Monthly Archives: July 2014

Satisfaction Guaranteed

Occasionally we get some information that allows us to toot our own industry horn.  That happened last week when an industry magazine ran a piece on a J.D. Power and Associates study that suggested insurance clients had a high degree of satisfaction with their experience in settling property claims.  These high satisfaction numbers were produced following two really bad years for disaster claims; their survey was based on more than 5,500 responses from homeowners insurance customers who filed a property claim between May 2011 and January 2013. 

Founded in 1968, J. D. Power has become a respected voice for the consumer in the last several decades, offering information on product quality in manufacturing industries and customer satisfaction in service industries.  They survey literally millions of consumers annually to gather insight into industries from automotive and telecommunications to financial services, insurance and healthcare. 

When we looked directly at the J. D. Power study, we found even more interesting information.  It appears about 8 percent of homeowners in the United States filed a property insurance claim.  These may be odd years because of the disastrous storm related claims but it certainly provides an indication of how the severe weather and events like wildfires is affecting claims.  The average settlement amount in the 2013 portion of the study – which included Hurricane Sandy – was $8,517; the average out-of-pocket expenses paid by homeowners also nearly doubled to $3,888 between 2012 and 2013. 

The findings in this study pretty much mirrored an earlier J. D. Power study of claims satisfaction in the auto insurance.  It also showed that satisfaction was remaining high even as out-of-pocket expenses are going up.  The study indicated that the industry was doing a good job not only in the customer service area, but in managing the expectations of clients in the claims situation. 

Another thing we appreciated from the study was that it provided support for the importance of independent agencies like Homer Smith Insurance in helping the industry maintain these satisfaction levels.  According to J. D. Power, “satisfaction is 50 points higher among customers who file a claim through their agent, than among those who file a claim through direct channels.”

Finally, J.D. Power and Associates offered some tips for homeowners insurance customers in their press release.  

* “Be sure your homeowners policy provides sufficient coverage for your property. Consider not just the replacement value of your home, but of its contents, including jewelry, art, collectibles, electronics and other expensive items. 

* Have your valuables appraised, photographed and declared on your policy. Keep a record of what you have done to protect them from theft or damage. …

* Keep an inventory of your personal property, include model and serial numbers, at least of your most expensive items. Keep a copy of this document in a safety deposit box at your bank, and give a copy to your insurer. If you’ve suffered property damage, photograph the situation as soon as possible, before cleanup or restoration has begun…. “

Of course, if you have been reading our blog here at HSI, you already knew that. 

Insurance101 – Part 3 – Auto

In our last 2 blog postings, we considered the implications of a Forbes article citing studies that indicated Americans Don’t Understand Insurance.  While the original article referred specifically to health insurance, some further research suggested it holds true for home and auto insurance as well, so our second installment dealt with home insurance concepts.  Today we round out the set with auto insurance.  

Forty-seven states require that you have at least some kind of car insurance, Washington State is one of them and state law requires all drivers to carry auto liability insurance and proof that they have insurance.  Washington law requires that anyone who drives a motor vehicle in our state carry liability insurance with liability limits of at least $25,000 for injuries or death to another person, $50,000 for injuries or death to all other people and $10,000 for damage to another person’s property.  There are alternatives if you don’t want to carry Washington auto insurance.  If you have $60,000 you aren’t using, you can pay a deposit to the Washington State Treasurer and avoid insurance all together.  Or, you can purchase a liability bond of at least $60,000. In our experience, these alternatives are seldom used.

So, only liability insurance is required in Washington State and it comes in two basic varieties – bodily injury liability that defends you if you are held liable in an auto accident in which other people are injured or killed and property damage liability that helps repair or replace autos or other property if you are in an accident.  Your liability insurance also pays for legal costs associated with defending you against lawsuits related to accidents.  If the minimum $25,000 doesn’t seem like enough to do that appropriately, you are likely right.  You probably want to purchase more than the minimum required coverage. 

Beyond the state required liability insurance, your insurance choices become a matter of your risk tolerance.  Commonly, auto insurers offer collision, comprehensive, uninsured and under-insured motorist, and medical payments coverage as part of an auto insurance package.  You can elect different levels of coverage and differing levels of deductible to help control your costs.

Collision insurance repairs or replaces your car if it is damaged in an accident and comprehensive insurance is what covers you against damage from theft, fire, flood, vandalism and other non-accident related events.  Uninsured and underinsured motorist coverage insures you against losses caused by other drivers with little or no auto insurance and many policies also cover things like lost wages and coverage for your passengers.  Finally, a medical payments coverage or personal injury protection covers medical or funeral expenses for you and your passengers.   All of these coverages can be varied as to the policy limit and collision coverage includes a deductible amount that you must pay before the insurer pays.  You can set the deductible higher or lower to exercise some control over your premium payments – the higher the deductible, the lower the premium. 

