Extreme weather changing the home insurance business
Wildfires in California and Oregon. Hurricanes that wreak havoc from the Gulf Coast up to the Northeast. Hail in the Midwest that is so big and falls with such intensity that it punctures roofs.
Extreme weather is causing billions of dollars in property damage with a greater frequency than even a few years ago. In response, insurance companies are increasingly rethinking which homes to cover and at what price.
In some cases, they are raising premiums two to five times in a year. In others, they are denying coverage because they deem it too risky to have a lot of properties in an area that is prone to wildfires (like Los Angeles County).
Insurers are also putting more of the onus on homeowners to keep up the maintenance on, say, roofs in areas that are regularly hit by hurricanes. They may also be asking if homeowners in fire-prone areas have done anything to mitigate fire damage. And people looking to buy a coastal home should make sure it is insurable at all.
“The severity, frequency and size of the storms is really what’s changed in the last two to three years,” said Jean Sullivan, vice president of insurance sales at Precisely, a data analytics company that does geographic risk assessments.
“Insurance companies are finding out that the models they built just three to five years ago are not holding up in the last two to three years,” she said. “That’s concerning to them, and that’s caused more pressure on the reinsurance companies that insure their risk, and more pressure on the homeowner.”
As a result, many homeowners in climate-ravaged areas are starting to have to deal with the availability and affordability of insurance, along with stricter terms and conditions, said Ross Buchmueller, president and chief executive of PURE Insurance, which focuses on high-networth clients.
“If you want to buy a house in the canyons of Beverly Hills, you should check that it’s insurable,” Buchmueller said. “It’s not about someone couldn’t get insurance at a fair price. It’s you can’t get insurance at all in certain places.”
NFP, a large brokerage, felt fortunate to be able to retain a celebrity client’s insurance even with the price doubling, said Brett Woodward, the firm’s managing director, who runs the personal risk practice.
“He was paying $400,000 a year for his insurance last year,” Woodward said. “It was renewed in July at $850,000. We were happy he still had coverage.”
But even some wealthier homeowners are asking if insurance, or at least insurance for the full value of their homes, is worth paying year after year.
Some California clients of Bessemer Trust, a wealth management firm, have put in their own wildfireprotection systems instead of paying high premiums on insurance with limited coverage, said Gary Pasternack, head of insurance advisory at Bessemer.
“It may be more economical for someone to spend money on lossmitigation strategies than to pay so much in premium for policies that have large deductibles and poor coverage,” he said. “It’s playing out in California now in a significant way. People have to make a decision: Do I want to continue to buy insurance, or should I be making more of an investment in protecting my property against losses, particularly fire losses in the West?”
A built-in system that sprays foam on a house to protect it from catching fire can cost $4 to $6 a square foot. It is even more expensive on multiple-building estates in fireprone areas, Pasternack said. Some homeowners have bought foam systems mounted on all-terrain vehicles and given caretakers the responsibility of spraying down the buildings.
Of course, that system will not work if there is an evacuation order.
Still, Pasternack said, homeowners get creative when a policy that had an $80,000 annual premium a few years ago is now unavailable in the regular market or costs five times that — or, in one case he saw, 10 times more.
Short of foam-spraying ATVs, there are things regular homeowners can do to protect their homes. A wellmaintained roof can stand up better to hurricanes, heavy winds, and rain or hail. And insurers are often using aerial photography to see it.
“Even though you have trees hanging over your house, they’re using aerial imagery to look at your roof,” Sullivan of Precisely said. “Are there shingles missing? Does it have moss growing on it? Are there signs of it failing?”
Climate has changed the way many insurers are looking at claims, particularly if a roof may have been older than its useful life.
“Take a wood or cedar shake roof,” Woodward said. “Let’s say it’s supposed to last 40 years. An insurer may start knocking off coverage at the 20-year mark.”
Location has also become an issue. Insurers are using local climate data to be more precise in how they insure a property, Sullivan said.
“Five, 10 years ago, if your property was in a certain ZIP code, that was good enough for them,” she said. “They need to know more now. They need to know where that home is located on the property. Is there a flood zone? How close is it to a river? The cost for the same property at two ends of a street could be different because of the elevation.”
Some people who bought homes in unfamiliar areas or have fewer choices in an overheated market have found after the fact that the properties — particularly older, coastal homes — were uninsurable through traditional means. To get coverage, they have to turn to what is called the surplus market, where the rates set by the state insurance regulator do not apply. An insurer in that market can charge whatever it wants.