Getting Back to Selling Insurance

Here is a day in the life of an insurance broker:we provide advice on how to minimize risk, we empathize with and assist our clients who have suffered a loss and we negotiate with underwriters. And now a major part of our day is spent appraising houses and determining reconstruction values What? Yes, life on the front lines of insurance sales has become much more challenging over the past few years.

The insurance industry has historically used the cost to rebuild a home as the basis for establishing a premium for the risk. At one time, the homeowner easily answered seven to 11 questions to provide a “ballpark” figure for replacement value and this served the industry well.

A number of factors changed this. Technology, for starters. The computer replaced the old paperbased calculation method, making it possible to incorporate ever-increasing levels of complexity to the process. Today’s calculators use component-based methodologies that assign a construction or reconstruction cost to every component of the dwelling; then they layer on quality factors such as standard or premium. There are now, depending on the software product, hundreds of potential data points that brokers can enter to come up with the insurance valuation of a home. It’s necessary to capture this data, vendors and insurers tell us, because in this Home-and-Garden-Channel, do-it-yourself era, house construction is increasingly complex; even subdivision housing includes architectural designs, custom features and unique building materials. But the volume of detail we are able to capture in these products is far beyond what most homeowners know about their home. So no matter how sophisticated the tool, the principle of ‘garbage in, garbage out’ prevails. For all the work involved, we’re no closer to getting accurate valuations; in fact, many underwriters are still applying a loading factor to compensate for the 30% or so underinsurance that has been acknowledged in the industry for the past 20 years. One has to ask: is it necessary or even appropriate to capture this much data for underwriting purposes, or is it just that computerization makes it possible?

Several competitive products are now available to do these complex calculations. Entering the same data in each of these products will often yield wide-ranging results — sometimes by a difference of up to 50%.This has created an environ- ment in which it’s almost impossible to determine which valuation is most accurate at any given time. Many insurers use square-footage guidelines to test the calculator results for reasonableness, which begs the question: if underwriters know what minimum value they want per square foot, why can’t brokers just use that figure up-front and save a lot of time and aggravation?

The terminology for housing features differs from product to product. Similarly, definitions vary between those used by the calculators and those used by the local construction industry. This adds a further obstacle to accurate valuations.

Software vendors tell us they use local loss data and local construction data, with factors localized to the first three digits of postal codes. Frankly, I see little corroborating evidence for these assertions.

The issue of brokers potentially using the tools for competitive advantage has been the subject of some discussion in B. C. But doing multiple valuation calculations and then using the lowest value for quoting and determining premium has the potential to underinsure the home and put Guaranteed Replacement Cost further at risk. Similarly, the potential exists for a calculator to be set to produce valuations consistently below competing products, giving a software vendor a short-term competitive advantage. Over the long term, however, it will diminish the vendor’s efficacy in producing credible insurance valuations.

Local housing markets in some geographic areas are sufficiently dynamic that the back-end data in the calculators are always substantially behind the curve. Here in B. C., the busy activity of the residential construction industry for the past few years has outpaced the valuations, causing underwriter angst and pressure on brokers to renew valuations and bring them more in line with market pricing. Now that the housing market has cooled off and construction costs have stabilized, homeowners expect insurance valuation increases should be leveling off as well. Alas, that has not been the case.

For brokers, it’s all about the customer. We’ve invested in the operational systems, gone to the training seminars and read the bulletins, and we’re still seeing our homeowner business walk out the door. We’re not serving our clientele well when we spend our valuable face time with them — a 20-minute exercise at the minimum (I defy those who insist it only takes three to five minutes to perform an insurance valuation) — talking about carpet, drywall, roof components and the percentage of finished basement. Then we have to talk them down off the ceiling with an explanation about the impact of a changing economy on their premium – an explanation that most view with skepticism at best.

Brokers want to get back to talking about coverages and risk management. B. C. brokers have been vocal in our concerns about ITV because we believe any solutions will require a coordinated effort by all stakeholders. We simply have to eliminate the friction and frustration at point of sale.

We should seriously consider whether or not component-based valuation is even the right method for calculating insurance value. Or perhaps more accurately, is the broker’s office the right place for long-form, component-based calculation? Would another method, such as square-footage calculation, be just as effective?

In his column published in the February 2009 issue of Canadian Underwriter, E2Value chairman and CEO Todd Rissel compared the insurance industry to a 1972 Chevy coping with the immense horsepower of a brand new engine (ITV software). I would suggest instead that the insurance industry is a modern, fuel-efficient car that ITV software vendors are trying to equip with a truck, train or plane engine. They have taken technology designed for other applications and are telling us it’s the right product for the insurance industry at point of sale. I see mounting evidence that this is not the case.

Whatever the industry determines to be the right technology for insurance valuations, we need to get back to the half-dozen or dozen questions that will determine the general size and scope of the risk. We need to do this within this calendar year; in the interim, we need to agree to do business in a way that does not cause our customers any more irritation.

That’s why, a few months ago, B. C. brokers floated the idea of a moratorium on doing home evaluations for renewal policies. We’ve heard and we understand the reasons why underwriters are reluctant to support the idea. They argue this does not educate the customer about the need for updated valuations; it just postpones the inevitable discussion with the client about valuation. But a short-term moratorium on renewals would help us retain our good, loyal clients. As one broker told me, if we had a moratorium, his staff would be doing cartwheels around the office. It would give us the time and the motivation to come up with workable alternatives.

For decades, brokers have worked individually and through their associations to keep insurance transactions positive and customer-centric. We’ve resisted or mitigated attempts to attach other functions to the insurance transaction. We have been proud of our successes in this area. It’s one reason why we’re able to look our customers in the eyes each day and say with all sincerity: “I’m here for you.” But we’ve somehow allowed a cumbersome, inaccurate, inefficient and problematic process to creep into the transaction for homeowners’ insurance.

We’re at a critical juncture in the history of brokering. How we resolve this ITV issue will have an immense impact on the operational efficiency of our brokerages and on our relationship with our customers. We have to get it right.

We have to get back to selling insurance.

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Brokers want to get back to talking about coverage and risk management. We need to get back to the dozen or so questions that will determine the general size and scope of the homeowner’s risk.