MR CREOSOTE, ANDY WARHOL & INSURANCE VALUATIONS
Andy Warhol once suggested that instead of spending $200,000 on one of his pictures, maybe instead his collectors should just take that money, tie it up and hang it on the wall for all to see. He was trying to prod the egos of art collectors, but he was also missing a point about asset appreciation and depreciation. Unlike actual dollar bills, his art went up in value over the years. Decades later, a famous collector of Warhol’s work was being interviewed for a TV show on prolific art collectors. Pausing in front of a Warhol “Marilyn Monroe”, the interviewer asked what it was worth. The collector became uncharacteristically demure. The interviewer tried again, “what is it insured for?”. The collector instantly relaxed. “Ah, when it comes to insurance valuations”, he enthused, “the sky’s the limit!”. So assets go up and down in value, and sometimes they’re insured for too much (‘over insured’) and sometimes they’re insured for too little (‘under insured’). How do we get insurance valuation ‘just right’, if indeed that ‘right’ number even exists?
Most people are pretty demure when it comes to their insurance valuations. Ask a typical person to put a number on the total value of the contents of their home and most would under cook it. If we just pinned the monetary value of our possessions around the home, as Andy suggests, we’d probably be rather staggered by what it all added up to. It’s ever been thus and represents a major problem to the insurance industry in a number of ways.
THE PERILS OF UNDER-INSURANCE
If I estimate that the total value of my home contents is £50,000, when it is in fact £100,000, then I’m probably not paying the right premium. But this is precisely how most insurance works: the insurer asks their customer to estimate the total value of their property. And most people, quite understandably, get it wrong. And generally they under-estimate it rather than over-estimate it. Add up this effect across the whole household and contents insurance market and that adds up to a pretty big loss of potential premium to the insurance industry. Insurers are effectively acquiescing in the artificial contraction of the value of their addressable market, and that’s not generally a smart thing for any industry.
The problems for the industry don’t stop there. This under-estimation, or under-declaration, of values increases volatility, or unexpectedly large claims, for insurers. If I lose or damage something that costs £2,500 then as part of a £100,000 total insured value that sort of makes sense: it’s 2.5% of my material asset wealth. On that low ball figure of £50,000 it’s 5% and that starts to look like a lot of asset wealth to have in one possession. So on the one hand insurers are failing to count the full value of what their customers have, and then they’re shocked when individual claims look disproportionate to the customer’s total insured value.
So what’s the solution? Insurers could educate customers in how to better calculate the value of what they own. The problem is, most people don’t want to be educated when it comes to insurance (see blogs passim). People want ever quicker and more accessible means of getting insured, and insurers want to cater to this to maximise their rate of customer acquisition (and mitigate their cost of acquisition).
MR CREOSOTE & THE ALL YOU CAN EAT BUFFET
It’s a bit like an all you can eat buffet. The restauranteur wants to entice the customer with a simple offer: come on in, pay a single easily marketable price and eat your fill. But to get their unit economics right they have to work out how much the average customer will eat, and seek to mitigate the outliers. If I have an average level of hunger and want to eat an average amount of scoff, then I am almost certain to be cross subsidising Mr Creosote (cue Wikipedia for anyone who’s not a Monty Python fan). Put another way, if I diligently insure the value of my property to the best of my ability, I am probably cross subsidising those that routinely under value their property.
BACK TO ANDY WARHOL…
It’s a problem for customers as well. If you’d taken Andy Warhol’s advice and hung $200,000 in bank notes on the wall, it probably wouldn’t be enough to buy that Andy Warhol picture any more (more to come on inflation in future blogs). But if you weren’t as cynical as Warhol pretended to be, and you really loved his art, cynicism and all, and you were really attached to the sight of your Warhol hanging on the wall, then if someone told you that you should really increase the insured value to $220,000, and, yes, you’re also going to have to pay 20% extra premium, many people would think that was fair and prudent and go with it (the rest would be like Mr Creosote after one too many chocolates… that one’s probably for YouTube).
Now how do all you can eat buffets and Andy Warhol pictures possibly relate to embedded insurance, I hear you clamour. Well, by interacting with the retailers and manufacturers of the things our customers own, embedded insurers such as Zing already have a far better understanding of what you actually have and what it’s actually worth. If you’re buying something important from a Zing partner retailer, and choosing to insure it with Zing, we’re capturing and storing what it would cost to replace. If you’re adding something to your Zing subscription that you already own, we’re getting an up-to-date replacement cost valuation from one of our Zing partners. And we don’t just sit on this data. So if supply chains, a climbing RPI or just the vicissitudes of complex markets mean that it would actually cost you more to buy the same or an equivalent item today than it did last year, you might want your insurer to help you out by telling you that. If the cost of gold means you wouldn’t be able to replace your wedding band like for like it might be useful to have an easy way to correct that. And in more complex markets such as collectible items, it’s also useful to have an insurer that keeps your insurance adequate and relevant.
THE IMPORTANCE OF PARTNERSHIPS
And, much like Mr Creosote, I’m not quite done yet. At Zing, because we actively involve our partners in the claims process, typically in sourcing replacements for insured items, they have a pretty good idea of what a true ‘replacement cost’ for that item should be at any one time. This isn’t always the case with conventional insurance. This should be good for insurers and good for customers. By identifying our customers’ most important items (the very things likely to give a general household insurer a shock) and by keeping the values for those items in line with ‘true’ replacement costs, we’re minimising under insurance (bad for the insurance industry), minimising bad claims outcomes (bad for customers) and keeping insurance premiums fair (good for everyone).
If you’re interested in becoming a Zing partner, then we’d love to speak with you. Get in touch with me or one of our partnerships team here.