These insurance coverages reflect a typical “package” of insurance but there are other provisions that can be added to a basic policy to tailor it to your needs and these are often included in your package.  Roadside assistance usually covers towing, minor repairs and fuel delivery, even if there was no accident and rental reimbursement pays an amount to rent a car when your car is out of service due to an accident. These coverages are often inexpensive but they do add a small amount to your total premium and they are optional.  

When evaluating your insurance needs, bear in mind that your liability coverage should be sufficient to protect your assets in most circumstance.  If you have a $300,000 home and a vacation condo, you may want a lot more than minimum liability coverage because you will be responsible for expenses of claims that exceed your policy limits. If you can tolerate an out of pocket expense of $1,000 for a deductible, it might be wise to invest your savings from that in increased liability protection.  

As always, if you need sound advice, call Homer Smith Insurance.  We can help you work through these questions. 

Insurance 101 Part 2 – Home

In our last blog posting, we looked at a Forbes article citing studies that indicated Americans Don’t Understand Insurance.  While the article referred specifically to health insurance a little digging around suggests it likely holds true for home and auto insurance as well. In this segment, we look at home insurance.

As a responsible homeowner, you should review your homeowner’s coverage annually to make sure your insurance is sufficient to rebuild or repair your home after a disaster and if your coverage is sufficient to provide the protection you need.  At a minimum, your house should be insured for 80 percent of its value – not counting the value of the land –and the Insurance Information Institute recommends a minimum level of at least $300,000. So, what do you need to look for during the annual review of your homeowner’s policy? 

In reviewing your policy, pull out the declarations page – usually the first page in your policy, or a sheet that is sent each year with your renewal. The home owner’s insurance policy is usually divided into 2 parts with Part I your Property Protection and Part II your Liability Protection. Property Protection is often further broken down into sections.  The dwelling section typically covers your house, attached structures and the fixtures in the house – appliances, plumbing, heating, permanently installed air conditioning systems, and electrical wiring. If you have detached structures such as garages, storage sheds, and fixtures attached to the land including fences, driveways, sidewalks, patios, and retaining walls, these are shown under an Other Structures section.  A Personal Property section covers the contents of your home and other personal items owned by you or family members who live with you.  This section is one where you want to read a bit deeper into your policy to see what is actually covered.  Most policies don’t cover motorized vehicles unless unlicensed and used only at your home and there are likely to be coverage limits on items like firearms, artwork, electronic data, jewelry, and money. If you have high value items, business property or small boats, check your coverage carefully, you may need to buy an additional rider or endorsement to make sure you are covered. Finally, there may be a Loss of Use section that covers living expenses if you cannot live in your home while repairs are being made.  

Check each of these components to determine whether you are comfortable with the amounts and with the type of coverage you are being afforded.  Your policy may offer actual-cash-value coverage, full replacement cost or more rarely, guaranteed replacement cost.  You should understand that your actual cash value coverage will pay what your stuff was worth before it was lost or destroyed, less depreciation — not what it would cost to replace it.  If you have full replacement cost coverage, the insurer will replace or rebuild your property without any deduction for depreciation. Full replacement cost on your personal property will cost you 10 to 20 percent more than the actual-cash-value coverage. Guaranteed replacement policies are also available which take into account appreciation in value, but you need to be careful here as well since insurer’s typically limit the amount that they pay out to replace or rebuild your home to an amount usually no more than 20 percent above the amount for which your home is insured.  

The liability component of your policy is also an area to look at closely.  In today’s climate, it is possible to exceed the limits of liability on a homeowner’s policy.  High net worth individuals may want to seek extra coverage in the form of a personal umbrella policy or higher liability limits. There are others who may need to consider higher levels of liability coverage.  If you have a pool, machinery on your property or a dog you consider a guard dog you may be increasing your risk for a liability claim.

As always, it is easy to discuss these options with your insurance agent at Homer Smith Insurance. Also, there are some online tools that can help.  Dummies.com has an “Insuring Your Home and Everything in It” worksheet that explores the key areas to look at in order make sure you are adequately covered.    

In the next installment we will look at auto insurance.  

