Tag Archives: ho3

Is Ownership a Thing of the Past?

Ask a millennial who has just bought a car, “How much did you pay for it?” and the typical answer would be something like, “about $300 a month.”

The same scenario will play out with other purchases such as a home, an expensive computer and virtually any other big-ticket consumer purchase.

There is nothing wrong with putting the monthly cost (access) of a product ahead of the final price (ownership), because, in the mind of today’s consumers, ownership is increasingly the exception to the rule.

Less Emphasis on Ownership

In one of my previous articles, I summarized this point with the following:

“Rather than worrying about status, ownership and hierarchy, think about the benefits of access, collaboration, trust and sharing.”

In fact, most millennials, (born 1985 and later) are in the accumulation and the consumption stage of their lives but are giving very little credence to ownership. For millennials, ownership signals responsibility and maintenance; two terms that this consumer group has very little interest in. Owning something is not convenient.

Although this new attitude may signal a disruption to the status quo (baby boomers), this new idea of access over ownership can easily be embraced by manufacturers, marketers, retailers and, most importantly, insurers.

Things that we rent, lease or share, also require a manufacturer, marketer, retailer and insurance policy. Rather than own – we share.

Let’s dig a little deeper.

See also: Navigating Through Tough Times With The Aid Of Employee Ownership  

The Sharing Economy

There are many prominent examples of this shift from ownership to access. Consider the two sharing economy platforms that started it all: Airbnb and Uber.

Airbnb was founded in 2008 when three determined entrepreneurs realized the need for more guest accommodations that could be booked online. Their approach to the hospitality industry started with a blow-up mattress but is now valued at $30 billion. The Airbnb story is a groundbreaking example of the sharing economy and how it disrupted the status quo.

Uber, which got its start about the same time as Airbnb, set out to resolve a perceived transportation need. And what a ride it has been! Created as an online method to hire a car and driver in large metropolitan areas, the company created an online platform that connects riders with drivers through an innovative on-demand mobile application. The simple, yet brilliant, strategy has garnered more than one billion users.

What Was That About Ownership?

And what does all of this have to do with ownership? Everything!

These two platforms own nothing. They don’t own homes or cars. Yet Airbnb has more than two million properties worldwide, and Uber has more than one million vehicles on its platform.

Access: But Wait, There’s More!

What if you need to get an expensive evening gown but plan to use it rarely? Check out Rent the Runway where you can access what you may not be able to afford to own. You can rent a $3,000 gown for $75.

What happens when you must travel out of state to attend a funeral and can’t afford the high costs of a kennel? Welcome to Dog Vacay. This platform provides a list of people in your area who love dogs and will charge less than a kennel.

What if you want to impress someone by pulling up to their home or office in an expensive sports car? No problem. Turo can match you with the owner closest to you who will rent that sleek, fast-moving ride by the hour or by the day.

Your in-laws just called and said they would be joining you for the weekend. Your schedule is hectic, and your apartment a disaster. You check out TaskRabbit to gain access to someone in your neighborhood who can’t wait to clean your apartment so your in-laws won’t think you’re a slob.

By now, you should be getting the picture that consumers are sharing their consumption needs and services without considering ownership, and the price tag that comes with it.

The Impact on the Insurance Industry

Insurance professionals must adapt as millennials kick over the economic tables. Carriers must respond by creating products to manage the sharing risks or, at the very least, offer endorsements for personal and commercial products currently in the marketplace.

Questions must be answered. Like…

  • If I rent my expensive tuxedo on a sharing site, does the platform provide coverage, does my renter’s policy provide coverage or is my tuxedo now considered business personal property, meaning I have to get commercial coverage?
  • If I decide to board a neighbor’s dog through a sharing site, does the sharing site provide liability, or will my homeowner’s policy cover a dog bite from a neighbor’s dog when I’m charging that neighbor a boarding fee?
  • I know I can get a landlord’s policy to cover a home I’m renting, but will coverage apply for daily rentals? What if I’m renting the home I live in while I’m on vacation? Will my HO3 cover when I’m renting my residence for a week or two?

Although insurers have begun to respond to the home-sharing and ride-sharing scenarios, what about all the other products and services that are now being shared rather than purchased?

See also: How to Lead Change (Part 2)  

Agents need to ask all current and prospective clients about the reality of renting their assets, to determine if a coverage issue is on the horizon.

Agents must let insurers know what’s changed in the marketplace and how they can transfer these new risks in an efficient and affordable manner.

If you have not become familiar or heard much about the new sharing economy, shouldn’t it be your responsibility as a trusted adviser to uncover and point out the risks that are unfamiliar and likely not disclosed in a traditional client/broker conversation?

