“I conceive that the great part of the miseries of mankind are brought upon them by false estimates they made of the value of things.” — Benjamin Franklin
It seems difficult to watch a daily newscast that doesn’t have a segment on the latest wildfire. California. Colorado. South Carolina. New York. The list goes on. The frequency of wildfires appears to be increasing and, with the encroachment of civilization, the economic severity is definitely increasing due to the combined effect of the proliferation of residential and commercial structures and our failure to actively engage in loss prevention measures.
Gen. Jimmy Doolittle once said, “The problem with Americans is that we’re fixers rather than preventers.” In our industry, that is all too often the truth.
As the risk of loss, such as from wildfires, approaches certainty, the insurance mechanism becomes an unsustainable means of managing risk. But there are some things that insurance professionals can do and lessons we can learn from these wildfires. In this article, I’ll focus on just a few of the many.
Property Undervaluation
The first one is the obvious one: properly evaluate the replacement cost of structures and contents, select adequate limits of insurance, and include insurance contract provisions that recognize the increased cost of repair and replacement following a major disaster.
Early in my career at ISO, we offered valuation services using a choice of Marshall & Swift, Boeckh, and/or McGraw Hill products. Over the years, they morphed into Marshal & Swift/Boeckh and ultimately CoreLogic, now Cotality. For many years, M&S/Boeckh published a report on property undervaluation.
Typically, these reports indicated that most residential and commercial buildings were underinsured, often by 20%-35%, and sometimes individually by 200%-300%. I wrote about this in my December 2023 Insurance Journal column titled “5 Worthy New Year’s Resolutions.”
Has this problem improved? Given what seems to be a never-ending hard market, that’s probably unlikely. Given that the vast majority of losses are partial and not total, the focus is on reducing premium costs, and the easiest way to do that is to buy as little building coverage as possible without incurring a penalty under a coinsurance or insurance-to-value clause.
This approach works most of the time, but it results in higher unit rates and invariably leads to gross underinsurance in the event of total or near total losses–the kind of losses one encounters in widespread disasters like wildfires and localized events like tornados.
In the case of conflagrations like wildfires, there are other considerations beyond just the proper valuation of property. Take, for example, debris removal.
