The paradigm has changed, probably forever, and homeowners are feeling it.
By Neil Shapiro, Managing Director & Senior Adviser, Family Office Group
A client recently bought a pristine, multi-million, waterfront home in a high-risk coastal area. When it came to insuring the home it was standard operating procedure initially.
The house and personal belongings were easily covered under a homeowners policy with a high-end insurer. This was straightforward. However, given the home’s location, its age and the age of the roof in particular, the insurer was not keen to provide coverage for wind damage. Wind damage from storms is among the biggest threats to a waterfront home, so we had a problem.
We pushed back hard with the insurer, and they eventually came back with an proposal that was simply uneconomic. The insurer knew this would be the case; it was their way of offering coverage, without really offering anything.
Such is the state of property insurance these days. It’s hard to get comprehensive policies, and when you can, those policies are much pricier than they’ve ever been. This doesn’t apply to just new home purchases, but to policy renewals across small condos to large estates.
There are two main factors impacting homeowner policy renewals that we see with clients (and in our own lives) these days:
- Much Increased Dwelling Limits / Asset Values. Each year insurance companies “inflation adjust” the value of items insured, from homes to engagement rings. The increases we have seen recently are almost double that of prior years. This change reflects the impact of inflation in the economy. For example, not only are houses appreciating in value, but construction costs to rebuild are much higher today than a few years ago.
- High Risk Areas. A hurricane zone like Florida or the Hamptons; wildfire risk areas, including much of the western United States; and earthquake coverage in places like Los Angeles and San Francisco carry unprecedented costs, if coverage can be obtained at all. Interestingly, the impact is not only from climate change and resultant natural disasters. New York City has seen major pricing increases reflecting the impact of water damage and temporary relocation claims from plumbing issues in aging buildings.
Many homeowners don’t even know they have a problem until renewal on their current policy comes up, or they try to get coverage for a new home. This just happened to a client of ours with a waterfront home. The national insurer decided to exit the area and not renew the policy, giving us just weeks to find new coverage. In another waterfront home case, a national insurer offered continuing coverage, but with a 43% pricing increase just weeks before renewal citing both inflation and location rate changes.
The fluidity of insurance companies entering and leaving the market creates a ripple effect, because insurers try to spread their risk across geography, insurance value, and type of risk. Fewer options in one area means the remaining options will be more expensive there and everywhere else.
The difficulty is in figuring out what to do next. There’s no straightforward solution to the insurance problem nowadays, and there may never be again. Doing diligence on the remaining options requires a network of insurance contacts, boots on the ground, detailed analysis and leveraging customer bases.
Having been through this process countless times over the past several years, we’ve developed a playbook to deal with these issues when clients get hit with them, or better yet, before they get hit with them.
- Work the broker relationship. We use our influence and the scale / importance of our client’s premium dollars to get better deals from the carriers.
- Decouple standard property versus specialized risk coverage. One-stop shopping may not give you the best terms, even if that seems counterintuitive.
- Use “non-admitted” insurance (e.g. Lloyd’s of London) that has flexibility in underwriting and premium pricing. “Admitted” refers to a state’s regulation of the terms of an insurance product. Non-admitted means that a state did not regulate the terms of an insurance product. This is an administrative distinction and not an opinion of the quality of the insurance or the carrier itself. This was what we did in the example above to secure wind coverage.
- Flex the amount of risk we take by having less insurance and/or a larger deductible. These changes shift risk from the insurance company to the client and can make the insurance policy more affordable.
- Fight automatic asset value increases or requirements to reappraise assets. In extreme cases, we may elect to self-insure and not have coverages like wind or flood.
- Mitigate risk by installing a monitored alarm system, new roof, impact resistant windows, shutters or sprinklers; install a fire hydrant nearby; or elevate key machinery systems or the house itself above the flood line.
- When buying or financing a home, insurance diligence is now an important part of our process. Availability and cost of insurance is a major cost consideration that certainly can affect one’s desire or negotiation strategy to move forward with a purchase or a loan.
Between all these options, we have been able to get appropriate, relatively cost-effective coverage for clients under what we believe is a new, long-term reality in the insurance market. It’s a significant challenge, but the appropriate coverage can generally be there if no stone is left unturned.