Educating clients must be a top priority heading into 2017 and beyond.

Flood Insurance at the Crossroads

News outlets around the country are broadcasting the horrible scenes from Northern Mexico, Texas and Oklahoma of devastating floods that have killed many. Once tallies are completed, property damage will likely be in the billions of dollars. Once again, a disaster raises interest not only in the insidious nature of catastrophic flooding, but in how the insurance industry, in concert with the federal government, more specifically the National Flood Insurance Program (NFIP), tackles – or sidesteps – the vexing problems associated with this peril.

Stories abound of the heart-breaking losses as a result of flooding; homes are whisked away downstream, people’s prized possessions are destroyed and, most importantly, lives are lost. Amid the recent rampant devastation brought on by the Texas floods, what struck us was one simple statement by a local news correspondent on the scene, who described the victims’ plight: “Some residents are lucky; they have flood insurance.” “Lucky” hardly describes the harsh reality these flood victims are experiencing.

Having flood insurance with the NFIP is akin to having jumbo shrimp, in the infamous description of the oxymoron by comedian George Carlin. To understand why, consider that property damage to a house comes in three varieties: (1) damage to the actual structure, (2) damage to the contents within the structure or (3) expenses associated with not being able to live in the structure as a direct result of a flood claim and having to live elsewhere. The standard HO3 policy form has all three of those potential loss sources adequately covered. That raises the question: What does the NFIP flood policy cover?

Your Building

The maximum the NFIP will pay for the dwelling structure, referred to as Coverage A, is $250,000, even if the dwelling is worth more. There is no amount of additional premium one can pay to get more coverage for this policy. If the dwelling is worth more, the homeowner is forced to purchase another flood insurance policy to cover an amount over and above $250,000.

Your Contents

The maximum the NFIP will pay for losses to contents, referred to as Coverage C, is $100,000, again, even if the homeowner owns more than that amount. The homeowner is still out of luck even if he acquires a second flood policy to cover excess losses to the dwelling, as those types of policies do not generally cover contents. To make matters even worse, if the homeowner is “lucky” enough to have a flood insurance policy through the NFIP and should suffer a flood loss to contents, the content valuation reimbursement will be depreciated. The homeowner will NOT be reimbursed for a new carpet when forced to rip up that damaged 20-year-old carpet and will receive just enough funds from the claim to buy another 20-year-old carpet. In other words, the claim’s valuation basis via the NFIP is the actual cash value (ACV) of the damaged item, not the current replacement cost value (RCV) after applying the policy deductible.

Worse, the homeowner is forced to fill out mountains of paperwork to detail what was damaged and account for when the item was purchased and the cost. Then there are the contents in basements, which can represent a whole separate problem. Try filling out the paperwork a few hundred times over for all a household’s valuables, knowing that, regardless of whether those items are meticulously itemized, the homeowner STILL will not be paid the cost to replace them.

Loss of Use

Should a homeowner have a flood loss and need to live elsewhere while the damage is being repaired, expenses for the Loss of Use, Coverage D, is entirely borne by the homeowner. It doesn’t matter if it’s a small amount of damage requiring a one-day stay at a hotel or extensive damage requiring a new home; the homeowner is responsible to pay for all living expenses out of pocket.

If the NFIP policyholder doesn’t already feel lucky enough, then there are the lingering questions surrounding the NFIP’s solvency.  Both Hurricane Katrina and Superstorm Sandy left the NFIP with few funds to pay claims, and if the homeowner is lucky enough to have flood insurance through the NFIP she will have to wait – oftentimes months!

By now, you get the point. Flood insurance through the NFIP really is not insurance; it’s something else altogether. For starters:

  1. The NFIP is not risk-based. Two homes with very dissimilar flood exposure could pay the exact same rate.
  2. The NFIP has done little to discourage risk-taking, by subsidizing low rates for homes that have had multiple claims payments.
  3. The policies do not meet homeowners’ needs. The coverage gaps are large and the headaches dealing with getting paid are quasi-medieval – certainly not consumer-friendly.

The industry can and must do better. All the tools and resources needed to adequately price and manage risk are present. New models and maps stand ready to evaluate risk, estimate loss costs and aggregate exposure. Abundant excess capital is available, and in many cases is standing on the sidelines looking to jump in the game. What better source of risk-based premium is there than the inland flood exposures now monopolized by the NFIP and, ultimately, the taxpayers? This is the opportunity for growth, innovation and applying commonsense risk management thinking that the industry not only is starving for, but has been praying for the past 30-plus years.

The industry must now ask itself: Does it want to sustain its legacy groupthink by maintaining the status quo, or does it want to remain relevant, now and in the future, and be a part of the solution?