The Expert Podcast

So this homeowners insurance crisis is not going away no matter what part of the country you're in. You're finding some difficulty in getting good rates on homeowners policies, property policies, or maybe even companies pulling out of markets. Whether you're on the west coast in California with wildfires, or on the east coast in Florida with hurricanes, or even in the middle of the country with more tornadoes and hail storms, you're finding a lot of insurance companies having difficulty being able to profitably write policies for homeowners and even business properties running into the same thing.

Why is this? Well, you have to understand the mechanics of how coverages are priced. And we'll also talk at the end of this video about how to solve this problem. If you're a homeowner and your insurance company told you they can't renew your policy or your rate has gone up 50%, or you're finding coverages that are limited in scope, we're going to talk about a new kind of insurance called parametric that may be able to solve some of these problems. But also what you can do with your existing policy to keep it eligible and to keep the rates down.

First of all, why is this happening? Well, the way insurance rates work is a company that's an admitted carrier allowed to do business in your state, they're licensed by the state's insurance commissioner. What they have to do every year is file their policy claim forms or their policy forms and their rates to have them approved. They can't just make up rates out of the blue. And they file these forms with the commissioner. The commissioner says, "Yeah, this coverage is good, your rates are okay, you're good to go." And you have to justify your rates using prior claims history, right? You can't just say, "Well, we think we want to charge, you know, $1,000 a year for this policy." You have to show why that number makes sense based on how much you've had to pay off on similar policies in the past.

Now, if all of a sudden you have claims jump up like they did starting in 2020 with supply chain issues, inflation, labor costs, building problems, real estate prices, now you say, "Well, our claims expense went up. So now we need to start accounting for that." Well, you have to wait till the end of that year, let's say 2020, to get your rates or get your claims cost and file them with the state. So now you file them in 2021 and they may take six or eight months to look at it to approve it. So you're not going to get that back till the end of 2021. You might not be able to put those in place because by the time you get all the new rates and all the new information in 2021 or even beginning of 2022, you might have to wait till 2023. That's three years later. So now you've had three more years of these higher claims and you have no way to account for them because you have to wait for those to go through the system. So a lot of companies are just saying, "Look, we can't write policies if we think we're not going to have enough money."

Here's the other thing: Insurance companies are required to keep a certain amount of assets on their balance sheet to cover all the potential customers, and these assets have to meet certain ratios. Also, the claims have to be certain ratios. So if all of a sudden your claims went up and your rates don't meet them, you might not be eligible to do business in that state. Some companies are just saying, "Look, we're not having the financial numbers make sense to do business." Insurance companies don't want to non-renew you. They want to sell you insurance because they make money on insurance. The only reason they're going to non-renew you is because if the amount the state is allowing them to charge isn't going to be sufficient for them to stay in business, they have to stop.

What can you do about it? Well, a couple of things you can do. First of all, if you are a homeowner, look at your coverages. The first thing to look at is your deductible. If you have some financial resources, consider raising your deductible higher than what it is now. You have to check with your bank if you have a lender. Your bank may require you to keep a certain minimum deductible or maximum deductible, but if you don't, see how you can change your deductible. Also, take a look at if you have coverages that are duplicated. Maybe you have a wind policy, but some of that's covered under a catastrophic policy. The third thing you can do is look at parametric insurance.

Parametric insurance is a type of insurance that can supplement your claims payout on other types of policies. It's based on an event, not based on damage. So if an event happens, let's say wind more than 70 miles an hour within 20 miles of your house, they pay you a fixed amount of money regardless of what your damages are. And it gets paid out quickly because they don't have to calculate how much it cost to fix your house. Now, this normally works for people with more sufficient assets, private client, high net worth type clients. But if you are of means, you may be able to use parametric coverage plus a catastrophic coverage on your homeowners to be able to have some risk transfer that doesn't require you to find a certain insurance company. A lot of companies like State Farm are pulling out of a lot of states. So talk to your broker.

You can contact us below if you want to do some consultation about this for changing your coverages, looking at different options, considering parametric insurance. And parametric is not a brand; it's a type of insurance, and it's a good way to reconsider and reimagine how you are handling the risk for your property. If you have multiple properties, it's even more of an opportunity for you to see how these all fit together. In addition, make sure that if you're coming up on your renewal, let's say if you have a renewal in September of a year, start your agent on looking at options early on, maybe in June or July. Most agents aren't automatically going to look at your options for you unless you ask them to. You might think, "Well, they should do that." Well, they have hundreds and hundreds of clients unless they're a private client agency that deals with a lower volume, and they can't shop every policy every year.

So if you do want some additional research, ask them three or four months early so they have time to check with the market and see what's out there available to you. If you have questions, you can reach us on our website below. We'd be glad to be of assistance.