Extreme Weather: Navigating Insurance in Uncertain Times
OCTOBER 5, 2021
Mother Nature has been busy. In just the past month, there have been multiple extreme weather events throughout the world: record-breaking snowfall, hurricanes, cyclones, winter storms, dust storms, record temperatures, heat domes, wildfires and floods. Natural disasters worldwide caused $268 billion of economic loss in 2020.
As the unpredictability of weather grows, it’s important to know how the insurance industry is responding and what you can do to protect yourself in this time of uncertainty.
More Intense Natural Disasters Have Led Insurers to Recalculate the Cost of Risk
Insurance companies have started investing heavily in state-of-the-art technology that models for climate and weather activity to better understand extreme weather and assess potential risk. As a result, insurers are capable of underwriting each risk based on a particular location’s merits and challenges. These tools have led to a much tighter insurance market, helping insurers distinguish the best risks for their interest and appetite.
Insurers have also started to curtail coverage in areas vulnerable to extreme weather activity and significantly increase premium. Disaster-prone areas carry a higher risk, reflected in higher premiums charged. Some homeowners, especially the elderly and those on fixed income, have been unable to keep up with the premium increases, and as a result, have turned to bare-bone policies offered by state and federal governments. Unfortunately, these policies come with significant downsides: customers may be grossly underinsured, and when disaster strikes, the homeowner and taxpayers will pay the bill.
How to Navigate the New Landscape of Insurance and Extreme Weather
The risk associated with extreme weather is rising, and yet behavioral economics research argues that we are collectively underinvesting in protecting ourselves. In The Ostrich Paradox: Why We Underprepare for Disasters, Robert Meyer and Howard Kunreuther point to several personal traits that expose us to greater risk from natural disasters:
- Individuals focus on short time horizons, and thus underprepare for future threats.
- When major disasters do occur, individuals are shocked, but quickly begin to let their guard down again.
- People are overly optimistic, and thus underestimate their own risk exposure.
No one wants to fall into the above referenced categories. So, how do consumers begin to navigate the complex world of insurance related to extreme weather?
- First, know your risk. Climatecheck.com provides risks at a given address. Having this information is vital to create an effective risk management plan and invest your insurance dollars most efficiently.
- Next, protect your property. The following actions will help protect your home against wildfire, hurricanes, floods, hail and earthquakes.
Click the below icons to reveal recommended preventative actions for each:
Performing these preventative loss control measures may lead to more favorable pricing and interest in providing insurance from insurers. Keep in mind, insurance companies are more willing to insure a home that has protective features. Do everything you can to secure your home. Discounts may also be available for protection devices such as alarms or early warning notification systems. When in doubt, ask the insurance company to provide you a list of steps that may potentially lower your rate.
How USI Can Help
A client of USI Insurance Services had purchased a $3 million cabin in the woods. USI requested a risk management evaluation of the cabin. The evaluator suggested removing a large tree, clearing the brush around the home, and installing a fire alarm system. The client followed the recommendations and reduced both the risk and premium.
Unfortunately, negligent campers started a wildfire in the woods. The cabin’s fire alarms activated, and the alarm company immediately notified the fire department. The client’s cabin was spared, and despite some ash on the property, the cost of cleaning was below the deductible.
Active risk management by clients is one key to improving the market conditions for insurance. As experienced risk managers, USI personal risk advisers work with clients to focus on proactive loss control and mitigation to reduce the chance of loss. The long-term solution for the current crisis in the insurance industry must include this critical step, which USI does as a standard practice for our clients.
Another USI client had relocated to Houston, Texas. He knew his home was at risk for flooding, and he requested a quote for a National Flood Insurance Program (NFIP) flood policy. USI obtained the NFIP quote and also presented a quote from a private flood insurance carrier. The private company’s policy was slightly more in premium than the NFIP’s, but it offered substantial cost of living expenses not available through NFIP. The client decided to purchase the flood coverage from the private company.
When Hurricane Harvey hit, the client’s home incurred $100,000 of damage. The family had to leave the home while it underwent repairs, which were delayed significantly due to a lack of available contractors. The client’s temporary living expenses of $7,500 were covered by insurance, and he was only responsible for his $1,250 deductible.
Navigating the world of insurance is becoming more challenging than ever, but no one has to go it alone. Please see our natural disaster planning checklist and contact a USI personal risk adviser to discuss your individual needs.
As Climate Impact Worsens, Homeowners Struggle to Find Affordable Insurance. Yale E360. August 25, 2021
California Protects Homeowners From Having Fire Insurance Dropped — Again. James Bikales. November 5, 2020
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