Homeowners all across the United States are doing double takes as they look at their annual insurance policy renewal statements.
A spate of natural disasters, accompanying insurance claims and subsequent premium increases has pushed some homeowners to the breaking point. Out of both personal and financial frustration, some are considering dropping their coverage.
In the insurance industry, it’s known as “going bare.” And while it might be tempting if you’re looking at a policy price that’s tripled or quadrupled in the last year, it’s not a decision to be made rashly.
“Two types of people might qualify to go without coverage,” says George Yates of Dayton Ritz & Osborne, an insurance agency based in East Hampton, N.Y. “The independently wealthy, with an asset so small to them that it wouldn’t matter if they lost it, or someone who just can’t afford insurance.
“In either case, it’s not particularly good risk management.”
But sometimes, a homeowner’s day-to-day financial management issues are more pressing.
In Florida, for example, homeowners are finding their premiums have skyrocketed. Add to that deductibles that look like they won’t be met unless the structure is destroyed. Plus, many insurers have either gone out of business or decided to stop writing policies, limiting customers’ comparison-shopping options.
In the end, many homeowners find themselves in the unhappy position of choosing between high premiums or exorbitant premiums. Or no premiums.
- Can I drop my homeowners policy?
- Can I afford to regularly put money into an account to cover any storm damages?
- How large should my self-insurance account be?
- Can I afford to buy a basic hazard policy?
- What happens to my liability coverage if I cancel my homeowners policy?
1. Can I drop my homeowners policy? If you have a mortgage, the answer is probably “no.” Because you have a lien on the property, most home loans require you to have coverage that the lender finds suitable. If the policy lapses, you can be in mortgage default. If you are having trouble finding an insurer or paying the premiums, call your lender to see if it can offer suggestions and/or work with you to solve the problem.
2. Can I afford to regularly put money into an account to cover any storm damages? This is a necessity if you’re going to drop your homeowners insurance coverage. Without the emergency self-insurance account, you’ll either be stuck not making repairs, borrowing money to make them or putting them on credit cards, which could create additional problems.
3. How large should my self-insurance account be? Sit down and do a worst-case scenario in the event of a natural disaster. Consider what it will cost to repair or replace your home or major parts of it, such as your roof or walls that are more exposed to potential damage.
Then there are your belongings: furniture, clothing, food, exterior buildings, landscaping, and potential costs of debris removal or demolishing partially standing structures that need to come down for safety reasons.
Don’t forget to factor in living expenses if your property is so damaged you’re forced to find other accommodations — at least for the short-term.
Once you compare these costs to your premium and deductibles, you might find that your policy wasn’t as expensive as you thought.
4. Can I afford to buy a basic hazard policy? This is the coverage that protects you in the case of run-of-the-mill losses, such as fire, burglary or broken pipes. These you face 365 days a year, not just during a special season. Talk to your agent about purchasing at least this type of coverage.
5. What happens to my liability coverage if I cancel my homeowners policy? You lose it. That’s not a good idea. While you might not face a hurricane or tornado this year or next, you could face a costly situation if a delivery person slips dropping that package on your front porch. Talk to your insurance agent about getting a separate liability rider or including the coverage in that basic hazard coverage you’re going to buy.
Unexpected problems the uninsured face
You also need to consider what going without homeowners insurance might mean in other areas of your life.
“There are a couple of factors that come into play,” says Timothy Perr, managing principal of the consulting firm Perr&Knight. “One is what happens if you drop prior insurance coverage and then try to get back into the market.”
Perr says that insurers generally see you as a worse risk. In such a case, even if you can get insurance, you’re likely to pay more for it.
“A lot of companies won’t write you if you have dropped your homeowners insurance,” says Perr. They might see it as an indication that you couldn’t afford it in the past and therefore might have problems meeting premium payments now.
Or companies might suspect that you’re trying to get insurance now because you know you have an imminent claim coming.
Your credit also could be affected. If you have no insurance and aren’t prepared to cover any post-storm costs yourself, your credit likely will take a hit. And that will reverberate throughout your entire financial life, not just insurance.
Higher costs blowing in the wind
It’s easy to understand why insurance costs have risen so dramatically for homeowners in Gulf Coast states.
