112 KS Klein
Amongst homeowners who have dwelling insurance for fire, most want adequate (meaning, full) insurance. And most homeowners who have a choice,
choose to insure their dwelling for fire.
Simply put, homeowners typically do not choose to underinsure their
dwelling. Most homeowners want to fully insure or over-insure. This is an
incidental but important finding of work by economists Benjamin Collier
and Marc Ragin (Collier & Ragin 2019, Table 9.3). They studied the National
Flood Insurance Program (NFIP) in the United States. It is a public insurance product, sold by private insurance agents. In other words, all insurers
offer the same product – the only variable is the agent selling it. Collier and
Ragin were interested in the NFIP for this reason – they were trying to study
the influence of an insurance agent on the decision of how much insurance
to buy. And the NFIP Program lets them control for all other variables.
The NFIP offers maximum cover of $250,000, and a minimum cover of 80%
of the estimated rebuild cost or of $250,000, whichever is less. Collier and
Ragin isolated policies with estimated rebuild costs of less than $250,000.
In other words, in these instances, insureds had a choice of 20% underinsuring, insuring to estimated rebuild cost, or over-insuring up to $250,000. 80%
of homeowners either insured to the insurer’s estimated rebuild costs, or
over-insured above that. And in Australia a survey of homeowners affected
by the ACT bushfires found an identical number – 80% said they were adequately insured (Australian Securities & Investment Commission (ASIC)
2005, p. 63).
And most homeowners – either voluntarily or involuntarily – do insure
their homes for fire. ‘Homeowner’ or ‘householders’ insurance, as the product denomination implies, provides cover for the owner of a dwelling in the
instance of damage or destruction of the dwelling (Federal Insurance Office
(FIO) 2015, pp. 13, 15–20; Australian Competition & Consumer Commission
(ACCC) 2020, pp. 12–17). Homeowner insurance may insure both the dwelling and/or the contents of the dwelling. For homes with a mortgage, however, insurance of the structure – the collateral for a mortgage loan – is
not a choice; mortgages in both Australia and the United States require the
homeowner have insurance of the mortgaged dwelling for fire (ACCC 2020,
p. 147; FIO 2015, pp. 3, 15).
Because of the architecture of mortgages in the United States, there
almost always is fire insurance of the dwelling in place for homes with a
mortgage. Most mortgages in the United States provide that if the borrower
allows insurance to lapse then the lender will purchase ‘force-placed’ insurance at the borrower’s expense; this insurance protects the lender from a
fire loss of collateral (Cronkite 2016, p. 691). There does not appear to be
an analogue in Australia to force-placed insurance, where it seems at least
theoretically possible for a home under mortgage to have no insurance of
the dwelling for fire (ACCC 2020, p. 462).
Nonetheless, the prevalence of insurance of dwellings for fire is exceptionally high and nearly identical in both the United States and Australia. In the
Amongst homeowners who have dwelling insurance for fire, most want adequate (meaning, full) insurance. And most homeowners who have a choice,
choose to insure their dwelling for fire.
Simply put, homeowners typically do not choose to underinsure their
dwelling. Most homeowners want to fully insure or over-insure. This is an
incidental but important finding of work by economists Benjamin Collier
and Marc Ragin (Collier & Ragin 2019, Table 9.3). They studied the National
Flood Insurance Program (NFIP) in the United States. It is a public insurance product, sold by private insurance agents. In other words, all insurers
offer the same product – the only variable is the agent selling it. Collier and
Ragin were interested in the NFIP for this reason – they were trying to study
the influence of an insurance agent on the decision of how much insurance
to buy. And the NFIP Program lets them control for all other variables.
The NFIP offers maximum cover of $250,000, and a minimum cover of 80%
of the estimated rebuild cost or of $250,000, whichever is less. Collier and
Ragin isolated policies with estimated rebuild costs of less than $250,000.
In other words, in these instances, insureds had a choice of 20% underinsuring, insuring to estimated rebuild cost, or over-insuring up to $250,000. 80%
of homeowners either insured to the insurer’s estimated rebuild costs, or
over-insured above that. And in Australia a survey of homeowners affected
by the ACT bushfires found an identical number – 80% said they were adequately insured (Australian Securities & Investment Commission (ASIC)
2005, p. 63).
And most homeowners – either voluntarily or involuntarily – do insure
their homes for fire. ‘Homeowner’ or ‘householders’ insurance, as the product denomination implies, provides cover for the owner of a dwelling in the
instance of damage or destruction of the dwelling (Federal Insurance Office
(FIO) 2015, pp. 13, 15–20; Australian Competition & Consumer Commission
(ACCC) 2020, pp. 12–17). Homeowner insurance may insure both the dwelling and/or the contents of the dwelling. For homes with a mortgage, however, insurance of the structure – the collateral for a mortgage loan – is
not a choice; mortgages in both Australia and the United States require the
homeowner have insurance of the mortgaged dwelling for fire (ACCC 2020,
p. 147; FIO 2015, pp. 3, 15).
Because of the architecture of mortgages in the United States, there
almost always is fire insurance of the dwelling in place for homes with a
mortgage. Most mortgages in the United States provide that if the borrower
allows insurance to lapse then the lender will purchase ‘force-placed’ insurance at the borrower’s expense; this insurance protects the lender from a
fire loss of collateral (Cronkite 2016, p. 691). There does not appear to be
an analogue in Australia to force-placed insurance, where it seems at least
theoretically possible for a home under mortgage to have no insurance of
the dwelling for fire (ACCC 2020, p. 462).
Nonetheless, the prevalence of insurance of dwellings for fire is exceptionally high and nearly identical in both the United States and Australia. In the