Insurance101: Part 1

An article at Forbes site a few days ago offered a provocative title claiming in part “Americans Don’t Understand Insurance.”  It turns out they were talking about health insurance and particularly about confusion over the unfolding Affordable Care Act.  The article described surveys of Americans between the ages of 25 and 64 who have private coverage that found only 14 percent of consumers responding to the surveys had an understanding of basic health insurance concepts such as deductible, copay, co-insurance and out-of-pocket maximum.  These are all key concepts for consumers to understand in order to make informed decisions about coverage and they are the tools a health insurer uses to create cost sharing strategies to influence consumer behavior. Each of these concepts represents an incentive and understanding these incentives is crucial to knowing what benefit package to choose and how much your share of the medial care costs are likely to be.  

A health insurance policy deductible is a good place to start considering your alternatives.  In general the deductible works in the same way it would in auto or home insurance.  It represents a floor amount of money you have to pay before you can gain access to all of your policy’s benefits.  The idea is to give you an incentive to consider whether a health care visit is really necessary.  In effect, the deducible represents a question – if I were paying for this myself, would I go?  Many health insurance policies exempt services like an annual health exam or an emergency room visit from the deductible requirement.  After all, the insurance company benefits from keeping you healthy so they don’t necessarily want you to be skimping on services that keep you healthy or could lead to costly hospital stays.  In general, plans with higher deductibles will have a lower monthly premium.  If you are healthy and have a high tolerance for risk, you can consider choosing a policy with a high deductible in order to reduce your premium.  

The co-pay is another way the insurance company incentivizes you to consider the importance of your health care use.  The co-pay is a basic amount you pay every time you see a provider; a typical co-pay amount is $25. It provides a way to both share expenses with you as the insured and to give you an incentive to consider not seeking care for every minor condition.  A modest co-payment works pretty well to keep patients out of the doctor’s office for removal of a splinter, but they can cause problems for the patient and the insurer.  People with multiple conditions that require frequent visits can respond by avoiding care – having three or four co-payments a month adds up fast.  Having patients self-manage their own care can be problematic for insurance companies as a minor condition, untreated, can become a long term hospital stay.  If you are healthy or wealthy, you may not be concerned about your co-pay amount, if you are not, consider the impact of a co-pay on your probability of seeking care. 

And this leads us to another area of cost sharing incentive, coinsurance.  Your coinsurance amount is another costs sharing device intended to incentivize you as the insured to consume health care rationally. Coinsurance is a percentage of a health care provider’s charge you may be responsible to pay.  Medicare, for example, has a 20% coinsurance rate.  Patients are responsible to pay 20% of the allowed amount of the claim as their share of the costs. Again, the intent here is to provide an incentive to seek care only when it is medically important to do so.  Consider that if you have a $25 co-pay amount and a 20% coinsurance rate, your share of a $100 medical bill will be $45.  If your case of the sniffles isn’t worth $45, you may not want to see your doctor.  That is good for you and the insurer if it really is just the sniffles; it could be bad for both if it is pneumonia. 

Since we have already mentioned that there can be unwanted problems if people need health care and do not seek it, we can now look at the concept of the “out of pocket maximum.”  This is an amount set in your policy and is the most that you should have to pay for your healthcare during a plan period (usually one year).  You pay for part of your medical care through deductibles, copays and coinsurance until you reach the out-of-pocket maximum, but after reaching the amount set by the out-of-pocket maximum, your insurance will pay 100% of your covered healthcare expenses – at least up to some policy benefit maximum.  This may sound as though it is detrimental to the insurer, but it may not be.  If you are accruing expenses at a rapid rate, it may be in the insurer’s best interests to see that you receive the best care possible.  The out of pocket maximum insures there are no barriers to the care you need. 

In Part 2, we will look at home and auto insurance.

Kidnap and Ransom – Yes, There’s A Policy For That.

Planning a vacation in Somalia this year?  Don’t leave home without your Kidnap and Ransom Insurance.  Oh, wait a minute, you don’t have Kidnap and Ransom Insurance; well, you might be surprised about where you could need it.  Kidnapping for profit is estimated to be a $500 million a year business and it isn’t just Somalia but many areas less well known for kidnap activities. As you might expect, Afghanistan, Nigeria and Iraq join Somalia at the top of the riskiest destination list, but there are hotbeds of activity in new world destinations like Venezuela, Colombia, Mexico and Haiti which are in the top ten list for kidnap and ransom risk.  

A lot of the kidnapping and its close relative piracy is work related these days.  Your chances of being kidnapped on a family vacation to Cancun are pretty small but those chances increase if you are an oil company executive or a mining engineer working in a high risk country.  Kidnapping corporate citizens is a profitable enterprise – estimated now at about $500 million a year and it is prevalent enough to generate about $200 million in premiums primarily to protect companies from the risks and costs associated with kidnapping.  Those costs can be substantial.  Not only is there a ransom involved, but there are generally a lot of ancillary expenses like hiring negotiators and retaining security consultants.  

