Some home service plans not only help fix problems when they occur, but also help prevent problems from happening in the first place with regular maintenance services. (Credit: William Potter/Shutterstock)Many homeowners and homebuyers do not know the difference between home insurance and home service plans (aka home protection plans or home warranties). In fact, only 30% of homeowners are confident they understand what their home insurance policy covers, according to a 2020 survey from Plymouth Rock. It’s understandable, because, on the surface, they seem to do the same thing: Protect policyholders from paying excessive out-of-pocket expenses when things go wrong with their home.
But that’s about the extent of the similarity because home insurance and home service plans are two very different, yet complementary products. In fact, insurers can benefit from partnering with a high-quality home service plan provider, as it can increase customer satisfaction and loyalty.
So how do home service plans differ from home insurance? Certainly, anyone in the insurance business has an intuitive grasp of the differences, but explaining it to a policyholder may not be so clear-cut.
The key differences: What might happen vs what will happen
At a high level, home insurance covers damage that is unlikely to happen and difficult to predict: a fire that causes smoke damage, a tree that falls onto the back corner of the house or a severe hailstorm that damages the roof. A home service plan, on the other hand, covers the events that are absolutely expected to happen, such as a water heater near end-of-life that needs to be replaced, or a built-in microwave oven that suddenly stopped working. Some home service plans not only help fix problems when they occur, but also help prevent problems from happening in the first place with regular maintenance services.
Some readers may be thinking, “Can’t homeowners simply buy breakdown riders as part of their home insurance policy?” Yes, they can and for some policyholders it may be a good option. But there are significant differences between a home service plan and a breakdown rider. Homeowners are disincentivized to use breakdown riders, for example, because they fear too many claims could increase their rate. Additionally, they don’t cover maintenance services and coverage doesn’t fall under the high deductible. So, while breakdown riders certainly cover some of the gaps that homeowners experience with a home insurance policy alone, they don’t provide the risk reduction or the frequent engagement of a home service plan.
Benefits to home insurance carriers
For starters, the right home service plan can help prevent the need to file a home insurance claim for issues like flooding and fires. In many Texas homes, for instance, the water heater is located in the attic. Few homeowners regularly flush out the sediment, which will increase the water heater’s life and prevent a catastrophic failure. If it bursts, 20 to 100+ gallons of water will flow through every floor, causing serious damage along the way. Or take the clothes dryer: If the exhaust vent is not periodically cleaned out, there is an increased chance of a fire. A comprehensive home service plan can ensure that regular maintenance reduces risk, and enables carriers to write more discounts and win more business.
The right home service plan can also help increase an insurer’s net promoter score (NPS), which is a measure of how likely your customers are to recommend your company to others. It’s an important metric that’s a strong predictor of growth, according to the Harvard Business Review. The median NPS score across all industries is 44. For a home insurance carrier it’s 42.
One way that home insurers can increase their NPS score is to have more frequent positive interactions with their policyholders, but that’s tough to do. After all, people buy home insurance hoping that they’ll never have to use it, and, for the most part, they don’t. Only one in 20 homeowners file a claim annually. On average, home service plans see each customer file two claims each year, so a home service plan company has over 40 times more contact with policyholders than does a home insurance company. By partnering with a high-quality home service plan company, an insurance carrier not only mitigates their risk of paying out for preventable claims, but also gain the opportunity to have far more positive interactions with their customers.
Home insurance and home service plans work well together, providing homeowners with peace of mind that they will be covered for both low-frequency, high-severity events and high-frequency, low-severity events. And for insurers, home service plans can reduce the risk of home insurance claims, increase customer satisfaction and develop stronger customer loyalty. They truly are better together for everyone.
Jorey Ramer is CEO Super Home, Inc.
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