brokers’ primary loyalties are bound to the customers they represent. This first agency relationship assumes a mandate to ensure that the client is as well protected as possible; with respect to ITV, this means making certain a client’s property is evaluated, whether using a tool with information gathered from the client or through on-site appraisal. Within the framework of this relationship, evaluations need to be conducted with the advance knowledge and agreement of the broker. Further, the data collected, since it is identifiable personal information, forms part of the client’s accumulated file and belongs to the broker as the client’s representative.

It is in all parties’ best interests, especially the client’s, for the industry to foster a fair and stable marketplace — one in which properties are insured for values reflecting the actual exposure, and rates commensurate with that risk are charged equitably across the market. Whether considering partial or total losses, insurers must be confident they have collected the proportionate premium for their exposures. Otherwise, risks that have been properly valued will subsidize the remainder of the portfolio. From the perspective of both the client and the broker, accurately assessing ITV is a requirement: even a Guaranteed Replacement Cost (GRC) endorsement is no substitute for adequate, full limits.

2) Consumers should sign evaluation forms attesting to the documented value of their property whenever possible.

Frequently, consumers’ dissatisfaction with the new replacement cost values applied to their homes stems from a lack of information. Informing customers and actively involving them in the ITV process is therefore a crucial element in addressing the present issues. These tasks fall easily within the scope of the broker’s primary relationship with the consumer. Creating a practice of direct customer participation, making them aware of the factors entailed and soliciting from them some personal commitment on the accuracy of the information provided could alleviate some resistance.

3) Insurance companies sanction the use of specific ITV calculators.

This recommendation assumes, of course, that insurers would sanction only ITV calculators that have demonstrated accurate results. By essentially making public judgments on the calculators’ accuracy, the industry would encourage natural competition among the vendors.

4) Brokers will have free choice as to which calculator they will employ from among the selection of available, sanctioned tools.

This concept goes hand-in-hand with the preceding recommendation. It is predicated on a marketplace in which software vendors compete not only on price, but the accuracy of their product. Further to this point, however, to ensure fairness to insu rers and consistent treatment for consumers, brokers must also commit to using only one calculator with any given insurer.

5) Current evaluations are mandatory when submitting new business and letters of authority. To avoid misapprehensions on part of either customer or insurer, and to work on the overall industry challenge of updating values, this appears to be a logical best practice. Within their mandate to protect clients’ best interests, brokers will naturally review a customer’s needs when writing a new policy, even for a remarket or letter-of-authority. The ITV review creates an opportunity to focus directly on the real value provided by the insurance product, in the amount of protection it affords. Nevertheless, shorter versions of the existing calculator tools, provided they can be shown to be accurate, would be most beneficial in alleviating brokers’ and customers’ frustration with the lengthy amount of time currently required to perform an ITV calculation.

6) Certain options within calculator software are accepted as required practices.

To consistently give all partners, especially consumers, the most accurate estimations possible, it will be necessary to establish standard practices to be applied with all calculator tools. Some significant factors — such as including the cost of foundations, or the amounts allowed for contractor’s overhead — can be handled differently from tool to tool and may contribute to inconsistent outcomes. Sometimes the need to include some of these items may not be immediately apparent, or they may not always have been required during an original construction scenario. IBAC’s committee realized that further discussion would be required to clarify practices and determine what the standards should be. Such discussion should take into account additional investigations using actual loss data.

7) The minimum default period for submitting updated valuations to insurance companies will be every five years.

Collectively, the industry needs to establish an objective of having reasonably current and consistent information in place for the vast majority of insured risks. Working towards this goal alone would do much to increase fairness and consistency, improving the odds that customers whose properties are insured at their correct replacement value don’t subsidize others. While the actual interval chosen would have to be agreed upon, above all the industry needs an ongoing strategy so that the present situation is not allowed to recur.

8) Establish a neutral forum in which stakeholders can evaluate the accuracy of ITV calculators. This recommendation draws on the observation that no single industry partner can solve the ITV issue without the participation, good faith and willingness of the others. This final suggestion can, and has already, prompted infinite discussion. Beyond objectively assessing ITV calculators, the forum could branch out into many shapes and roles, possibly including the formal endorsement of the standards or ‘best practices’ described above.

The idea of creating yet another industry entity is perhaps the most ambitious and challenging, but at the same time, potentially the most rewarding concept proposed in the broker discussion paper. Because the ITV issue impacts virtually all levels and modes of distribution, and given the competitive nature of our business, absolute neutrality would be essential. All stakeholders would need to agree on their commitment to working through the forum; reaching that agreement alone may be difficult to accomplish. Nevertheless, the IBAC committee recognizes that the seriousness of the current situation might just be the motivation required to bring all players together, to harness a unique opportunity to improve our industry and ultimately better serve our collective customers.

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Shorter versions of the existing calculator tools, provided they can be shown to be accurate, would be most beneficial in alleviating brokers’ and customers’ frustration with the lengthy amount of time currently required to perform an ITV calculation.

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Ultimately, the entire industry’s image is tarnished when consumers experience — and start to resent — processes that seem inconsistent or illogical to them.