The Discount Mirage:
A Cautionary Tale for Insurers
It looks like a discount from a distance.
But when you get close, when you compare it to the real thing, it disappears.
It happens all the time in retail. Stores have "sales," retailers offer "discounts," and buyers come running. It happens to insurers pricing jewelry replacements, too. The "regular selling price" is inflated so each customer can be treated to a discount.
Consider the case of a 1.5-carat diamond ring, purchased for $10,895. A year and a half later a claim was made for the lost ring, and the adjuster went to the selling jeweler for a replacement. Suddenly, the firm had increased the retail price to $12,800 plus tax.
However, said the jeweler to the adjuster, for you the price will be $4,560 (plus tax) for the diamond, plus $545 for the ring, plus $270 for labor, bringing the total to $5,375. It looks like quite a bargain, even compared with the original purchase price of $10,895. That adjuster should probably snap it up.
But aren't we comparing one inflated price to another the seller's exaggerated retail price to his inflated replacement price? Comparing one mirage to another? Buying a replacement from the selling jeweler, or automatically dealing always with the same firm for replacement, can leave us lost in a world of illusory discounts. As a reality check, this adjuster put out a request for competitive bids. He was ultimately able to buy a replacement from another retail jeweler for $3,550 well below that first "discount" offer.
As if to twist the knife a little, about a year after this situation occurred, the jeweler who sold the original ring and quoted the first replacement price published an article in an insurance trade magazine. In it he said, "Without a jewelry replacement program, insurance companies are susceptible to the all too common discretionary retail discounts given by various individual jewelers."
Don't believe you're getting a discount just because the replacement firm says so. The most cost-effective jewelry replacement program is competitive bidding.
FOR AGENTS & UNDERWRITING
Get an appraisal with a complete, detailed description of the jewelry. This description will ensure a replacement of the same quality as the original, and it will make the adjuster's job much easier. With complete information, replacement jewelers can bid on exactly what is needed. If descriptive information is incomplete, jewelers must guess at the missing qualities, so different bids will be based on different quality jewelry. We recommend an ACORD >78/79 appraisal to ensure accurate, complete, detailed descriptions of the jewelry being insured.
Agents and underwriters should attempt to get the original sales receipt (or at least know what the client paid) in an effort to avoid the "over-insurance" nightmare which generally doesn't reveal itself until a loss occurs and the adjustor settles the loss for a fraction of its insured value.
Oftentimes the underwriter is unaware of the ill-will problem that the agent experiences when the customer is surprised by the amount of the claim settlement.
Get competitive bids for all jewelry of substantial value.
Gather as much information as possible about the lost jewelry. If you are not working with an ACORD >78/79, put all descriptive information on an >ACORD 18 form. This presents the details in an organized way and ensures that all bidding jewelers receive the same information. Send this form to the jewelers you are asking for bids. Do not include the appraised valuation or any information about the policy.
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