Homeowners Insurance   Hyper-Inflated Costimators 

It seems an increasing number of carriers have resorted to hyper-inflating their residential Replacement Cost calculations as a means of generating increased premium revenue, and policyholders are outraged! Is this problem unique to Illinois or are agents in other states having similar experiences?

When 3-4 bedroom tract homes that sold for $250,000 before the collapse of real estate prices generate RC estimates well in excess of $700,000 - more than double their current market value - there's a credibility problem!

Is the Homeowners industry trying in one fell swoop to overcome the under-insurance issue that was a popular topic a couple years ago? Probably not, but it's time to re-examine the accuracy of widely used replacement cost algorithms.

Lawrence,

We are having the same problem in NJ. We subscribe to Marshall/Swift estimator software and that is what most companies are using in their rating platforms. The numbers are way out of line. I had a house insured for $435,000 because that was the cost estimator value. The insured had a fire and I had a local builder come in and do the full demolition, site work, permits and a gorgeous house that was larger than the original for $272,000. There is definitely something wrong with that picture.

When I tell the companies that local builders told me they can build a nice house for between $140 ad $170 per square foot, they give me the same answer, that the number does not include debris removal, permits, etc.
Clients are upset but we are at the mercy of the software.

Dee Zampella
NJ

First, just so we're all on the same page. Price "sold for..." or market value has absolutely nothing to do with "Replacement Cost". I hope you can explain the difference to your clients.

That being said, I agree the inspection companies (like Mueller), company estimators, Marshall & Swift, etc seem to be inflated. Especially the companies that specialize in high value homes (are you listening Chubb,Firemans Fund,AIG?). In the tri-state area of NY,NJ,CT they are using $220+ per square foot. My local builders tell me they can do it in the $150-175 sq ft range.

There are some on-line estimators that I think are way more accurate but only a few companies will accept "outside" estimates.

Arguing the RCwith the companies is an effort in futility.

It is not only a problem with residential cost estimates it also is pervasive with commercial. Insurance companies know they are collecting excess premium for the exposures they have insured. I just had my 3rd total loss in over 40 years in the business. Replacement cost had been forced on my client at 320,000 we got ripped off by the demolition company for $ 80,000 to tear the structure down and the entire claim including demolition was settled for $ 250,000.

It no longer has anything to do with indemnity its how much can the companies gouge the client for. It is pervasive throughout the insurance industry. Once one company can get away with it they all do it.

The simplest way to get a handle on this issue is to make the insurance carriers pay up to the insured value regardless of what it costs to repair or replace and put the burden of proper values back on their lap. This would put a pretty quick end to this practice of forcing over-insurance.

The bigger problem is the company thinking they can squeak a couple more dollars out of each policy. Stockholders have to be paid ( even if they are company personnel ). The fallacy is that those few dollars put so many more dollars at risk. Way back in the day before the companies made these "maintenance" policies - all the companies made money in Homeowners.

Had a field rep in the other day that I asked how the company arrived at the new numbers - She tried to do her estimate on the program the company is using but the inspection company used a totally different program - yep could not even begin to get the numbers to come close.

Along with everything else - if the estimator companies do not change the numbers - then they cannot sell their product.

Bottom line - we do not need any new additions to coverage - Thank you "Sewer backup, Accident forgiveness etc."
When the losses happen under these new coverage - it is always the agents fault - so cut our commission.

That is also a problem here in NW Wisconsin. Some of the replacement cost estimators are completely out of line. I have mentioned this many times to my Company Reps. to no avail. I have many local contractors insured in my Agency that tell me the local cost is approximately $125 to $150 a square foot. Yet some of these replacement cost estimators are coming in at $200 - $250. It is no wonder some of the rates on Homeowners have doubled in less than 4 years. Not only that, I can do 4 different company quotes and come up with 4 different figures. One company that I represent always comes in significantly higher than the rest. For example, if a home is estimated at $200,000 they would come in at $270,000, for a home that could be rebuilt for $165,000. It is legal robbery of our clients. I wish I had an answer to how this can be stopped.

I had an incident last year where a house sold for $350K beautiful home but when the field inspector went out to provide a rebuild calculation, it came up to over $1M!! The house is beautiful but not $1M worth. I had to talk the client into it with a sales pitch. I mean, even if it doesn't take $1M to rebuild the home, the client still gets all of it, doesn't she?? I thought insurance was supposed to indemnify them and not put them in a better position. I haven't been an Agent for too long so if my thinking is wrong here, please let me know.

With responses from agents in the Midwest and the East Coast, it looks like this is not an issue confined to a small region or a few carriers! Obviously agencies throughout the country are spending/wasting enormous amounts of time explaining the inexplicable to their personal lines clients.

Dale's suggestion of settling claims for the dwelling's insured value raises an interesting question: are Replacement Cost estimates consistently and significantly lower in valued-policy states such as Kansas or Georgia? A safe bet would be that they are.

This is not a problem that individual agencies can easily overcome. However, if enough of us call attention to it, maybe an aggressive state association will will take up the issue.

Also a problem in the great state of Louisiana!

This has been a big problem that I am dealing with in SC, especially with one particular carrier. In the last 2 weeks it has gotten much worse. I have already lost a customer because of the increased RC after inspection and the way the carrier handled it. There is no way to be competitive with other carriers when your RC is double another carrier. I am at a loss as to what to do. Would love to hear any stories of people that fought this fight and won!

We just lost the account of a good young family whose home the incumbent carrier wanted to insure at renewal for $760,000: they paid $265,000 for it a year ago.

The husband called a few minutes ago to tell me he was moving his home and auto policies to a quasi direct writer. He's doing it reluctantly but said they appraised the home's RC at $495,000, saving him over $800. He was still upset over our carrier's RC estimate so went along with the new carrier's 'demand' to write the autos too.

We can beat most direct writers' rates but when they're using more realistic RC numbers than any of our companies, which are otherwise top quality, they regain the advantage!