COMBATING INFLATION IN PERSONAL INSURANCE CLAIMS
While options to control costs are limited, these tips can help your clients
Saving a few premium dollars
won’t be worth it in the long
run if your clients find themselves
underinsured at the time of a loss.
By Marc McNulty, CIC, CRM
For those of you who are new to the insurance industry, you’ve most certainly learned by now that insurance is not immune to inflation. It’s amazing to hear how many clients continue to expect their premiums to remain flat at renewal because they’ve had no claims—despite the cost of almost everything else having increased. Every agency is currently dealing with this issue.
Each of us has limited options to control costs, such as packaging accounts with one carrier, increasing deductibles, or eliminating physical damage coverage on vehicles that don’t need it. However, the real challenge isn’t controlling premium costs before a loss but doing your best to minimize damage caused by inflation after a loss has occurred. Insureds don’t care how much you save them in premiums if a claim leaves them with a significant out-of-pocket exposure afterward!
Update replacement cost estimates
While this may seem redundant, especially where you just wrote a client’s homeowners coverage a few years ago, consider taking the time to review the replacement cost details with your client as part of an account review, and then update the replacement cost estimate (RCE) accordingly. You may find that the dwelling coverage needs to be increased, despite any inflationary factors that have been added to the policy at each renewal.
Prior to 2020, it was not uncommon to see Coverage A amounts be more than they should in cases where a client was with the same carrier for an extended period of time. Compounding inflationary factors at each renewal would eventually cause dwelling limits to exceed current replacement values, so adjusting the RCE to current values, and subsequently reducing the Coverage A on policies, was a tool in every agent’s arsenal to help reduce premiums at renewal.
However, times have changed, and you may find that dwelling limits of insurance need to be increased—even in cases where your client has been with the same carrier for a long time.
Add enhanced replacement cost
At some point in your insurance career, you’ll experience a total loss on a home in your book or will work with an agent who has one. Don’t be surprised if the cost to replace the home is more than the Coverage A on the policy, despite efforts that were made to properly insure the home to value.
A variety of factors can contribute to this. When homes are being built as part of a development, labor and material costs are planned accordingly. As you can imagine, building materials that are purchased in bulk are usually subject to discounts.
This doesn’t necessarily apply in a one-off total loss situation. We’ve even had a homebuilder tell our agency point blank that they slightly pad their profit margins when they know an insurance carrier is writing the checks (which is infuriating, but another topic for another day).
One way to provide extra cushion is to add an enhanced replacement cost estimate endorsement onto your homeowners policies. Most carriers offer the HO 04 20 (Specified Additional Amount of Insurance for Coverage A – Dwelling) or an equivalent endorsement as part of their homeowners insurance programs.
Typically, this form can be added to provide an additional 25% or 50% on top of the existing Coverage A on the policy, so you can rest assured knowing that your clients have extra protection should their rebuild costs exceed existing dwelling limits.
However, note that this isn’t necessarily an add-it-and-forget-it endorsement. The form provisions require that the insured allow the carrier to adjust Coverage A in accordance with property evaluations they make as well as adjust the limit to keep up with inflation. While these may not seem like a big deal, the form also requires that the insured notify the carrier:
Within 30 days of completion, of any improvements, alterations or additions to the building insured under Coverage A which increase the replacement cost of the building by 5% or more.
This means you still need to stress to your insureds that any improvements to their homes be reported to your agency so that replacement cost estimates can be updated accordingly.
In some cases, carriers may offer guaranteed replacement cost endorsements. This is an even better option, as it doesn’t cap the additional amount of coverage at 25% or 50%. Rather, it provides an unlimited amount of coverage to rebuild the home (as-is, of course) in the event of a total loss.
Just like with the HO 04 20 endorsement, these forms will require that you properly insure the home to its current replacement value and amend the Coverage A limit any time improvements, alterations, or additions are made.
Update jewelry appraisals
Another conversation that I’ve had recently with clients centers around jewelry appraisals. Over the past five years, the price of gold is up almost 25%, platinum is up about 16%, and silver is up approximately 12%. If you have clients with scheduled jewelry, it is imperative that they keep their appraisals current.
As I’ve told insureds on more than one occasion: It’s great when a client calls after a piece of jewelry is lost or stolen and we can tell them that they’re covered. However, it’s terrible to have a follow up conversation with the client when the amount of coverage is insufficient to replace the insured item.
Stress to your clients the need to obtain updated appraisals for their scheduled valuables every few years. Not only are the prices of precious metals increasing, but so are the replacement values of various watch brands such as Rolex.
Increase rental reimbursement coverage
On the auto side of things, talk with clients about increasing the rental reimbursement limit of insurance on their auto policies. The $30 or $40 per day limit they may currently have on their policies will most likely be woefully insufficient if they need the coverage after a covered accident.
For example, I recently searched for rental cars in my area (Dayton, Ohio) with a well-known national car rental company. The price for a compact car was $400 per week while a standard model was $420 per week.
Obviously, prices will vary by area, but the premise remains the same: The small amounts of rental reimbursement that are included with the auto policies you sell won’t be enough to put your clients into an equivalent vehicle after a covered loss.
Given that auto repairs are often taking longer now than they were a few years ago, insufficient rental reimbursement limits could add up quickly and your clients won’t be thrilled about what they must pay out-of-pocket if their limits fall short.
While everyone is increasingly conscious about what they are paying for goods and services—insurance included—we all need to remind our clients that this is not the time to skimp on protection.
Saving a few premium dollars won’t be worth it in the long run if your clients find themselves underinsured at the time of a loss.
Marc McNulty, CIC, CRM, is a principal at The Uhl Agency in Dayton, Ohio, and has been with the agency since 2001. He divides his time among sales, marketing, technology and operational duties. You can reach Marc at firstname.lastname@example.org