Homeowners’ insurance needs to be more standardized because customers are confused about what their policies protect, New York’s financial regulator said.
Few fully understand all the complexities of their coverage, Benjamin Lawsky, superintendent of the state’s Department of Financial Services, said yesterday in an interview at Bloomberg headquarters in New York. More uniformity would help people compare offerings from competing insurers, he said.
“There’s room for greater standardization,” Lawsky said in follow-up remarks. “We’re doing it for health insurance and we need to ask, ‘Why not move in the same direction for homeowners’ policies?’”
The push to simplify residential policies was inspired by changes made to medical insurance through President Barack Obama’s health-care overhaul, which set out standardized coverage levels, said Lawsky, 43. Superstorm Sandy also highlighted misunderstandings. Typical homeowners’ policies exclude flood damage, which was a major source of losses from the storm that struck the U.S. East Coast last October.
“For the average consumer, the contracts are difficult to read,” said Tim Dodge, assistant vice president of research at Independent Insurance Agents & Brokers of New York. “You probably could simplify some of the language without changing the intent. The trick is to find that right balance.”
Lawsky’s office received more than 3,700 complaints from consumers and businesses related to Sandy through July, according to information on the department’s website. That’s less than 1 percent of the more than 400,000 claims tied to the storm.
Improving policyholders’ understanding of homeowners’ coverage and making sure they carry adequate protection were among the recommendations of a report New York Governor Andrew Cuomo commissioned after Sandy. The Department of Financial Services was created two years ago by combining New York’s banking and insurance watchdogs.
Obama’s health law sets up exchanges where individuals can purchase coverage. There are four levels of coverage on the exchanges -- bronze, silver, gold and platinum. Bronze plans, the cheapest and least generous, are designed to cover about 60 percent of medical costs and carry higher deductibles. Platinum plans, the most expensive, cover about 90 percent of costs.
Today is the first day of enrollment in exchanges set up by the Affordable Care Act. Enrollment will take place even as the U.S. government begins a shutdown, after House Republicans sought a delay of the health overhaul as a condition for funding the government, a condition rejected by Democrats in the Senate.
Lawsky’s office has said that standardizing health plans makes it easier for consumers to find the best options.
“New York previously had a dizzying array of thousands upon thousands of plans,” Lawsky said in a July statement.
Other homeowners’ coverage terms that may confuse policyholders include deductibles that vary based on the cause of damage, and clauses that restrict payouts if a home is harmed at the same time by two or more risks, such as wind and floodwaters, according to the Consumer Federation of America.
“It’s unreasonable and unrealistic to expect consumers to understand all this stuff,” said Birny Birnbaum, executive director of the Center for Economic Justice. “It puts insurance companies in a commanding position because they’re writing the policies.”
Birnbaum’s group supports a set of minimum requirements for homeowners’ insurance. Having that base line would help consumers compare policies, he said.
Dodge said that excessive standardization could limit competition by discouraging companies from developing new features. Brokers and agents can help explain coverage, he said.
U.S. home insurers haven’t posted an annual profit on the protection since 2007 and collectively had a pretax loss excluding investment gains of $3.1 billion last year, according to A.M. Best data compiled by Bloomberg Industries. Insurers can cushion underwriting losses investing premium dollars until they have to pay claims. State Farm Mutual Automobile Insurance Co. is the largest insurer in New York and the U.S. followed by Allstate Corp., the data show.
“We always encourage our policyholders to talk to our agents to understand their policies,” said Rachael Risinger, a spokeswoman for Bloomington, Illinois-based State Farm.
Justin Herndon of Northbrook, Illinois-based Allstate also recommended such conversations with agents to ensure that clients have “the protection they need for life’s uncertainties.”