Is fire insurable? 119
be counter-intuitive because it creates an incentive for insurers to – in the
context of a single customer – sell less of their product.
Whether they are correct or not, insurers perceive their customer as highly
price elastic. And while coverage limits pale in comparison with deductibles
as a price determinant, coverage limits do change premiums at least on the
margin. In other words, an insurer might conclude that in a highly competitive market with what the insurer perceives as highly price elastic customers, there is market share to be gained by a slight drop in price. And that the
downside risk is minimal. Because claims in excess of coverage limits – even
suppressed coverage limits – are rare. When those claims are adjusted, in
many instances the insured will not challenge the adjustment. When the
insured challenges the adjustment, many of those challenges will be settled
at a discount. And of those that are not settled, the muddled legal landscape
will result in a total or partial victory for the insurer much of the time.
But that muddled legal landscape may not work so well for an insurer if
the insurer knows (or is found to be wilfully ignorant of) the (in)accuracy of
its own rebuild estimating tools. If an insurer knows about the average error
rates of its own estimating tools, then it cannot so easily prevail on a position that the homeowner knowingly contracted for less than full insurance.
Until the data is collected, it is impossible to know what it will show. But it
is reasonable to speculate that if the data was good for the insurer then the
insurer would tout it. And if the insurer thought the data would be good for
the insurer, then the insurer would do the research. The fact that no insurer
is touting its data is suggestive. But it is far from definitive. Because in both
Australia and the United States, while getting the cover correct requires
time and expertise, the onus of error falls on the homeowner (ASIC 2007,
p. 7; Klein 2019, pp. 82–97).
There may well be solutions to underinsurance. Two possible solutions
are to require insurer transparency about the accuracy of its estimating
tools, and/or to require – with clarity – insurers to bear the responsibility for
understated coverage limits. But solving underinsurance will do nothing to
resolve the increasing unavailability of affordable fire insurance. To the
contrary, resolving underinsurance could cause prices to rise.
The emerging challenges of affordability and availability of fire
insurance of dwellings in Australia and the United States
While presently – in both Australia and the United States – most homeowners either voluntarily or involuntarily do insure their dwellings for fire, that
may not be the state of matters for long. Increasingly, both Nations face
issues of availability and affordability.
There is inadequate academic literature defining the precise parameters
of affordability and availability of fire insurance of dwellings – either in
Australia or in the United States – in the face of the increasing frequency
and economic impacts of fires. That said, in both Nations the issues are
be counter-intuitive because it creates an incentive for insurers to – in the
context of a single customer – sell less of their product.
Whether they are correct or not, insurers perceive their customer as highly
price elastic. And while coverage limits pale in comparison with deductibles
as a price determinant, coverage limits do change premiums at least on the
margin. In other words, an insurer might conclude that in a highly competitive market with what the insurer perceives as highly price elastic customers, there is market share to be gained by a slight drop in price. And that the
downside risk is minimal. Because claims in excess of coverage limits – even
suppressed coverage limits – are rare. When those claims are adjusted, in
many instances the insured will not challenge the adjustment. When the
insured challenges the adjustment, many of those challenges will be settled
at a discount. And of those that are not settled, the muddled legal landscape
will result in a total or partial victory for the insurer much of the time.
But that muddled legal landscape may not work so well for an insurer if
the insurer knows (or is found to be wilfully ignorant of) the (in)accuracy of
its own rebuild estimating tools. If an insurer knows about the average error
rates of its own estimating tools, then it cannot so easily prevail on a position that the homeowner knowingly contracted for less than full insurance.
Until the data is collected, it is impossible to know what it will show. But it
is reasonable to speculate that if the data was good for the insurer then the
insurer would tout it. And if the insurer thought the data would be good for
the insurer, then the insurer would do the research. The fact that no insurer
is touting its data is suggestive. But it is far from definitive. Because in both
Australia and the United States, while getting the cover correct requires
time and expertise, the onus of error falls on the homeowner (ASIC 2007,
p. 7; Klein 2019, pp. 82–97).
There may well be solutions to underinsurance. Two possible solutions
are to require insurer transparency about the accuracy of its estimating
tools, and/or to require – with clarity – insurers to bear the responsibility for
understated coverage limits. But solving underinsurance will do nothing to
resolve the increasing unavailability of affordable fire insurance. To the
contrary, resolving underinsurance could cause prices to rise.
The emerging challenges of affordability and availability of fire
insurance of dwellings in Australia and the United States
While presently – in both Australia and the United States – most homeowners either voluntarily or involuntarily do insure their dwellings for fire, that
may not be the state of matters for long. Increasingly, both Nations face
issues of availability and affordability.
There is inadequate academic literature defining the precise parameters
of affordability and availability of fire insurance of dwellings – either in
Australia or in the United States – in the face of the increasing frequency
and economic impacts of fires. That said, in both Nations the issues are