Creating informed consumers

Met Life Auto & Home survey shows that an annual review is vital
to fill gaps and educate buyers

By Elisabeth Boone, CPCU

Back in the 1970s, the faces of insurance company executives turned bright red when they learned that insurance policies were ranked near the bottom of the respected Flesch Reading Ease scale. Intelligent people who made an honest effort to understand what their policy did and didn't cover usually gave up in frustration after trying to wade through the stilted polysyllabic wording, obscure legalese, and tortured ambiguities in a simple homeowners or auto policy.

In the years since then, insurers have taken huge strides toward making policies readable and comprehensible to consumers. Many states now require that policies score at least 40 out of 100 on the Flesch scale, and today it's possible to read a personal lines policy with a fair degree of comprehension.

That's the good news. The bad news is that most people still don't read their policies and don't really know what protection they do and don't provide. That reality came through loud and clear in the responses to the Insurance Literacy Survey conducted earlier this year by Zogby International for MetLife Auto & Home.

The two-part survey tested consumers' knowledge of insurance basics for homeowners and personal auto coverage. According to MetLife Auto & Home, most consumers don't shop just on price and are willing to pay more to obtain better coverage and the peace of mind it provides. To the insurer's surprise, however, the survey revealed alarming gaps in insureds' knowledge and uncovered an array of misconceptions that can have potentially serious consequences.

MetLife Auto & Home and Zogby conducted their first Insurance Literacy Survey in 2007. "Then, as now, the goal of our research was to determine the extent to which consumers may be unknowingly exposed to potentially costly insurance surprises," explains Paul Lonnemann, senior vice president for sales distribution at MetLife Auto & Home.

"We found that, despite the economic recession that has prompted many Americans to review their personal finances and to seek strategies to protect their assets, major misconceptions about their auto and homeowners insurance policies still exist," Lonnemann says.

"From our perspective, it's vital for insurance consumers to seek guidance from a trusted advisor in resolving the knowledge gap our survey revealed. We believe that agents and brokers can provide the appropriate counseling by conducting a thorough annual review with each insured."

Fact vs. fiction

It's hard to dismiss the need for such a review when you consider the array of misconceptions and knowledge gaps uncovered in the recent survey.

For the homeowners insurance survey, Zogby interviewed 1,196 adults who have homeowners, condominium, or renters insurance and who live in a house with a telephone.

According to the survey, 31% of the respondents don't know how much their homes are insured for—despite the fact that, for most Americans, their home is their most valuable asset. An additional 46% of those surveyed don't know how much coverage they have for personal property in their home like clothing, furniture, appliances, and electronics.

Some common misconceptions that the survey brought to light can result in frustration for insureds. For example, 30% of respondents believe their insurance coverage is based on their home's current market value. Further, 71% of those surveyed believe insurance pays the full cost to rebuild their house in the event of a major loss, and 64% think their policy will cover any building code-mandated upgrades in an undamaged portion of their home.

What's more, many insureds are unaware that certain causes of loss are excluded from the standard homeowners policy, such as water damage caused by the natural peril of flooding. For water damage caused by a sewer or sump pump backup, 67% of respondents believe they have coverage and aren't aware of the need to purchase a rider for this exposure.

Although 83% of the respondents believe that foundation damage from earth movement is serious, only 37% know this peril isn't covered under the standard homeowners policy. Twenty-eight percent believe they would be covered for an earthquake or volcanic eruption, and the same percentage weren't sure.

The survey also identified misconceptions about coverage for personal property, with 73% of respondents believing their insurance will pay the full cost to replace personal property in the event of a loss. Sixty percent believe their policy will pay the full cost to replace valuables like jewelry and collectibles, and many seem to be unaware of the need to schedule valuable items on a floater.

There were several instances where those surveyed were unaware of coverage that is extended under the standard policy, which can provide opportunities to save money. For example, more than 90% of survey respondents didn't know that their homeowners policy can extend coverage to electronic data like music and ringtones. Fifty-nine percent didn't realize their policy would cover damage to appliances and wiring caused by a power surge. And 47% of those surveyed were unaware that the standard homeowners policy covers the personal property of college-age children who live on campus.

Auto coverage: What's the score?

The second part of the survey elicited consumers' beliefs about what their personal auto insurance covers. The survey sample consisted of 1,203 adults who have auto insurance and live in a home with a telephone.

As in the homeowners portion of the survey, respondents tend to believe their auto policies provide more coverage than is typically the case. At the same time, however, many who responded weren't aware of discounts and other ways to save on the cost of auto insurance.

