JF2070: Three Factors to Consider for Property Coverage With Sean Harper #SkillsetSunday
Sean is the CEO of Kin, an insurance company built from scratch on modern technology. Today you will learn three factors to consider when determining the right coverage for your property; covering the property for the right amount, why it’s important to get flood insurance and he shows how you can see if your insurance company is spending its revenue on claims or other expenses to make sure they take care of their customers.
Sean Harper Background:
- Co-founder and CEO of Kin, an insurance company built from scratch on modern technology
- Realized the homeowners insurance industry was still being managed in a way that NO other consumer financial products are managed today
- Leads a team of 100+ employees to help educate and cover their clients
- Based in Chicago, IL
- Say hi to him at https://www.kin.com/
Click here for more info on groundbreaker.co
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“50% of flood losses happen outside of FEMA designated flood zones” – Sean Harper
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Sean Harper. How are you doing, Sean?
Sean Harper: I’m well. How are you?
Joe Fairless: I am doing well, and – a little bit about Sean. He’s the co-founder and CEO of Kin, which is an insurance company built from scratch on modern technology. He’s based in Chicago, Illinois. He leads a team of 100+ employees to help educate and cover their clients. Today we’re gonna be talking about three factors to consider when determining the right coverage for your property. This is a Skillset Sunday; I hope you’re having a best ever weekend.
First, Sean, how about you give us a little bit about your background, and then we’ll roll right into the three factors?
Sean Harper: Sure. I’ve been doing online financial services stuff for a long time; my co-founder Lucas and I both have. We really sort of stumbled into this insurance stuff when we started buying real estate ourselves. There were a lot of things about the real estate process that are pretty anachronistic, stuff that operates less efficiently than it could; insurance was one of them… And we were just scratching our heads at how manual and how much paperwork was involved, and how much back-and-forth… When there are other areas of financial services where it’s much more automated.
Think about getting a credit card, for example. You don’t need to talk to anyone; you just get the offer on the website and you click, and then you’ve got a credit card. So that’s what we’ve been building… It requires a lot of technology to do that, and most of the tech is around having — the core of every insurance company, bank, or whatever is actually a software platform. So all this software to do the underwriting rules, the accounting, the payments, the price and all that… So we had to build that, and then we had to build a really good system for understanding from public data sources and some private data sources, and even some machine learning, to understand the traits of the home. Because of course, we’re not there. We can’t see the building. So we needed a machine that’s really great at pulling data in, so that it does understand the building. It’s pretty fun, we’ve learned a lot about buildings… [laughter]
Joe Fairless: What have you learned?
Sean Harper: You know, it’s funny – the details are really important. One thing that really surprised me was even a simple trait of the building – think about square footage – is actually really hard to know. We’ll talk about a single-family house for a second. You could ask the MLS, you could ask the property tax site, and then you could actually take a picture of the home from above, from an airplane, and use the area times the number of stories you know it is to calculate it… And you’ll end up with three different answers.
Joe Fairless: Yeah.
Sean Harper: You could ask the person who lives there, and you could ask the person who lived there before them, and they’ll give you two different answers. And that’s just for square footage, which really should be a simple thing. Then you start trying to ask people what the quality of their cabinets and appliances are, or how old their HVAC system is, or what the pitch of the roof is… And the details get really complicated. There’s a lot of ambiguity.
Joe Fairless: How do you navigate that?
Sean Harper: We know that no data source is gonna be perfect for this stuff, so we try to have redundancy and we try to have objectivity. One thing that insurance companies have always done is they’ve always relied on the user and/or broker to tell them about the building. And sometimes they know, and sometimes they’re honest. But there are also times when they know and there are times when they are dishonest. The first part, the objective sources that we use – they’re not always perfect, just like asking the user isn’t perfect… But at least they’re objective. They’re not skewed in any way. Versus if you start asking somebody who knows, that if they tell you they have a newer roof, for example, that they’re gonna end up with cheaper insurance – well, that creates a really big incentive for them to tell you they’ve got a newer roof. And people do what benefits them; maybe they’re not being dishonest, maybe they’re omitting something.
So that’s a big part of it – we try to rely on sources that are objective… And then the other is we try to have redundant sources. In that example I gave you before, of square footage, if those three data sources are all pretty close, then you have a high confidence that it’s accurate. If there’s a huge spread between them, or maybe two of them more or less agree but the third one doesn’t, that tells you something about it as well. So having multiple data sources that are calculated in different ways, that can be used to cross-check against each other, is pretty important, too.
Joe Fairless: That’s a good lesson for anything where you have conflicting information… Even if it’s a he said/she said thing, well what are the objective sources saying that took place? And then are any of those objective sources redundant, or aligning with each other? And if so, then you go that direction with the answer.
Sean Harper: Yeah, absolutely. Having some tie-breaker is really nice.
Joe Fairless: Yup. Let’s talk about the three factors to consider when determining the right coverage for your property. What’s number one?
Sean Harper: Number one is you really wanna make sure that you’re covering the property for the right amount… And it’s really easy to get drawn into trying to find the cheapest insurance, because no one wants to pay more for insurance… But a lot of companies, especially a lot of insurance agents, will try to fudge essentially the insured value. So you might have a home or a building that’s legitimately worth 1.5 million dollars, and you’ll get an insurance quote that looks really good… And if you look under the hood, you’ll see that they’re only ensuring the building for 1.2 million dollars.
