In news story after news story about last year’s devastating floods, hurricanes, and wildfires, the media shared heartbreaking tales of individuals who were either uninsured or underinsured for the tragedy that befell them. As a result, most disaster survivors are facing a daunting, stress-filled effort to rebuild their businesses, their homes, and their lives without adequate resources to do so. Increasingly, many see no other option but to sell their lots and walk away, often still underwater from unpaid mortgages. The impact on the communities they leave behind exacerbates the adverse impact of the disaster, itself.
The scope of the problem becomes almost incomprehensible when one hears the statistics. A law firm that examined policies of 200 survivors of the recent northern California wildfires found 97 percent of the policyholders to be underinsured. According to estimates prepared by CoreLogic, at least 60 percent of American homes are underinsured by at least 20 percent. Given those facts, it’s no surprise that Risk and Insurance listed the insurance gap as one of 2018’s Most Dangerous Emerging Risks confronting the insurance industry.
Framing the Issues
The reasons that businesses, individuals, and non-profit organizations are uninsured or underinsured are diverse. For any given situation, they may include:
- Complex policy language and lack of standardization in policies across policy types and state boundaries, making it difficult for customers to purchase the right amount and type of insurance to meet their needs
- Cultural constraints (including language barriers)
- Demographic factors (e.g., fewer homeowners who typically have higher awareness of insurance needs and more households of unrelated individuals)
- Economic factors (e.g., price of housing and/or cost of replacement rises faster than anticipated, especially in a post-disaster market)
- Failure to explain risk in a way that the public may understand
- Financial limitations (e.g., given the wide variety of desirable insurance coverages and the cumulative cost, people may not be afford to be fully insured for all risks. As a result, they assess their individual risks and make choices such as life insurance over earthquake insurance)
- Insurance industry billing practices (e.g., insufficient/no discounts for risk mitigation behaviors and a requirement of annual or quarterly payments, not monthly ones)
- Insurance industry marketing practices (e.g., avoidance of businesses or individuals located in low-income areas, customer dislike of a commission driven business model, focus on home owners by sales personnel to the neglect of renters, and failure to use e-commerce tools popular with segments of the population)
- Insurance products don’t match the preferences of potential customers (e.g., customers prefer to have combined contents, structure, and temporary housing coverage, not separate caps on each item)
- Lack of focus on insurance in emergency preparedness messaging (which focuses on creating a kit and having a plan, not on being adequately insured)
- Psychological factors (i.e., absence of rewards for risk reduction actions, assumption that government will cover their losses, failure to appreciate risk, lack of interest in planning for adverse events, or reliance on tax deductibility to help recoup losses)
- Regulatory roadblocks to the swift rollout of innovative products or pricing practices
- Tax policy which may distort insurance purchasing decisions (e.g., if an individual does not have employer provided health, dental, disability, life, long-term care, or vision insurance, those costs must be absorbed personally, which may crowd out property and casualty insurance since automobile insurance is required by law)
- The changing nature of risk (both as to frequency and severity) has outpaced the ability of the insurance system to respond
- Time constraints (i.e., insufficient time to learn about the insurance options available and make a decision about additional coverage)
A Host of Thoughtful Solutions
The good news is that the problem is recognized, and many entities are stepping up to offer strategies to close the insurance gap. Experts with Clyde & Company have suggested that a shift to parametric insurance could help close the insurance gap. BHSI executives have highlighted a need to rethink the approach to underwriting property and casualty risks. Thought leaders with McKinsey & Company have drawn attention to operational and strategic considerations by asking, “How can players in the insurance industry act together to close the massive insurance gap?”
Converting Those Ideas Into An Effective Action Plan
Solutions are at hand. What we don’t have is a mechanism to identify the causes, pool all of the possible recommended fixes, vet them, and then craft a comprehensive national strategy to combat the insurance gap.
Fortunately, the White House Conference on Aging offers a well-tested model for such a process. Organizers of the most recent conference, held in 2015, solicited input and encouraged participation from interested parties across the nation to formulate recommendations on four key topics (i.e., healthy aging, long-term services and supports, elder justice, and retirement security). To gather input and foster discussion, they used the web, social media, listening sessions with stakeholders, and five regional forums. A similar strategy could be utilized for this effort with a final closing conference to cap off the process.
The wheels need to be set in motion for such a conference as soon as possible. The perils of waiting are too daunting. As Kerjan and Taglioni point out,
“…[T]he ratio of annual cost of natural disasters to Gross Domestic Product (GDP) was on average one-tenth of a percentage point in the United States in the 1980s. In the 1990s and 2000s, that level tripled, and it almost quadrupled from 2010 to 2017. From 1980 to 1990, the United States averaged fewer than three annual disasters that cost more than $1 billion; since 2010, the average has risen to ten per year.”
During 2017, the United States experienced 16 $1 billion disasters with a cumulative cost exceeding $300 billion. Thus far in 2018, we’ve experienced three more $1 billion dollar disasters. Obviously, time is of the essence to develop a strategy and get it implemented by the appropriate public and private sector authorities place. So, who will step up to lead this effort and help secure funding for it? Will that be you?