Big Disasters Leading to Higher Insurance Rates
Now’s a good time to review your home coverage
The terrible firestorms and hurricanes that have devastated so many people the last few years are leading to another long-term consequence for even more homeowners: rising insurance rates.
Some Aspiriant clients are just starting to feel the impact. “A client of ours who lives in Sonoma saw his homeowner’s insurance premiums increase 65% year over year,” said our colleague Greg Schick, director in wealth management. Sonoma was just one of the Northern California communities impacted by several infernos that burned 245,000 acres and 8,700 structures in October 2017.
While 65% may be on the extreme side, many homeowners in catastrophic areas will begin to see significant increases as insurance companies attempt to compensate for widespread losses and remain solvent.
“It is happening, but it depends on the carrier,” says Kyle Cliff, an agent with HUB International Insurance Services in San Francisco who partners with Aspiriant to provide insurance to many of our clients. He mentioned a client of his saw the premium for their small Truckee, Calif., home rise from $1,300 a year to $1,800. “We were very pleased with the renewal offer, given the current hard insurance market,” he said.
After Hurricane Andrew in 1992, which caused $25 billion in losses, nine insurance companies folded and other major carriers pulled out of the state, the New York Times reported.
In 2017, numerous fires in California from October through December resulted in $12 billion in claims, according to the Insurance Information Institute. And last year, the Camp Fire in Butte County, the most destructive and deadliest in the state’s history, has reportedly already put one regional carrier out of business.
In the high net worth arena, there are essentially four major carriers who specialize in luxury properties: Chubb, AIG, Cincinnati and Pure. Other insurance carriers also cover expensive homes and estates in certain markets, but the level of service and degree of coverages are often not as robust. Having a carrier that excels in customer service and expediting a claim can make a traumatic event seem much less so. This level of care may come with a premium, but it is worth exploring when purchasing coverage.
There are a few ways premiums will go up, according to Kyle.
- Construction costs — In some areas that have experienced widespread losses, the costs of construction have skyrocketed because of high demand for labor and materials, as well as complying with the latest building codes. Typically, owners of larger, higher-end properties purchase replacement cost coverage, which means the insurance company will pay to rebuild the home at today’s costs (up to certain limits) rather than simply cover the home at actual cash value (which factors in depreciation for materials) when it was destroyed.
“After these devastating California wildfires, many of the carriers are paying out much more than what the property is insured for,” Kyle notes. Replacement cost rates could go up above the 5% average increase most carriers use for the dwelling limit at each renewal, he says.
- Surcharges — Some carriers will be adding or increasing specific surcharges for things that could lead to greater losses, such as brush or combustible siding. These additional costs will be property-specific.
- Across the board — Insurance companies may apply across-the-board statewide rate increases for residents living in high-risk states, like California and Florida, to cover business expenses and future losses. Additional increases in targeted zip codes that have experienced major losses may also apply, depending on the carrier’s exposure to claims. Kyle said to expect to pay about 10% more for building coverage.
Kyle mentions he has even seen some non-renewals in the mid-market insurance space as those homeowners reach out to him for coverage. The major carriers will most likely quote a price, but the cost will depend on their appetite to insure in a specific geographic area.
Review your policy
Even if your home is safe and sound, disasters like these are a good reminder to review your policies and make sure you’re sufficiently covered.
“After a close call, that’s when people want to take a deep dive into their insurance to see, ‘Do I have enough?’ The majority of the time, we find most homes are underinsured with the mass-market carriers.” Kyle says.
And if you are one of those homeowners who has received a larger insurance bill, there are ways to potentially reduce the cost.
Customize your coverage
“I don’t recommend reducing coverage to rebuild your home, but you may be able to take a closer look at other structures,” Kyle advises.
A normal policy will underwrite an additional 20% for detached structures on the property. But figure that on a $10 million home, that’s $2 million. If you only have a pool house and storage shed, you may not need that much coverage and can bring that limit down.
You may want to consider reducing your personal property coverage, as well. Standard coverage is 70% to 75% of the property amount, according to Kyle. That may be brought down to as low as 40%, which would still be $4 million for a $10 million home. If you have jewelry, artwork or other high-value items, consider separate collectibles coverage or riders instead.
Also, take a closer look at liability coverage, a key component of a home policy. If you have a large umbrella policy, you can bring the homeowner liability down to the minimum amount required for an umbrella, usually $300,000.
Finally, think about increasing your deductible. Weigh the amount you’ll save on the policy against the amount you’re willing to pay out of pocket to recover. Chubb, AIG, Pure and Cincinnati offer a Large Loss Deductible Waiver where your deductible is waived for any loss over $50,000 (some restrictions apply).
Remember, if major renovations or purchases have been made or gifts received, contact your broker to update your coverage.
Insurance companies offer a variety of discounts that can take a chunk off your total premiums. Very common, of course, are multi-policy credits. Insurance companies love to handle your home, auto, collections and other specialty coverages, so you get a discount for the more policies you buy from a single carrier.
Other credits are designed to reduce risk or loss amounts. An investment that makes your home safer not only cuts your insurance bill, but could better protect your home and family from a catastrophe.
Some common improvements that may qualify for credits, depending on where you live, include:
- Monitored fire and burglar security systems, where you pay a monthly fee to alert a central station
- Automatic seismic gas shut-off valves that cut natural gas flow following an earthquake
- Automatic water shut-off devices to stop major leaks
- Updated electrical and plumbing systems
- Fire-resistant roofs
- Interior fire sprinklers
- Professionally guarded communities
- Back-up generators (particularly helpful in cold zones to prevent freezing pipes)
If you’ve recently had a large renovation or are planning one, contact your insurance broker or company to find out what credits you may qualify for.
Penny wise, pound foolish
We all buy insurance hoping we never need to use it. It only becomes an investment if you make a claim. And it’s at that moment of disaster when you not only want good coverage, but exceptional service. Like most things, you get what you pay for. But at the same time, you don’t want to pay for more than what you might reasonably need to recover.
As your life becomes more complex, with accumulating assets and growing liabilities, it’s important to regularly review your insurance needs with your insurance agent in partnership with a wealth manager. Together, they can help provide peace of mind that your family will be well-protected when disaster strikes.