While there have been numerous high profile cases – Somali pirates being only a recent example – it appears the real day-to-day work of kidnap and ransom has been evolving into a less glamorous form called “express kidnapping” which can be somewhere between a holdup and a kidnapping.  In Latin America or Russia, for example, local gangs may kidnap a tourist and hold them only long enough to go to an ATM machine and force them to withdraw money or grab an expatriate employee and hit the company up for a quick ransom amount.  

What these folks lack in big time ransom yields, they can make up in volume.  In some cities in South America, tourists are advised to stay away from “gypsy” cabs – those unauthorized car for hire folks who may be inclined to drive you to the nearest ATM machine for a quick transfer of funds from you to them.  

The two principal markets for K&R Insurance are the corporate marketplace and the very wealthy or very famous.  So far as kidnappers are concerned, deep pockets and a desire to avoid publicity are primary incentives.  For that reason, if you travel internationally for a company, don’t necessarily assume you are not covered by K&R insurance and if you purchase it as an individual, expect to be told to keep your purchase under your hat.  Divulging the fact you have coverage is a bit like hanging a big “kidnap me” sign around your neck.  You can become a high value target quickly.  

Many underwriters offer K&R insurance, and some companies offer insurance bundled with security services and evacuation policies.  For individuals, it appears you can get coverage in the range of $500 per year depending on the features and services that may be included. At the upper end of corporate services, K&R business insurance may cover the cost of a professional crisis management team, public relations services to protect the company’s image, property damage, reward payments and even legal defense in the event a kidnapped employee sues.  If you are the unfortunate victim, you can expect to be compensated for medical expenses, repatriation, loss of income and perhaps burial expenses.  

While this sort of insurance coverage is not “top of mind” for most individuals and for many small companies, our world is getting smaller and many more people are moving internationally.  The opportunities for kidnappers are increasing and the technology for identifying targets is improving.  There is evidence, for example, that Latin American kidnappers are improving their victim choices by gathering information from Facebook and other internet sources to identify travelers with families or employers who have access to cash. 

Key Man Insurance

We have a lot of small businesses out here on the Olympic Peninsula. Most all of them will have an insurance program that includes general liability, property coverage and errors and omissions or officers and directors liability coverage. Another important insurance coverage, but one less often considered, is key man insurance; a potentially important component of risk management for any small business.

No one really wants to think about the impact of a death on a business, but whether it is the business owner or a crucial employee, there may be one or more people whose knowledge, skills or recognition are so essential to the business that it may not carry on effectively without them. Key person insurance is an important precaution for a business when the company’s success or survival relies on the role of a few people.

Key man insurance – or key person insurance or key employee coverage if you are politically correct – is a life and/or disability policy that is taken out with the business as a beneficiary in the event of death or disability to a particular key employee or employees. The policy works by paying the business in the event of the death or disability of a person who is so important to the business that their loss could destroy or significantly harm the business. A key man policy can be a cheaper option than standard life or disability policies because the policy can be purchased to cover multiple key employees with a “first to die” provision. Take the example of a two person architectural partnership. One policy could be purchased to cover both partners. In the event of the death of one, the policy is paid out and the insurance on the remaining partner terminates.

The intent of key man insurance – like other business policies – is to protect the business itself. The business purchases the policy, pays the premium and receives any payout on the policy. The payout may be used for a variety of business purposes. For a small software firm, the Chief Technology Officer and the Chief Marketing Officer might be covered under a key man policy. On the death of the Chief Technology Officer, the proceeds of the key man policy might provide income for the business while a search was conducted for a replacement or used to support the costs of an executive search. There is even enough flexibility to allow the business to share part of the proceeds with a family.

There are some other creative uses for key man insurance available to businesses and business owners. Once purchased, a key man insurance policy can be monetized by selling the interest in the policy to another business entity. This is similar to the use of viaticals we reported on here in an earlier blog. For a business owner, there is an opportunity to sell the insurable interest in the policy to another entity that will keep up the premiums.

If you own a small business, there are some questions you can ask to help decide whether you need key man insurance. The global question to ask for senior employees is “What would happen in the event of the unexpected loss of these people.” More specifically, the questions you need to answer to determine whether and how much insurance you might require are:

  • How long will it take to replace the person?
  • How much income or revenue would be lost in the time necessary to bring on a replacement?
  • What are the acquisition costs to replace the person (search costs, travel costs, incentive pay, etc.).

The answers to these questions will help you understand whether you need key man insurance and how much you should purchase to provide protection.