According to the Insurance Information Institute, seven of the 10 most expensive hurricanes in U.S. history struck between August 2004 and October 2005. During those months, Katrina, Rita, Wilma, Charley, Ivan, Frances and Jeanne produced a total of more than $77 billion in damages.
But the insurance effects of those storms are being felt nationwide.
“Windstorm coverage has become a real issue,” Yates says. “Allstate, for example, has retreated quite dramatically.”
In New York, that insurer is no longer writing new policies from Westchester County to Montauk Point (on Long Island), he says. Other companies are renewing existing policies, but not adding new clients, depending on attrition to whittle down their exposure.
The reason: Lloyd’s America told insurance companies gathered for the Northeast Hurricane Conference in July that if a storm hits New York state, it could result in insured losses of $65 billion.
Given that last year the company’s models showed industry losses of $60 billion for a Gulf storm, roughly the estimated cost of hurricanes Katrina, Wilma and Rita, insurance companies are taking the projection seriously.
“The modeling that’s been done by a lot of the actuarial work is showing a large Category 4 hurricane or natural disaster that will wreak havoc here,” says Richard McGrath, president of McGrath Insurance Group in Sturbridge, Mass.
“We haven’t lost any of our clients,” McGrath says, “but there’s a lot of frustration in the marketplace because the pricing has gone up dramatically and the number of carriers willing to supply has diminished.”
Yates’ customers also are hanging in there, but he says many of them are “taking huge deductibles, saying, ‘I’ll self-insure the first $50,000 to $100,000 of the loss.'”
Overreaction or business as usual?
Because of the population density in the Northeast, Yates says that “one good blowup here, it doesn’t have to be a Category 4 or 5,” could do substantial damage. But the insurance industry’s reaction to that possibility, he says, might be a bit of an overreaction.
“You know that Florida and the Gulf Coast are going to be hit, but there’s been no major blowup here since the early ’70s,” says Yates. “So you’re looking at an insurance industry that has generated huge amounts of profits over the last 35 years.
“Should that go into their calculations? Morally, it probably should. But if I was running a company, answering to shareholders, that might not be a major factor.”
Another reason that insurers are dropping clients and raising the rates of those they do keep is that natural disasters aren’t limited to coastal areas.
Earthquake insurance poses as big a problem for Californians as hurricane policies do for Floridians. But, once again, that catastrophe knows no bounds.
Beginning in August, Allstate will not write new quake policies for homeowners living along the New Madrid Fault that runs through the central United States.
“A huge number of people in just the St. Louis area will be affected,” says Yates. Then you have tornado alley, and general hail and windstorm policies across the rest of the country that are increasing in cost, too.
Wait it out
If there’s any bit of good news for consumers, it’s that this, too, shall pass.
“Part of our client base is large commercial consumers of insurance,” says Perr. “They come to us, and we help them quantify the costs of risks.
“There are market cycles in insurance when commercial insurance gets very expensive, and strategies to deal with them,” Perr says. “These catastrophes have been coming for years and years and years.”
The last large-claim and insurer retreat was six years ago, when droves of Texas homeowners discovered they were living with mold. “That was never planned to be covered, and suddenly all the claims were filed,” says Perr. Subsequently, coverages were excluded, premiums were hiked and insurers shied away from the state.
Now, says Perr, Texas is one of the hottest markets, and he expects the same will eventually happen in Florida and other areas where homeowners are now facing an insurance crisis.
“Other carriers see it as an opportunity to come in,” says Perr. “No catastrophe will happen for a couple of years, no losses for a couple of years, then everyone comes back.
“Insurance is knee-jerk, no matter how they try. They’ll double rates, write half the business and the loss ratio (claims paid compared with premiums collected) will drop and they’ll make a huge profit.
“The board of directors will say, ‘Florida made a huge profit last year. Can’t we write more there?’ Competitors will say, ‘Look how much money that company made in Florida. Can we come in?’
“People forget about it,” says Perr. “Companies make a lot of money and they come back. Consumers need to think of it that way.”
The best thing an insurance-strapped homeowner can do in this part of the cycle is try to keep the costs down, says Perr, but stay in the marketplace.
Yates is bit more blunt.
“Noninsurance is really not an option,” says the New York agent, “at least not a sane option.”