Although most Americans understand what it means to be "upside down" on a home mortgage, the survey report notes, 50% of respondents with car loans don't realize it's possible to owe more than a totaled vehicle is actually worth unless they'd purchased gap insurance. The same misunderstanding exists with respect to leased vehicles, with 57% of respondents saying they aren't sure whether their auto policy would replace a leased vehicle that was totaled and also would pay off their lease obligation.

In another important misconception revealed by the survey, 56% of respondents believe that in the event of an accident, their policy would pay the full replacement cost for items like batteries, tires, and shock absorbers. This points to a lack of awareness about the depreciation factor in standard auto policies and can be particularly costly for the owners of hybrid vehicles, whose batteries are extremely expensive to replace.

With respect to personal property stolen from a vehicle, 33% of respondents believe their auto policy will pay to replace items like cell phones, iPods, and MP3 players.

As with the homeowners survey, many respondents to the auto survey are unaware of available discounts and other ways to save money on their coverage.

For example, 28% of those surveyed say they buy additional insurance when renting a car, although most auto policies and credit cards provide rental insurance benefits. Forgoing the rental car coverage can save consumers an average of $9 to $19 a day, according to MetLife Auto & Home.

Almost everyone (93%) knows they can get an insurance discount for having a good driving record, but just 67% realize they also can obtain discounts by shortening their commute or carpooling to work.

Don't sell—educate!

In reviewing the survey findings, Lonnemann says, "One of the things I found most striking was the general misconception that all insurance policies are created equal. When consumers view price as the key factor in buying insurance, they naturally see insurance as a commodity. In fact, of course, there are a lot of variations even in the basic coverages in both auto and homeowners policies.

"Consumers shouldn't be sold insurance; instead they should be educated about insurance," Lonnemann continues. "That's why I think there's a strong need for agents to conduct an annual review with each of their clients. Furthermore, the survey results suggest that there's a desire on the part of consumers to have a trusted advisor do a needs analysis to identify gaps in both their auto and homeowners coverages," Lonnemann declares.

In fact, he points out, 77% of survey respondents said they were willing to pay more for better coverage and peace of mind, whereas only 17% indicated they simply wanted the cheapest option available.

This finding, Lonnemann believes, creates a significant opportunity for agents to position themselves as trusted advisors instead of getting caught in the commodity trap. "The time to address a coverage gap is not after a claim has been filed," he remarks. "A thorough annual review is a way for the agent to demonstrate his or her value to the client by explaining coverages, correcting misconceptions, and asking questions to identify gaps in existing coverages."

The annual review also allows the agent to learn about new exposures created by changes in the client's life, like marriage, divorce, a new baby, kids leaving for college, a home renovation, or big-ticket purchases that need to be insured.

In addition to strengthening client relationships and enhancing agency revenue, conducting an annual review can also help an agency reduce its errors and omissions exposure, Lonnemann observes. Many E&O claims against agents arise when an insured discovers that an item or peril he thought was covered in the policy was either excluded or inadequately insured. Agents can both educate their clients and protect themselves by explaining coverage options and documenting the client's choice to accept or reject them.

MetLife Auto & Home has developed a checklist that agents can use when conducting an annual review, Lonnemann says.

"It's both a challenge and an opportunity for agents to get their clients to take more than just a passive role in the insurance process," he asserts. "As the survey results show, some consumers seem to be in denial about what they aren't covered for, and perhaps even unwilling or afraid to confront the possibility they could have a loss someday. As a result, they may be reluctant to sort through the details of their policies.

"Let's face it," Lonnemann continues. "There's nothing exciting or sexy about insurance policies. Once they've bought an insurance policy and it's been delivered, very few people take the time to read it. However, that's actually the best time to sit down and go through the policy, and if a client has any concerns, he should reach out and engage the agent."

It's the agent's role to promote and encourage this kind of engagement, Lonnemann believes. "It's up to the agent to help clients understand that insurance gaps can be opportunities not only to secure more complete coverage but also to reduce clients' anxiety about protecting their two most valuable assets: their house and their autos."

As the MetLife Auto & Home Insurance Literacy Survey clearly shows, consumers are often confused and uninformed about what their auto and homeowners policies do and don't cover, and a majority of insurance buyers are willing to pay a trusted advisor not just for insurance but for that vital and priceless commodity called peace of mind.

For more information:

MetLife Auto & Home

Web site: www.metlife.com/insurancequiz