AIG Private Client Group

BULLETIN

The following information was compiled to help you educate your clients on the importance of proper insurance to value (ITV) on their homes.

We hope our series of ITV bulletins has helped you facilitate discussions with your clients. AIG may be one of the first carriers to proactively address the issue, but ITV is an industry-wide concern. Following is a brief re-cap of the top five factors:

Inadequate valuations — The growing disconnect between insured value and claims costs is threatening the stability of the marketplace.
Increased demand for building supplies after disasters such as Katrina — Because the recent hurricanes impacted supply hubs, it costs more to rebuild, even when using the most basic materials; an $8 sheet of plywood in 2003 now costs $15.¹
Rising fuel prices — Diesel prices have gone up by 50 percent², making it more expensive to transport building material and operate construction machinery.
Booming real estate marketplace — The average cost of a home in the U.S. rose by over 12 percent in 2005, compared to 7.7 percent for the same period in 2004.³
Home renovations — 60-75 percent of homeowners fail to increase their insurance coverage to reflect significant renovations.⁴

Although the contributing factors vary, the conclusion is singular: maintaining proper alignment of ITV across our Homeowners book is essential if we are to continue providing guaranteed or extended rebuilding cost coverage at a competitive price. We need to make the appropriate adjustments now to ensure that the quality, breadth and value we provide won't be compromised in the future.

How and When Your Clients Will Be Notified
The roll-ons will impact renewals 90 days from February 20, 2006* (120 days for Florida). Please note that renewals print 45 days prior to a policy's effective date. Your clients' renewal packages will include an announcement — customized for their property location(s) — that explains the change. View the announcement template.

The value of the roll-on is state driven and will range from 10% to 15%. For state specific inquires, please click here.

For Your Reference
Here are printer-friendly versions of each bulletin, should you wish to forward or disseminate the information:

Inadequate Valuations Threaten Homeowners
Building Costs Escalate Due to Natural Disasters
Global Demand for Materials Drives Up Construction Costs
Hot Markets Inflate at a Faster Rate
Upsurge of Renovations Contributes to the Underinsurance Problem

1. Carliner, Michael. Building Materials After Katrina. National Association of Homebuilders, October 19, 2005.
2. www.cnn.com. Construction costs building steam. CNN/Money, October 27, 2005.
3. Office of Federal Housing Enterprise Oversight's Quarterly Housing Price Index. December 1, 2005.
4. According to the Independent Insurance Agents and Brokers of America; as reported in "Beef Up Your Insurance." This Old House, August 2004.

*The effective date in North Carolina is tentatively set for March 25, 2006.

The current economic climate continues to present new challenges for our industry. AIG Private Client Group makes every effort to help establish accurate rebuilding costs when a policy is issued, but the accuracy of our estimates will deteriorate over time unless sufficient adjustments are made at renewal. Not only do we need to account for normal inflation, but also we must consider supply and demand issues, market pressures and unreported upgrades. We strongly encourage you to raise the issues surrounding ITV with your clients. If you have any questions, please contact your underwriter or business development manager.