By Mary Byrnes, AAI-M, AU, Education Department
Recently I read an article about personal lines and widespread underinsurance. The article delved into why insurance is seen as a commodity, but we all know why, so let's not go there. Remember the concept of the law of large numbers (the larger the sampling, the more accurate the prediction of losses) and how they're used in the rate making process, etc. But it also serves to reason that the concept will work with trends of insureds.
This article used the California wild fires to make a point, of how homeowners affected by a single wild fire were underinsured on their dwelling coverage and almost half were underinsured on their personal property. Since this is a pretty large sampling of homeowners, that degree of underinsurance is just startling! So with that large sampling is it possible that the same percentage would hold true for any geographic area?
Most carriers require an ITV calculation on dwellings; as long as the cost per square foot or the room cost provided by the program used is accurate, you should be able to plug in the numbers and voila! If a carrier isn't requiring an ITV calculation, it's still a matter of self-preservation for the agent to do one anyway. For this discussion, we're going to consider that the dwelling is on point for the ITV.
For personal property, though, ITV is not so easy. If the replacement cost value of personal property is 70% of the dwelling amount, is that enough? Everybody has their “thing", mine is the kitchen. I love everything about it. When I open a drawer with all the little gadgets in it, if I think about having to replace all if it, I hyperventilate! This reaction is no different than your insureds would have to losing or having to replace the things that they prize most. So whether it's the kitchen, clothes, furniture, jewelry, antiques, train displays, etc., when you're talking to a client about their contents limit, get them to mentally open their junk drawer, closet, and so on.