Informed Tip of the Week: Don’t know what shrinkflation is? It’s when companies shrink package sizes so they don’t have to raise prices and it’s been happening a lot lately.
It’s been going on in insurance for years and is something Informed has written about previously. It’s a great way for companies to trick less aware customers into buying their product, but it’s a pretty deceptive and disrespectful practice.
You may have seen the headlines about Florida looking to pass a new law to “help” the affordability of home insurance premiums. While this may sound good on the surface, it’s actually a highly anti-consumer bill that benefits insurance companies at the expense of their customers. In other words, it’s shrinkflation.
Worse, consumers are unlikely to learn about the adverse consequences of the bill until they have a claim someday and are surprised at how much they are now expected to pay. So what exactly is the bill about?
Roof Replacement Values
The key provision of the bill is allowing insurers to offer roof coverage on a depreciated, or actual cash value (ACV), schedule. The logic for this makes sense at first glance. Unscrupulous lawyers and roofers have colluded to abuse the full replacement value currently required.
If someone has a 20 year old roof and a storm comes through that causes a little bit of damage, the roofer can get the homeowner a brand new roof for “free” at the expense of the insurance company.
This clearly isn’t right and is unfair to insurers. Homeowners should be expected to maintain their roof to avoid disrepair and replace it at their own expense when it gets worn. Insurers don’t pay for basic maintenance.
Insureds shouldn’t be able to avoid maintenance, pray for a storm, and then get a free roof. Switching to depreciated coverage would change the financial incentives by causing the homeowner to bear part of the cost for the maintenance they should have done on their own.
This Sounds Great. What’s The Problem?
If you’re following so far, you probably think the above makes eminent sense and wonder what in the world my beef is. Congratulations, you are guilty of thinking like an insurance employee.
Yes, if every homeowner in Florida was cashing in on free roofs, then depreciated coverage makes sense. But is that what’s really happening? Or is it a minority (even if it’s an ever growing minority) that is taking advantage of the situation?
So why do we penalize the many for the sins of the few? Typical insurance mentality. The underlying issue is the fraudulent behavior of the roofers and plaintiff’s bar. They are the ones signing people up for bogus claims and getting the insurance company to pay.
But rather than address the underlying cause, the politicians have chosen to make the average homeowner suffer. How is this progress? And why do they do this to the people they are supposed to represent? Because law firms spend a lot of money on elections in Florida. Of course!
Why the Homeowner Will Get Screwed
In a perfect world, after this law passes, homeowners would start doing more regular maintenance on their roof to avoid big out of pocket bills after future storms. This would help alleviate pressure on premium increases and result in improved results for struggling insurers and more affordable home insurance for homeowners.
And, if you believe that, once again, congratulations on thinking like an insurance employee. Now, let’s do a reality check. What do we really think will happen after this law is implemented?
What Should Happen:
1) Every insurance agent should have a conversation with their client explaining how they are losing coverage and are more at risk after a hurricane.
2) This conversation should include mathematical examples of how much they’d have to pay out of pocket now vs. before given their home’s roof age.
3) Homeowners should have to sign a document – in plain English – stating that they understood what their agent explained to them and are aware of the increased risk and don’t want to pay more for a policy with replacement cost.
What Will Happen:
1) Most agents will say nothing. After all, they don’t get paid anything extra to explain this.
2) There likely will be nothing in the bill requiring disclosure to the homeowner. If amazingly there is a requirement, it will be a legalese notice at the back of the policy renewal that most often gets thrown away unread.
3) Thus, probably 95% of homeowners will have no idea that they are going to owe thousands of $ for roof repair after the next hurricane.
Now, stop thinking like an insurer for a minute and tell me why this bill is a good idea?
But you want to know the real kick in the teeth? Let’s say you notice some worn tiles and decide to repair them to avoid any future leaks. How does this change your coverage? It doesn’t!
If you are depreciated to 60%, doing routine maintenance doesn’t change that. The schedule is the schedule. Hopefully you’ve reduced your chance of a claim, but if it’s a big enough hurricane, it’s not going to matter.
So there is literally no incentive to maintain your roof, unless there is some provision in the legislation addressing maintenance that typically doesn’t exist in ACV language. Why not let people submit receipts of repairs and let that buy them some coverage back? That would create alignment of interest.
Sunlight is the Best Disinfectant
All this bill does is try to fool homeowners and pray the next hurricane won’t be for another decade. But, sooner or later, there will be a big storm and voters will be shocked by what the politicians and insurance companies forced them to pay.
There is nothing inherently wrong with depreciated roof coverage. As I said upfront, homeowners shouldn’t expect insurance to replace their roof because they ignored maintenance.
However, consumers should be aware of what they’re buying. If they decide to take ACV and risk a higher payment down the road to save premium today, that is their call. Just as those who want full replacement coverage should be presented the choice to buy it if they think it’s worth the extra premium.
But that’s not what this bill does. It hides the true cost of what they’re buying just like when the cereal maker shrinks the size of the box. Insurers are hoping people won’t notice. That’s deception.
The better solution is to find the political will to pass laws that prevent fraud and punish the perpetrators rather than honest homeowners who find themselves in the path of a hurricane.
Florida owes it to their residents to explain the tradeoff of giving up coverage in the hope it will reduce fraud. If this were done in a transparent way, I could support switching back to ACV. But there is nothing transparent about this process and innocent people are going to get hurt. You would think the Sunshine State would know sunlight is the best disinfectant!
Before I wrap, let’s do a quick numerical example of how this law might affect an average homeowner.
The Shrinkflation Math
Let’s assume a $500K home with a 2% hurricane deductible and a 20 year old roof that is depreciated 50%. Assume a hurricane causes $20,000 of damage to your roof. You might think you only pay your $1,000 deductible and the insurer pays $19K.
But you’ve forgotten two things. Your insurance now only pays 50% of your claim due to depreciation, so they pay $10K and you pay $10K. But wait, there’s more!
This was a hurricane which means your 2% deductible applies and you have to pay $10K (2% of $500K) before insurance pays anything. So guess what you’re left with? That’s right! ZERO!!!
So your $20K damage got shrinkflated by $10K of the hurricane deductible and $10K of depreciated roof value. And this is Florida, so you probably paid $5,000 of premium for that “claim” that paid you nothing.
And because depreciation schedules don’t reward you for maintaining your roof, even if you spent the money to keep your roof in tip top shape (unless you completely replace your roof each year), you still get paid $0 in this example.
There Are Things Worse Than Natural Disasters
Do you really think people are going to be OK with that? Especially when nobody took the time to explain to them upfront what the risk was? This bill is a disaster waiting to happen.
I’m sure some of my friends in Florida will be eager to tell me how I’ve got this all wrong and I’m happy to debate it with them. However, taking away coverage from your customer and not telling them is never a good solution.