116 KS Klein
about the pervasiveness of underinsurance. But the chart also makes plain
that whatever is going on, it likely is alarming. The possibility of underinsurance seems to be ubiquitous. In other words, most insureds have a coverage limit, and an inadequate one. Because if most homeowners, or even
many homeowners, had GRC, then one wouldn’t see these high percentages
of underinsurance. It simply would not be possible.
One additional data point that is not in this chart is instructive. It is a
rate filing by a California insurer after the 2017 Santa Rosa fires (CSAA
Insurance Exchange 2018). In the United States, many states require that in
order for an insurer to sell a policy at a particular rate, the insurer must file
the proposed policy and rate with the State and get state approval (FIO 2015,
p. 15). California is one such state (CDI n.d.). The filing by insurer CSAA
sought to support a rate increase by detailing the prior claims adjustment
experience. And the data provided is consistent with two-thirds of insureds
being underinsured, most of them profoundly (by at least 20% or more).
And when one asks, when a homeowner is underinsured, is it by a lot or a
little, the news does not get better. The data is sparse. But when the studies go
the next step and inquire – when one is underinsured, on average how much
is the protection gap? – the answer again is by a lot, likely conservatively on
average by at least 20%, more likely by quite a lot more (Klein 2019, pp. 46–50).
So, how does this happen? Most homeowners put little thought into coverage limits. In Australia many homeowners do not seek input. Surveys in
Australia suggest 56% of homeowners pick coverage based on their own
estimate or the purchase price (which 85% of the time is more than twoyears stale), while only 22% rely on the insurer’s guidance (Quantum Market
Research 2014, p. 17). In the United States, a homeowner simply contacts an
agent or broker, goes to a website, or calls a national telephone number, and
asks for insurance on their house. The homeowner is asked a few questions,
is quoted a policy cover and cost, and a deal is struck.
For the homeowner who wonders whether the cover is adequate, the
advice they are given is to ask the insurer. For example, in the United States,
the Insurance Information Institute says, ‘… your insurer will provide a
recommended coverage limit for the structure of your home….’ (III 2021a;
2021b). The National Association of Insurance Commissioners says, ‘Your
insurance agent usually will help you decide how much dwelling coverage to
buy when you first get homeowners insurance. Your coverage should equal
the full replacement cost of your home’ (National Association Insurance
Commissioners (NAIC) 2010). The website of the Texas Department
of Insurance says, ‘Your insurance agent can help find out your rebuilding cost.’ (Texas Department of Insurance 2021). And the website of the
North Carolina Department of Insurance says, ‘Below are a few important
questions that everyone should ask their agent when purchasing homeowners insurance 1. Do I have enough insurance to rebuild my home if it is
destroyed?’ (North Carolina Department of Insurance 2022). Australia is
no different. In Australia, ‘Consumers generally need specialist assistance
about the pervasiveness of underinsurance. But the chart also makes plain
that whatever is going on, it likely is alarming. The possibility of underinsurance seems to be ubiquitous. In other words, most insureds have a coverage limit, and an inadequate one. Because if most homeowners, or even
many homeowners, had GRC, then one wouldn’t see these high percentages
of underinsurance. It simply would not be possible.
One additional data point that is not in this chart is instructive. It is a
rate filing by a California insurer after the 2017 Santa Rosa fires (CSAA
Insurance Exchange 2018). In the United States, many states require that in
order for an insurer to sell a policy at a particular rate, the insurer must file
the proposed policy and rate with the State and get state approval (FIO 2015,
p. 15). California is one such state (CDI n.d.). The filing by insurer CSAA
sought to support a rate increase by detailing the prior claims adjustment
experience. And the data provided is consistent with two-thirds of insureds
being underinsured, most of them profoundly (by at least 20% or more).
And when one asks, when a homeowner is underinsured, is it by a lot or a
little, the news does not get better. The data is sparse. But when the studies go
the next step and inquire – when one is underinsured, on average how much
is the protection gap? – the answer again is by a lot, likely conservatively on
average by at least 20%, more likely by quite a lot more (Klein 2019, pp. 46–50).
So, how does this happen? Most homeowners put little thought into coverage limits. In Australia many homeowners do not seek input. Surveys in
Australia suggest 56% of homeowners pick coverage based on their own
estimate or the purchase price (which 85% of the time is more than twoyears stale), while only 22% rely on the insurer’s guidance (Quantum Market
Research 2014, p. 17). In the United States, a homeowner simply contacts an
agent or broker, goes to a website, or calls a national telephone number, and
asks for insurance on their house. The homeowner is asked a few questions,
is quoted a policy cover and cost, and a deal is struck.
For the homeowner who wonders whether the cover is adequate, the
advice they are given is to ask the insurer. For example, in the United States,
the Insurance Information Institute says, ‘… your insurer will provide a
recommended coverage limit for the structure of your home….’ (III 2021a;
2021b). The National Association of Insurance Commissioners says, ‘Your
insurance agent usually will help you decide how much dwelling coverage to
buy when you first get homeowners insurance. Your coverage should equal
the full replacement cost of your home’ (National Association Insurance
Commissioners (NAIC) 2010). The website of the Texas Department
of Insurance says, ‘Your insurance agent can help find out your rebuilding cost.’ (Texas Department of Insurance 2021). And the website of the
North Carolina Department of Insurance says, ‘Below are a few important
questions that everyone should ask their agent when purchasing homeowners insurance 1. Do I have enough insurance to rebuild my home if it is
destroyed?’ (North Carolina Department of Insurance 2022). Australia is
no different. In Australia, ‘Consumers generally need specialist assistance