Home Insurers Should Raise Deductible: Study

Home Insurers Should Raise Deductible: Study

NU Online News Service, Sept. 14, 1:37 p.m. EDT?Home insurers should require higher deductibles and increase their loss prevention efforts to alleviate affordability problems for the line, an insurance association report suggests.[@@]

The study, titled "How to Solve the HO Availability/Affordability Crisis," was written by Bill Wilson, director of the Big "I" Virtual University. VU is an online insurance educational and informational resource program offered by the Independent Insurance Agents & Brokers of America, based in Alexandria, Va.

Mr. Wilson said, "Years of underpriced and overly generous homeowners' policies, coupled with miniscule deductibles and increasing claims largely attributable to water damage and mold, have tightened the marketplace.

"Homeowners who report just water damage claims are increasingly finding themselves facing nonrenewal. Fortunately, there are steps that both insurers and consumers can take to mitigate this recurring problem."

Mr. Wilson said that homeowners policies are too broad.

According to the Insurance Information Institute, 80 percent of all homeowners' losses are caused by fire, lightning, windstorms and hail, water damage and freezing, or theft.

Mr. Wilson notes that in addition to these perils, as well as earthquakes, flooding and normal wear and tear, other unusual occurrences cause relatively few losses but result in voluminous, complicated claims that often require litigation and generate claims expenses disproportionate to the exposure.

A problem, according to the report, is that homeowners' insurance deductibles are too small.

Mr. Wilson argues that the typical insurance deductible of $250 does nothing to encourage homeowners to practice loss-prevention measures, such as using smoke alarms or surge protectors on major appliances.

"Car owners often have $500 deductibles for their automobiles, while the ?standard' homeowners' insurance deductible is usually $250. It doesn't make any sense for a car to have a higher deductible than a home. This does nothing to encourage loss prevention, which is one of the principal purposes of a deductible." Mr. Wilson said.

Along those same lines, the report finds that another problem is the lack of loss-control services or measures provided by insurers. He points out that in some cases, compliance with loss- control recommendations is mandatory in the commercial-lines market to make a risk acceptable to the underwriter, and that noncompliance is often grounds for cancellation.

"A risk-management approach to controlling personal-lines losses is an idea whose time has come," Mr. Wilson observed.

To combat these problems, he offers a variety of suggestions:

? Return to a "named perils" and "open perils" approach and apply homeowners' coverage on a two-tiered basis. Specifically, use the "named perils" designation for common losses?fire, windstorm and water damage?and use "all risks" when referring to "unknown" but potentially catastrophic situations. Separate deductibles, depending on the circumstances, should apply as well, with a significantly higher one for catastrophic losses.

? Raise the typical homeowners' deductible to one percent to two percent of the value of the home or institute a flat-rate deductible; the VU report recommends $2,500.

? Apply a risk-management approach to controlling personal-lines losses. The VU provides home-loss prevention checklists for insurance agents and their clients.

"How to Solve the HO Availability/Affordability Crisis" is available to VU subscribers and IIABA members.

More information about Big "I" membership and VU subscriptions is available online at www.independentagent.com.