Interesting editorial…but the author raises some very valid points.
Getting lenders onboard will probably be the biggest roadblock to any significant changes.
Realities of Honeowners Insurance
- Thread starter The Critic
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Interesting editorial…but the author raises some very valid points.
Getting lenders onboard will probably be the biggest roadblock to any significant changes.
Sure would like to know what a "PC 3" is and why the annual premium for a middle-class home there is $7,000.
Private Protection Class 3, and probably in hail-exposed regions of the Central US
Some further research shows that "PC 3" is "protection class 3" and is the same as an ISO rating, which measures how well the fire department is staffed, how close the nearest hydrants are, how close the nearest fire station is, etc. I found that the City of Manassas, a nearby city, has an ISO rating of 3.
Not what I found, it's about fire protection:
protection classes
<p>Protection classes are the 10 categories used by the Insurance Services Office, Inc. (ISO), to rank the fire protection in cities and towns according to three factors: </p><p>(1) The fire department quality—this includes its equipment, staffing (i.e., paid or volunteer), training, and...
www.irmi.com
Article says a middle-class home has an insurance bill of $7k? In a few select areas maybe but there is no way that is indictive of the majority. A quick search found that according to Bankrate the average premium for a home worth $250k is about $1500/year.
Public*Not what I found, it's about fire protection:
protection classes
<p>Protection classes are the 10 categories used by the Insurance Services Office, Inc. (ISO), to rank the fire protection in cities and towns according to three factors: </p><p>(1) The fire department quality—this includes its equipment, staffing (i.e., paid or volunteer), training, and...
And no, I wasn’t implying that the PC was related to hail exposure. I was suggesting that the $7k premium would not be surprising for a hail-exposed area of the US.
Seems like bad underwriting is a problem, as well as undercutting competitors.
I do think many of the catastrophic loss could have been prevented if the industry mandate better building codes and zoning, so that homes wouldn't be build too close to forestry / grass and gets burned down in wild file seasons, better roof material mandate to reduce hail payout / damage, better windows design to withstand hurricane (in Taiwan I've seen roll up gates in residential balcony, used only during a storm), etc.
Insurance is a zero sum game and you cannot just expect it to be "free money", eventually the premium has to match, or home owners have to lose. So if they have data to prove that something must change, then building and zoning code should change to eliminate some certain loss for everyone.
I do think many of the catastrophic loss could have been prevented if the industry mandate better building codes and zoning, so that homes wouldn't be build too close to forestry / grass and gets burned down in wild file seasons, better roof material mandate to reduce hail payout / damage, better windows design to withstand hurricane (in Taiwan I've seen roll up gates in residential balcony, used only during a storm), etc.
Insurance is a zero sum game and you cannot just expect it to be "free money", eventually the premium has to match, or home owners have to lose. So if they have data to prove that something must change, then building and zoning code should change to eliminate some certain loss for everyone.
We are becoming more and more self insured.
I'm borderline uninsured on my house. live in hurricane country. 2 powerful hurricanes in area in last 7 years.
rates keep going up. I went to switched to basic homeowners ( fire liability) with no windstorm a few years back and it is still getting near 2 grand a year now now.
Plenty of us with no mortgage eventually drop the homeowners insurance as we save enough to pay for anything but a catastrophic loss and a catastrophic loss is just one of those really small risks most of us are willing to take.
rates keep going up. I went to switched to basic homeowners ( fire liability) with no windstorm a few years back and it is still getting near 2 grand a year now now.
Plenty of us with no mortgage eventually drop the homeowners insurance as we save enough to pay for anything but a catastrophic loss and a catastrophic loss is just one of those really small risks most of us are willing to take.
I like this and I don't like this.
Adverse selection is a market where buys and sellers have different information. As in, sellers of insurance know an area is high risk and buyers do not.
Florida is one of the fastest growing states in the country. There is no scenario of adverse selection when it comes to hurricanes. You ever seen those America's Funniest Video clips where a dad gets hit in the nuts by a toddler with a plastic baseball bat while giving them their first t-ball lesson? You can see what's going to happen from a mile away. Florida is America's crotch and hurricanes are the toddler with a bat.
Everybody knows Florida has the highest likelihood of hurricane damage in the country, yet they all still move there anyway. After decades of kicking the can, the insurance industry (most, anyway) has finally caught up with the risk, largely by simply leaving the market. Unfortunately, smaller insurers and the state have continued the crack habit that will eventually end in an even worse financial situation.
So, hurricanes are a terrible example of adverse selection.
