What Insurance Companies Don t Want You to Know

Insurance

Companies

Don’t Want

You to Know

By: James E. Krist MBA CIC, President,

The Krist Insurance Group LLC

Credit Scoring

Have you ever wondered how insurance carriers really price insurance? Would you be surprised to know that the number one method, used by almost 100% of all personal insurance carriers, is based upon a mysterious tool that measures something — but even the insurance carriers don’t know for sure what that something is?

Welcome to new age Credit Scoring — or, more

politically correct, “Insurance Scoring.”

Several years ago, in a land far away, lived an actuarial firm called ”Fair Isaac.” They knew insurance, and they knew actuarial science, the basis for insurance ratemaking. They noticed a mathematical

relationship between Financial Risk Management tendencies and actual losses. The inference is that if you poorly manage your finances, you will poorly manage your insurance risk too. The issue here is that Fair Isaac sells, on a confidential basis, this ratemaking tool to insurers to use. Fair Isaac conducts an actuarial study of each individual company and then creates a tool based upon that company’s client base and their clients’ losses.

Following this analysis, Fair Isaac then constructs software just for that company and based upon their actual business, a loss model. This loss model pulls from over 400 available statistics into a subset that they put into a software package for each company to use exclusively. Here’s the interesting part — THEY DO NOT TELL THE INSURER WHAT THEY BASE THE RATE UPON. It is secret. The company does not know, the agent does not know, the client does not know — but the interesting part is that it predicts loss quite accurately.

Fair Isaac

What we do know we have learned from experience and testing several components.

1) Credit cards — EACH card you have is counted to the total credit you have available. This is a detriment if you have many. (How many times have you been offered an incentive to get a credit card? These, even if unused, even if cut up — but not cancelled — can reduce your credit score.) 2) Mortgage shopping — Many mortgage brokers

“hard hit” your credit record to shop your mortgage with multiple carriers. These hits, if numerous in a short time, can hurt too.

3) Late bill paying — Including paying medical bills late that may be in dispute.

4) Any negative credit development — Liens, bankruptcies, etc. 5) Divorces — Those affecting credit from lack of coordinated credit

usage by spouses that have split but not been officially divorced. This seems crazy, but they use tools that may not be typically considered as well. We can recite several instances where consumers are confused. “You mean I just got a mortgage on a $500,000 house, but my credit is not good enough for preferred insurance rates?”

If you are buying a home, it is a good idea to GET

YOUR INSURANCE SCORE FIRST - THEN GO

MORTGAGE SHOPPING.

If you have not followed this process, it may not be a bad idea to reshop your insurance shortly after you get it. The credit scoring is typically a moving, fluid target and you could get a better rate soon after the mortgage “hits” have cleared, usually within 60 days.

What Affects

Your Rating?

Things you can do to improve your insurance score:

• Pay bills on time.

• Manage outstanding credit balances, keeping them at or below 75% of available credit levels.

• Avoid excessive inquiries to credit reporting agencies. • Limit the number of credit accounts.

• Review credit reports regularly and take steps to dispute inaccuracies. • Avoid quick credit fixes. Good credit is built over time.

• Manage debt consolidation. Consider how to pay down debt without generating more credit activity.

• Limit the amount of new debt. Too many loans or credit accounts opened up in a short amount of time can negatively affect credit rating.

• Establish credit now. A longer credit history creates a positive impact on score.

• Work with creditors. Resolve outstanding balances before they are turned over to a debt collector.

Replacement Costs

One of the more difficult issues to grasp within buying homeowners’ insurance, or any property insurance on buildings, is the distinction of Replacement Cost versus Market Value.

One of the first things that professional agencies do is figure

replacement cost on every house or building insured. Replacement cost is the actual value to rebuild the house without including the purchase price of the lot in the calculations.

Better credit rating

means better

insurance rating.

Krist Insurance Services figures replacement costs on each house insured or quoted. Why? This is a critical component of valuation and encompasses several aspects of coverage.

Once successfully calculated, the insurer is obligated to replace the house, in many cases to 125% of this value in the event of a total loss. Plus, it can avoid a penalty for underinsuring in the event of a partial loss, through a mechanism called co-insurance.

Co-insurance is just that, a penalty for underinsuring, which is applied in the event of a partial loss, and most losses

are partial. The replacement cost is figured at the time of loss and used by insurance company adjustors to see if the house was

properly insured in order to pay a full partial loss. They take what you should have had for insurance, divided by what you do have, and pay this ratio on the loss, less the deductible. Market value, on the other hand, is just that, what the property could sell for and has nothing to do with the insurance requirements to insure it.

For example, if you bought a solid brick house in a run-down neighborhood, you may buy it at a bargain — say $65,000 for a 1,500 sq. ft. two-story house. The replacement cost of this house may be $120,000+ using $85 per square foot replacement cost estimates, and may go up because of special features in the house.

New Construction Replacement costs from the

builder may not be accurate either. Why?

Imagine you are a large homebuilder, building 500+ homes per year. Will you get a discount on your materials due to volume? How about a discount on labor to build it due to “quantity discounts” from your sub-contractors? You bet; it is a bargain. The large builders get better deals on the components of each home.

