Over the past several years, much has been done to promote awareness of windstorm mitigation discounts among residential H06 and H03 policyholders in Florida. Mandatory discount notifications, the My Safe Florida Home program and its associated grant money and free inspections, word of mouth, and more widespread promotion by insurance agents have all contributed to this trend, which has in turn has had a significant impact on premiums. This marked increase in awareness about windstorm mitigation is both necessary and commendable. In many cases, policyholders have been able to obtain insurance savings that make installing opening protection devices, bracing gables, or replacing a roof a more obvious economic decision. The array of incentives that help average Floridians make the right choices to protect themselves from hurricane-force winds benefits everyone who lives here.
However, there is another side to the windstorm mitigation inspection discount process that is equally important — especially to underwriters. As awareness of the windstorm mitigation inspection has increased, so has the sheer quantity of inspectors performing inspections, which now number in the thousands. This rapid growth has resulted in a widely varying level of quality control processes among inspection companies. While one company may subject its inspection data and supporting digital photos to hundreds of data validation checks and submit them to a quality control department run by a professional engineer, another may handwrite the inspection results on a paper form and leave it behind with the homeowner. Even for those inspectors specially trained to perform windstorm inspections, checks and balances for clerical or other errors may not be in place for every inspection. Handwritten forms may go unread and unnoticed until they land on an underwriter's desk.
The problem starts in Tallahassee. There are no Office of Insurance Regulation (OIR) guidelines for how to complete the inspection form beyond the language on the form itself. This opens the way for inspectors to interpret the questions on the form in subtly different ways that are contrary to underwriting department guidelines. Additionally, the forms may be signed by someone other than the person who physically performed the inspection. This can make it difficult (short of a discovery process in litigation) to identify the actual inspector. Unfortunately, fraud has become a topic of concern. Underwriters have reported numerous instances of inspectors not entering policyholders' homes or attics, an obvious prerequisite for a proper windstorm mitigation inspection. In the most egregious examples of impropriety, doctoring of the mitigation inspection form has occurred.
The combined impact of all these factors is that over the past several years the consistency and quality of the inspection reports being submitted to underwriting departments has decreased at the same time the volume of inspection forms has increased. As a result, the risk of inappropriately awarded mitigation discounts being on the books of Florida underwriters is undoubtedly higher.
Solving the Problems
Fortunately, there are several things underwriting departments can do to address these issues. For an existing book of business, a reinspection firm can perform a methodical review that isolates the most unlikely combinations of mitigation credits, roof and home dates, and physical locations. This will screen a book of business to isolate the most unlikely discounts. The cost of these targeted reviews can be more than recouped by the restoration of premiums to their proper levels. A less quantifiable but undoubtedly positive effect from this due diligence is the removal of potentially catastrophic under-priced risks from an insurer's book if the policyholder elects not to pay the proper insurance premium.
By way of example: Of the most recent 200 windstorm mitigation inspections audited by Don Meyler Inspections on behalf of underwriters, 64 percent were found to have one or more unwarranted credits. Of the eight answers on the current mitigation form, the median number of incorrect credits on each inspection was two. The credit most often incorrect was the opening-protection rating. Before the review, 54 percent of these policies had been awarded the highest hurricane rating for opening protection. However, after the review, it was found that only 12 percent of the 200 homes warranted such a rating. In each inspection, the inspector obtained photographic evidence wherever deficient or unprotected openings were found. This 78 percent reduction in the number of homes actually qualifying for the hurricane-opening protection rating undoubtedly had an impact on gross premiums.
While this is an admittedly small sample size, it is an indication of the average quality of the many hundreds of inspections being submitted to underwriters daily. The potential financial implication of this trend to carriers and their reinsurers is likely to be significant, although the exposure from unwarranted credits will obviously vary from book to book.
For new mitigation submissions, underwriters can take a variety of actions to exert control over the quality of this critical policy information. The forms should be rigorously reviewed as they arrive. In addition to validating basic information such as name and license number, dozens of logical validation tests can be applied to the data to weed out impossible or highly unlikely inspection results. By capturing a few additional fields of data, such as the inspection company and inspector name, suspicious trends can be quickly spotted and acted upon.
Identifying the Bad Apples
Instances of fraud and abuse should be reported to the authorities, including the licensing boards and the Department of Insurance Fraud. OIR is contemplating an update to the current OIR-B1-1802 inspection form that should introduce additional protections with respect to documentation requirements and signatures. A public workshop for interested parties was held in Tallahassee on Aug. 18. OIR's property and casualty review department will continue to accept comments after that date as the office reviews proposed changes to the inspection form.
Most importantly, the agent community upon which underwriters rely can be made keenly aware that certain companies have earned the confidence of underwriting departments through demonstrated best practices and guidelines. Promoting a preferred vendor (or vendors) for windstorm inspection services (a "white list") will allow underwriters to outsource some of the critical gate-keeping aspects of the underwriting process to trusted inspection companies. Only companies that 1) have a demonstrated expertise in the documentation of windstorm mitigation features, 2) work closely with underwriters as partners, and 3) utilize best practices for quality control, inspector training, and customer service (for insurance agents and homeowners alike), should make the grade.
By taking these steps, underwriters, agents, and inspection firms can all help ensure policyholders are knowledgeable about windstorm mitigation features and receive the discounts they deserve when hardening their homes, while ensuring that the premium being charged accurately reflects the windstorm mitigation features of the home itself. We can all do our part to preserve the kind of responsible incentives that these credits were created to encourage.
Scott S. Koedel, CPA, CIRA, is president and COO of Don Meyler Inspections. He may be reached at skoedel@dmifla.com and 800-469-0434.
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