I think better examples are flood and fire risk. Lots of progress has been made in identifying homes in areas of elevated risk. It's up to potential buyers to understand these risks and underwriters to craft plans that appropriately price this risk into policy premiums.
I live in a high fire risk zone. I had to buy the California Fair Plan insurance just for fire coverage. It is now over $1800 per year. In addition, my regular homeowners insurance policy just tripled. Many insurance companies simply refuse to write policies in these high risk zones now. So you either pay up or go without insurance.
I am reminded of the disastrous fire that swept though my neighborhood about 20 years ago and destroyed more than 300 homes. Many were occupied by the original owners who bought the houses for around $80k back in the late 1970's. The homes were worth around $650+ at the time of the fire. Many of those homeowners were retired and on fixed incomes and as the mortgages were paid off, had let the insurance lapse. They not only lost everything, but had to pay tens of thousands of dollars to clear their lots of debris, burned up vehicles and so on just to be able to sell the lots to someone who had money to build a new home there. I sure wouldn't want to take a total loss on my home so I pay the premiums and hope I never have to file a claim.
I am reminded of the disastrous fire that swept though my neighborhood about 20 years ago and destroyed more than 300 homes. Many were occupied by the original owners who bought the houses for around $80k back in the late 1970's. The homes were worth around $650+ at the time of the fire. Many of those homeowners were retired and on fixed incomes and as the mortgages were paid off, had let the insurance lapse. They not only lost everything, but had to pay tens of thousands of dollars to clear their lots of debris, burned up vehicles and so on just to be able to sell the lots to someone who had money to build a new home there. I sure wouldn't want to take a total loss on my home so I pay the premiums and hope I never have to file a claim.
I don't think that's the only thing. With correctly build home they can be insured. With enough premium discount for certain standard they can be insured. The older not up to code stuff would drop in value and be torn down either by hurricane or by developers making room for better stuff, like how Japan tore down or abandon older homes with no value due to improved building code.
You can play statistic by buying and selling insurance, or you can just pay upfront so you don't have to deal with it.
That's a classic example of taking a chance because they are too expensive. Sure there are subsidies insurance but eventually the equation has to balance out. Nobody will run an insurance at a loss forever and nobody will get super rich running an insurance forever if it is a fair market with multiple sellers. Home should probably have never been build there, whether it is for mortgage, paid off, or to be leased out as rental, someone will be paying for it and cutting corner in zoning will eventually come back to bite you.
The only way to address this safely is really to build a big enough fire zone around the neighborhood with no vegetation. You probably will end up with some 500' of concrete fireline around the neighborhood on public dime, then as the neighborhood expand the developers have to buy new land and expand the fireline in exchange for the lots from former fireline to build on. I don't know if it will be something worth doing but that's the cost to build in those area sooner or later.
Not always. Aggregations are a real thing.
Sure, but eventually they too have to be profitable as a whole, and if the industry as a whole is losing money on certain segment they will all work together to drop it or code it out of existence.
If you look back in history a lot of buildings are build with enough fire proofing or flood proofing despite they are only needed for like 1 in 30-50 years. Very often if you look at what they are, they are grain silos or food storage.
You missed the point - it has nothing to do with profit. This is an issue of risk managing one’s portfolio.
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This is the kind of quality comment I expect from BITOG. Well done, sir!
I understand what you mean. However the reason everyone has a different quote is either they provide a different service or a different risk management. You either cut some services (or make it self service), or you cut the boundary between go / no go, which bin the policy falls under, how much does it cost to cover, etc differently or else everyone should have the same quote.
Reason some of them leave a market vs others not leaving, would be how these are calculated and what they bet on. Some will make more and others would lose their shirts even with aggregation as a result. This is risk management.
I heard somewhere that Farmer's lost a ton of money in some area because they only do policy based on credit score and the home is completely neglected, or is it the other way around. They ended up writing some policies that will guarantee to have a loss for the price when they are the cheapest and take in the money losers other insurance companies priced away.
I do believe though, that a lot of risks can be eliminated / greatly reduced if the building code / zoning code are updated (i.e. mandating smoke detector and CO detector). This is likely the better way going forward for some of the stuff we are seeing in wildfire and hurricane zone. Insurance can't solve problems by risk management of the society, they can only solve it within the insurance business, and let those who couldn't afford the premium to take their own risk and they will eventually lose.
I no longer have homeowners insurance on my house here in Florida and stopped renewing the policy about 8 years ago.
I can afford a new roof after a hurricane or storm….. also no flood insurance.
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