Home Insurance: Stabilizing Your Sanctuary

House insurance rates are on the rise. In the US, the average cost of homeowners insurance is $2,230 per year, or about $186 per month, for a policy with $300,000 in dwelling coverage. However, rates vary depending on factors such as the age of the home, square footage, cost of building materials, and location.

The increase in rates can be attributed to several factors, including the rise in expensive natural disasters, higher-than-average labour and construction costs, and supply chain issues. For example, the cost of rebuilding a home has increased due to inflation, which has led to higher dwelling coverage limits in home insurance policies. Additionally, there has been an increase in fraudulent roofing claims, particularly in Florida, which has contributed to the financial strain on insurance companies.

To stabilise the market and reduce costs for consumers, lawmakers have implemented various measures. These include granting grants to help homeowners strengthen their homes against damage, prohibiting insurance companies from denying coverage based solely on roof age, and restricting lawyers' rates for property insurance claims to discourage fraudulent lawsuits.

Home insurance fraud in Florida

The state of Florida accounts for only 9% of the country's home insurance claims but an astounding 79% of its home insurance lawsuits, with many of these cases being fraudulent. This has caused insurance companies to incur substantial underwriting losses, with net losses exceeding $1 billion in both 2020 and 2021. As a result, several insurance providers have left the state, non-renewed policies, or increased premiums for Florida homeowners.

The Bureau of Insurance Fraud in Florida is tasked with investigating these fraudulent activities, which include organized schemes to defraud the public and insurers, insolvency of insurance companies due to internal fraud, and criminal activity by unauthorized entities. Despite their efforts, the problem persists and continues to impact the stability of the insurance market in Florida.

To combat this issue, Florida lawmakers have passed several bills, including Senate Bill 2B, aimed at curbing fraudulent claims and excessive litigation. These measures include restricting new business, non-renewing policies, and even cancelling policies. Additionally, reforms have been made to address the ""assignment of benefits" scam and the ""one-way attorney fee" system, where defendants were responsible for the plaintiff's attorney fees.

The insurance industry in Florida remains fragile, and it is expected that more reforms will be needed to stabilize the market and provide relief to both insurance companies and homeowners.

Insurers leaving Florida

Florida's insurance market has been described as a "man-made crisis" by the Insurance Information Institute. The state's insurance crisis has left many homeowners searching for new coverage or facing huge rate increases as home insurance companies go out of business or pull out of the state.

In 2024, Farmers Insurance became the fourth major insurer to leave Florida, joining more than a dozen other companies that have stopped writing home insurance policies in the state. This has left over 100,000 homeowners looking for new coverage in a market that is becoming increasingly unfriendly to customers.

Florida homeowners are already paying the highest insurance premiums in the nation, with an average premium of $6,000 per year, compared to the US average of $1,700. This is a 42% increase from the previous year. The high cost of insurance in Florida is due to several factors, including:

• Soaring litigation costs: A 2017 State Supreme Court decision allows courts to award plaintiff's attorneys two to two-and-a-half times their hourly billing rate when ruling in favor of policyholders. This has resulted in an increase in lawsuits, with Florida accounting for 79% of insurance lawsuits filed in the US.
• Increase in reinsurers retreating from the state: The rising litigation costs have also led to an increase in reinsurance costs, as reinsurers are becoming more selective about the companies they reinsure.
• Impact of natural disasters: Hurricanes Irma, Michael, and Ian resulted in approximately $46 billion in insured losses.
• Rising reinsurance rates: Reinsurance rates have gone up by 52% on average in the last year, increasing costs for policyholders.
• Insurance fraud: This includes fraudulent roof-replacement schemes, which have resulted in huge underwriting losses for Florida's homeowners' insurers.
• Housing market: The booming housing market in coastal counties, which are more prone to flooding and hurricanes, has also contributed to the increase in insurance rates.

The exodus of insurers from Florida has left homeowners with fewer options for coverage and has driven up the cost of insurance. This is expected to prolong the affordability crisis in the state, as premiums are likely to continue increasing.

Insurers tightening underwriting restrictions

As a result, insurers are tightening their underwriting guidelines and clarifying their policy language. They are asking for more detailed information to better understand the risks they are insuring. This includes specific practices, controls, and protocols in place to prevent or mitigate specific types of threats, such as ransomware attacks.

Insurers are also communicating more explicitly about what types of events can trigger a cyber policy and what losses the policy covers. For example, the war exclusion in most commercial insurance policies was not meant to exclude coverage for cyber terrorism, but now, the new, more specific policy language provides affirmative cyber terrorism coverage.

In the case of home insurance, the increase in expensive natural disasters, higher-than-average labour and construction costs, and the rise in supply chain issues have caused home insurance rates to skyrocket. The increase in wildfires, tornadoes, hurricanes, and other natural disasters has led to record-setting claim payouts and financial losses in the home insurance industry. As a result, insurance companies are increasing rates to pay for these losses and to ensure they don't go bankrupt after future climate disasters.

In addition, there are fewer carriers willing to write policies in high-risk states like Florida and California. This has resulted in stricter underwriting criteria and increased costs for homeowners.

