MS/B Says Underinsurance Problem Lessening

Undervaluation statistics for U.S. homeowners business have improved dramatically, according to Robert Crine, president of Marshall & Swift / Boeckh (MS/B).

Crine announced the news to senior executives from the
P/C industry at MS/B’s annual Client Conference in Atlantic City, N.J. recently. MS/B has been tracking this statistic since the early 1990’s and reports it as the MS/B ITV Quality Index (TM).

According to Crine, “The newest MS/B ITV Quality Index research shows the percentage of undervalued U.S. homes has dropped from 73 percent to 64 percent, and the percentage of undervaluation has improved from 35 percent to 27 percent across the industry.” The reduced potential for underinsurance problems is reportedly good news for insurance executives, consumers and consumer advocates, who have been concerned about the impact of home replacement costs on property claims settlements. “It’s a win-win-win situation,” said Crine.

Improvements in Insurance to Value (ITV) accuracy result in an increase in the number of properly valued homes, thereby reducing the likelihood of property underinsurance. This, in turn, reportedly causes premiums to be more properly aligned to each risk, increases policy retention and improves relationships with policyholders, consumer advocates and insurance regulators.

The net impact of the improvement in undervaluation has reportedly been substantial ever since the conversion from square foot to total component estimating methodologies began.

MS/B estimates that undervaluation costs the U.S. property industry nearly $8 billion in lost premium revenues each year on the underwriting side alone. The correction that has already occurred suggests that companies have earned back as much as $2.17 billion of this lost revenue.

“One of the main reasons for undervaluation improvements is the industry’s adoption of component-based or “total component” estimating to replace the now obsolete square foot valuation method,” explained Crine.

Other important reasons for undervaluation improvements are carriers’ increased focus on re-valuation programs, adoption of Reconstruction Costs, which better reflect the costs incurred by carriers in total loss situations, and utilization of fully automated valuation technologies that also archive data so that policy information can be kept current.

While the majority of property writers have all but reportedly embraced the component approach, there is still more to be done. Not every homeowner’s policy has been updated.

“Important milestones are being achieved,” added Crine. “There is a great deal of progress that supports the investment companies are making to determine more reliable coverage limits for their insured base.”

The MS/B ITV Quality Index is based on U.S. statistics. However, homeowners carriers in Canada have reportedly experienced similar undervaluation issues and have begun to use component-based valuation applications in their ITV initiatives.