Get

true

Now imagine the worst-case scenario — your home is a total loss. When you get it rebuilt, will your new contractor get the same quantity discounts? Will they get the same discounts building one house, as opposed to the typical new home developer who will build many at the same time on your street? Will you need to get the builder who has available time when you have your loss?

Will the replacement costs on your new home

be the same as your purchase price less lot?

NO WAY.

Professional agents use current construction costs from up-to-date guides that the insurance carriers are bound to, if used properly. To make matters worse, each carrier uses its own replacement cost guides, and independent agencies use several as a guideline when there is a house with a questionable replacement cost.

This is why the assistance of professional advisors is paramount — to make sure these replacement cost details are dealt with to avoid claims problems in advance.

Management Suggestions — Claims

With the age of electronic/digital databases, all of your claims are tracked by insurers, generating what the industry calls a CLUE report.

This report lists your home (and auto) claims with any insurer. This loss-tracking report impacts your premiums, and more importantly, your acceptability to the insurer. If you have had a ton of claims, or more importantly, a certain type of claim, some carriers may not want to insure you. Under current market conditions, this is a critical function for your agent to get involved and negotiate on your behalf.

Managing claims

means managing

coverage costs

It is no secret that homeowners’ insurers have been losing money. A ton, as a matter of fact. And the CLUE report has a huge impact on your insurance. If it’s not accurate, it can have as big an impact as your insurance score. Why? Several reasons:

• Homeowners’ insurance — made into a maintenance policy, not just protecting the catastrophic loss. Many small frequent losses are covered, violating the intent of insurance. Ben Franklin created the concept of fire insurance in Philadelphia in 1752 by spreading the catastrophic losses of the few to the many. Insurance was originally just for catastrophic losses. That’s not the case now.

• Changing weather patterns — the dramatic increase in wind/hail losses in Iowa has had a huge impact on insurance losses. Based upon industry data, 70% of ALL loss costs for the last five years in Iowa have been wind and hail. This is huge and is not calculated in your current premiums. Although some premium ground has been made up with rate increases in the last 12-18 months, increases are expected to continue.

• Mold Claims — the homeowner’s policy was never intended to cover mold, unless it occurred from a covered peril, like wind blowing off the roof in a rainstorm. Many courts have rewritten the homeowners’ contract, and carriers have taken a huge loss as an industry. This litigiousness drives up prices.

• The threat of mold — claims from the changing weather patterns. The damage caused by hail and wind (damaging or blowing off shingles) can cause the ongoing potential for water seepage, causing the dreaded mold.

Here’s the rub: you may have called your insurance company to visit with your agent about a situation where your home was damaged. It may have been as innocent as seeing if some shingles that blew off were covered in excess of your deductible amount to repair.

We have seen some agents inaccurately report this inquiry as a claim. That impacts your pricing and, more importantly, impacts your acceptability. With the above-mentioned market conditions and with insurers losing a ton of money in homeowners’ insurance, they are looking for ways

to not write new business. Most are non-renewing with two claims of any sort in three years. And we have seen where these erroneous CLUE reports cause a non-renewal, leaving the homeowner with no options except specialty home insurance which is outrageously expensive.

This situation can be avoided by working with a professional agency that can guide you through the maze of insurance issues and keep a quality, affordable insurance program in place.

“Extra” Coverages that are not really “extra”

Did you know that the homeowners‘ insurance industry has SIX different homeowners‘ forms? Did you know that the coverages are different in each of the six? Did you know that each company has endorsement to add or “stretch” these basic coverages?

One of the things that experience brings to any agency is the fear of low, inadequate coverage at the time of claim when your clients need it the most. Part of the process at Krist Insurance Services is to quote the coverages that show you these options on a cost benefit basis.

The musts (not extras):

• Replacement cost coverage on your contents • A review to properly insure your

- Off-premise items — Such as jewelry, laptop computers and cell phones

- Art — Review valuations to avoid discrepancies that may lead to a claim problem

The power of the

CLUE report.

- Antiques — Properly insuring these items takes careful evaluation

- Unique features in the house — Rooms, adornments, etc.

- Evaluation of replacement cost issues in line with owners‘ objectives — consideration of the “functional replacement cost”

- Toys — Boats, snowmobiles , ATVs, jet skis, etc.

• The Ho-15 endorsement, or “stretch” endorsements, including such things as:

- Backup of sewer and drain and sump pump malfunction - Refrigerated products — Covers spoilage for power outages - Increased coverage for jewelry, watches, furs, guns

Other new and exciting coverages available:

• Identity theft endorsement — Helps you recover the cost of your

stolen identity and clear up credit reports and records, invoking legal help if necessary

• Replacement costs on your home — Increasing the total value of coverage in the event of a total loss to the actual replacement costs of your house, even if it exceeds the policy limit

• Kidnap, ransom, and extortion insurance — Our affluent clients have taken great interest in these coverages

And, most importantly, an Umbrella Liability policy. Good agents will be protecting your net worth and evaluating your exposure on non-profit boards (E.G.-Boy Scouts) and volunteer positions (Little League) to properly examine these exposures and transfer them to an insurance company.