So that’s really important, is just to figure out how much the coverage costs you relative to the amount that’s being insured, and to make sure that the amount that’s being insured actually does cover the property… Because it’s not likely that something happens to your property, but if it does, you definitely don’t wanna be short on your insurance, because that could create a big problem; it could wipe out your equity.
The second one is — a lot of people don’t realize this, but most property insurance, commercial or residential, doesn’t include some really important hazards… And the biggie is flood. A normal homeowner’s insurance policy, or a normal commercial – it can go either way; it could include it or it couldn’t. You really wanna make sure that you’re buying flood insurance… And that’s true even if you’re not in a flood zone.
Mortgage banks will usually enforce that you get flood insurance if you are in a FEMA-designated flood zone… But the problem is that FEMA drew those flood zones a long time ago, and things have changes. The types of weather that we get change, the sea levels have risen, and then also things get more built up, it can create flood dynamics… If everything’s paved over near you, there’s no ground for the water to soak into, so it makes floods more likely. And you can see some really bad situations. If you go to Houston, there are neighborhoods that still haven’t really rebuilt fully after Hurricane Harvey, which was two years ago, and that’s because people didn’t have flood insurance. So 50% of flood losses happen outside of FEMA-designated flood zones. And the really tragic thing is that if you’re in one of those areas, buying flood insurance actually doesn’t cost that much.
Joe Fairless: If you’re in a non-FEMA flood zone.
Sean Harper: If you’re in a non-FEMA flood zone. Because it’s not that likely that you’re gonna get flooded, but that’s why you buy insurance. You buy it for the stuff that’s not likely, but would be really crappy if it did happen.
Joe Fairless: What are some other things besides flood insurance that most property insurance doesn’t include?
Sean Harper: The other biggie is earthquake. If you are in an area where earthquakes happen, that’s usually not covered by a normal policy… And then there’s sort of a subset of this where the deductible will be different. Oftentimes now if you’re in a place where there is a lot of wind and hale, you’ll end up with an insurance policy that has a second deductible. So it might be a thousand-dollar deductible. But then there’s an asterisk next to it that says “Well, unless it’s wind, or hale loss… Which, that’s a pretty common type of loss.
Joe Fairless: Sure.
Sean Harper: It’s a very common insurance claim. And those deductibles could often be a lot higher. It’s very common. They have a $1,000 normal deductible, and a $10,000 hale deductible on even just a normal house.
Joe Fairless: Okay. And number three?
Sean Harper: Number three – this one gets a bit esoteric, but it really helps if you can look at the financial statements (which are all public) from your insurance company. They actually have to file their financials with their state regulator…
Joe Fairless: I can already tell this is gonna be less than half of a percent of any person who’s getting insurance, based on that, so far.
Sean Harper: Absolutely. But it’s so easy to do. What you’re looking for is you’re looking for how much of their revenue they spend paying claims, versus how much of the revenue they spend on their overhead. What you wanna see is you wanna see an insurance company is spending most of the revenue that they get paying claims… Because that’s what you as a user care about. And because insurance can be really hard to compare, the last thing you want is your insurance company spending a little bit on paying claims… Maybe they argue with you a lot when there is a claim, or try to short-change you, and then they’re spending the rest of the money on corporate jets and fancy buildings and everything else for them.
Joe Fairless: Well, not having studied financials of insurance companies before, what percent would be considered high, versus average, versus low?
Sean Harper: That’s a really good question. For property insurance, the average is about 30% is spent on overhead and 70% is spent on claims. There’s actually a lot of variance. You’ll find companies that are 40/60, you’ll find companies that are 20/80. And usually, the ones that have the lower expenses are also the ones that have better customer satisfaction, because they’re not nickel and diming you when you have a claim.
Joe Fairless: What are some insurance companies that stand out in a good way in that regard?
Sean Harper: Some of the best insurance companies are regional. We’re very regional; we’re focused in just a handful of big states. One that is a national carrier, more on the personal insurance side, that does really well on that, is USAA. But it really is hit or miss. It’s not always the big brands that are the most efficient. In fact, some of those are the least efficient.
Joe Fairless: And what are on the opposite side? USAA is on the good side; what about the opposite side?
Sean Harper: I don’t wanna say that. That’s mean. I don’t wanna pick on anyone.
Joe Fairless: It’s just facts.
Sean Harper: [laughs] I’ll leave that as research for the user.
Joe Fairless: Where should they go to research that? Where is an easy place to look at that?
Sean Harper: The easiest is to just go to whatever state you’re in, search for their office of insurance regulation. Where I live, I just google “Illinois office of insurance regulation.”
Joe Fairless: Anything that we haven’t talked about as it relates to the three factors to consider when determining the right coverage, that you think we should?
Sean Harper: Those are my top three.
Joe Fairless: Well, how can the Best Ever listeners learn more about what you’re doing and get in touch with you?
Sean Harper: Kin.com is the easiest way.
Joe Fairless: Sean, thank you so much for being on the show and talking to us about the three factors – one, make sure we have the right amount; two, make sure that we have the right hazards covered, taking a look at flood and earthquakes in particular, and three, taking a look at the public financial statements of the insurance companies, and seeing what proportion of revenue is paying claims versus overhead.
Thanks for being on the show. I hope you have a best ever weekend, and we’ll talk to you again soon.
Sean Harper: Thank you.
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