The underwriting process is critical for insurance companies to maintain a healthy loss ratio. Bad underwriting decisions can lead to high loss ratios, meaning the insurance company will end up paying more in insurance claims than what it collects in insurance premiums. By setting an underwriting strategy and investing in underwriting training, insurance companies can reduce the variability in results.

Hurricane damage

Standard home insurance policies typically cover wind damage resulting from hurricanes. This includes damage to your roof, frame, foundation, interior, electrical systems, and plumbing. Your policy may also cover resulting water damage to the interior of your home if rainwater enters through openings caused by wind. Additionally, if your home becomes uninhabitable due to hurricane damage, your insurance will usually provide loss-of-use coverage for temporary accommodation and additional living expenses.

It's crucial to understand that home insurance does not cover flood damage caused by hurricanes. Flood damage is defined as water damage from an external source, such as a storm surge or overflowing body of water. To protect yourself from this type of damage, you will need separate flood insurance, which can be purchased through the National Flood Insurance Program (NFIP) or private insurance companies.

Hurricane Deductibles:

In many cases, your home insurance policy will have a separate, higher deductible for hurricane-related damage. This deductible is often a percentage of your home's value, typically ranging from 1% to 5% in high-risk areas. Some insurers may offer the option to pay a higher premium for a lower, fixed-rate deductible. The specifics of when these hurricane deductibles apply vary by state and insurance company.

Recommended Insurance for Coastal Homes:

If you live in a coastal area prone to hurricanes and flooding, finding adequate home insurance can be challenging and expensive. In addition to standard home insurance, you may need to purchase windstorm insurance or a wind-only policy to cover wind damage. Flood insurance is also highly recommended and may be required by your mortgage lender if you live in a high-risk flood zone.

Preparing for a Hurricane:

If you're underinsured or don't have adequate coverage, there are steps you can take to mitigate potential hurricane damage. These include trimming branches and trees, securing outdoor furniture, installing storm shutters, ensuring garage doors are wind-approved, and sealing any openings into your home. Taking these precautions can help reduce the impact of a hurricane on your home.

Insurers' financial strength ratings

When shopping for insurance, it is important to assess the financial strength of an insurance company to ensure that they are financially strong enough to pay the claims of their customers, especially when a big disaster hits.

There are five major agencies that rate insurance companies on a regular basis and offer their ratings and analysis online free of charge: A.M. Best, Fitch, Kroll Bond Rating Agency (KBRA), Moody’s and Standard & Poor’s. Each agency uses numbers or plusses and minuses to indicate minor variations in rating from another rating class. For example, an A+ from A.M. Best is the next-to-top rating of its 15 categories, but an A+ from Fitch, Kroll or S&P is their 5th-highest rating. Moody’s doesn’t have an A+ rating.

It is recommended to check the ratings from two or more agencies before judging whether to buy or keep a policy from a company. This is because agencies will announce changes to ratings on any day and insurance companies are likely to highlight a higher rating from one agency and ignore a lower one from another. It is also advised to check in annually on the ratings of any company you are interested in.

A.M. Best Company

A.M. Best has the most experience rating insurance companies, having been in the business since 1906. Each year, Best publishes Best’s Insurance Reports, a multi-volume set in two editions – Life and Health Insurance Companies and Property/Casualty Companies. Best rates each company on either an alphabetical (A++ to F) or a numerical scale. The latter is the Best Financial Performance Rating (“FPR”), with 9 being the highest rating and 1 being the lowest.

Fitch

Fitch provides an assessment of the financial strength of an insurance organization and its capacity to meet senior obligations to policyholders on a timely basis. Most companies that are rated by Fitch request the rating and go through an interview process. A Fitch Insurance Financial Strength rating will provide a detailed business review and overall outlook for the company.

Kroll Bond Rating Agency (KBRA)

No specific information on KBRA's rating criteria was found.

Moody’s Investor Services

Moody’s assigns Financial Strength Ratings that measure the insurance company’s ability to meet its senior policyholder obligations and claims. The rating analysis is similar to Moody’s well-known and respected bond ratings. Most companies that are rated by Moody’s have voluntarily requested the rating and go through an interview process.

Standard and Poor’s Corporation

Standard and Poor’s rates the claims-paying ability of insurance companies that request and pay for a rating. An S&P Financial Strength Rating is the agency’s current opinion of the financial security aspects of an insurance company, with specific focus on the company’s ability to pay claims on its insurance policies. The ratings are based on information furnished by rated organizations or obtained by Standard & Poor’s from other sources it considers reliable.

Demotech

Demotech is a financial analysis firm specializing in evaluating the financial stability of regional and specialty insurers. Demotech’s philosophy is to review and evaluate insurers based on their area of focus and execution of their business model rather than solely on financial size. Financial Stability Ratings (FSRs) are based upon a series of quantitative ratios and considerations which together comprise the Financial Stability Analysis Model. FSRs summarize Demotech’s opinion of the financial stability of an insurer regardless of general economic conditions.

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