March 30, 2022 – Property and casualty (P&C) policies in high-risk areas popular among wealthy property owners have become unusually expensive and increasingly hard to get. That’s because a spike in major loss events such as tornados, torrential rains, and wildfires has left insurance companies with record pay-out amounts, and they have pushed the additional costs onto policyholders.
For high- and ultra-high-net-worth clients who live in these areas, that means insuring a home has become a lot more difficult and could consume a significant portion of their assets. There are, however, a number of safeguards clients can put in place to help reduce their costs and minimize their risk. This is where wealth planners come in.
As fiduciaries, we already routinely review client assets—such as properties, artwork, and other valuables—to ensure they have adequate protection to shield them from external threats. As part of this risk mitigation role, we can also help clients navigate the evolving P&C landscape as they try to buy new policies or renew existing ones.
Understanding the new P&C terrain
According to insurance and reinsurance provider Swiss Re, natural catastrophes caused roughly $105 billion of global insured losses last year, the fourth-highest amount since 1970, due to the dramatic spike in the frequency and severity of catastrophic and major loss events. The average number of catastrophic events per year increased from 7.4 over the 42-year period from 1980 to 2021, to 17.2 during the most recent five-year period (2017 to 2021), according to the National Oceanic and Atmospheric Administration.
Insurance companies have reduced their exposure by no longer offering coverage in areas prone to loss and those with higher loss histories. They are more likely to decline new policy applications and charge more for those they do accept. Brokers have reported that a policy written five years ago could cost 2 to 17 times more to write today.
Pandemic-related inflation, rising labor costs and supply shortages are also driving up replacement costs of homes, impacting the accessibility of guaranteed and extended replacement cost policies. Such policies, which incorporate projected inflation rates into premiums, cover increased rebuilding and repair costs over the original coverage amount. Inflation-protected policies have become increasingly harder to find and more costly.
Insurers pass those costs onto policyholders across the board through higher rates, affecting even those who have not submitted a claim. But the spike in major and catastrophic loss events has hit high-risk policies especially hard. And while the policy changes impact all residents in high-risk areas, owners of high-end properties face an increased risk of rising premiums or loss of coverage. These areas might include beachfront properties prone to flooding and hurricanes such as Miami, or secluded communities with dry brush prone to wildfires such as Malibu, CA.
The soaring costs and scarcity of P&C policies could unduly impact older clients who are buying property for retirement. Older homeowners could also find themselves with very valuable, uninsurable property just as they begin to withdraw from their portfolio to fund their lifestyle. The new P&C realities could be financially devastating for older clients who lose their home to a natural disaster, self-insure, and also draw on investment assets to maintain their lifestyle.
Learning the P&C hierarchy
Before tackling the new policy woes, it helps to understand the P&C provider structure. Standard insurers, such as State Farm and Allstate, generally service the mass market. Clients requiring additional protection, typically above $1 million, usually seek private client insurance. This is offered by AIG, Chubb, and others.
This “white glove” coverage generally affords policy owners a designated agent with direct access to the underwriter and an increased likelihood of negotiating flexibility with respect to underwriter guidelines. ‘Gray area’ claims are more likely to favor the policyholder in these cases.
For very large risks, however, private-client insurers may only underwrite a portion of a policy or none at all. Homeowners in high-risk areas with high property values, typically above $10 million, who can’t get private client coverage, must seek surplus lines. Surplus lines, generally customized products written by firms such as Lloyd’s, are often divvied up among multiple carriers to spread the risk.
Adopting safeguards for a new norm
While changes in the P&C insurance market may seem daunting, clients may enlist the help of wealth planners to minimize the pain. We can help initiate autopayments and track policy renewal dates as part of our regular monitoring of wealth plans to avoid lapses in coverage and prepare for policy changes.
For homeowners whose policies are expiring, we can ensure they know their options. Clients may be unaware that the cost of their replacement coverage is slated to increase significantly or that the carrier no longer offers coverage in their state.
It’s particularly important for homeowners with loans against their property to avoid coverage lapses since loan agreements typically require them to have insurance. To avoid violating the loan terms, planners can inform the client of the policy renewal status at least three months prior to expiration. This should allow enough time to find another solution if the current carrier no longer provides coverage in the area or if the premium is too high.
A history of late payments can also increase insurance costs. A client whose policy was canceled due to non-payment may face higher insurance costs and downgraded terms with new coverage. We can help arrange autopayments to reduce the likelihood of late payments.
If the homeowner requires a new policy, we can explore options. Ideally, a planner has built a network of creative brokers who can be asked to assist clients struggling to renew policies or secure new ones. Some brokers believe there is a “home for every risk” and will work to find unconventional solutions. For example, one of those solutions could be securing surplus lines from eight carriers to insure a $40 million home.
If guaranteed or extended replacement cost coverage is unavailable, clients who’d like to ensure they can rebuild after a loss could attempt to insure their home for 10% to 50% more than their replacement cost to compensate for inflation. That policy may be pricey but paying $200,000 a year to insure a $15 million home would still be less painful than having no insurance — and no home — after a natural disaster.
Clients should be mindful that reporting multiple small property claims over a short period of time could also increase insurance costs and negatively impact future coverage terms. We recommend owners cover small damage amounts out of pocket.
Many insurance companies offer discounts for changes that reduce homeowner risk such as removing brush and fire hazards. Brokers can also recommend coverage for sump pump failures or other equipment breakdowns.
Additionally, clients can consider gradations on the risk spectrum. Insurance costs have become hyper-localized. For example, in a town prone to wildfires, homes farthest from the brush that are also buffered by other homes will have the lowest premiums. Homes closest to the brush may be uninsurable. Premiums rise in between, ranging from homes farthest away with the biggest buffer to those closest to the brush.
If clients are interested in purchasing a home in a high-risk area, they may find that insurability impacts the market value. We can help connect clients to real-estate brokers who understand the nuisances of local insurance coverage. If all else fails, we can always recommend what clients likely don’t want to hear—that it may simply be easier to avoid living in a high-risk area.
Our role as wealth planners may be broader than clients realize. While many of us are not insurance agents, we can help them tackle the soaring costs and scarcity of P&C policies. We can screen brokers, identify alternative solutions, and analyze new policies and coverage changes—all as part of our role in building a cohesive wealth management plan. Ultimately, our goal is to help clients achieve peace of mind through long-term financial growth and preservation.