Insurance Market Source regularly taps into its network of experts for insight into key trends across the insurance landscape. In this feature, Bill Gatewood, Corporate Vice President and Director, Personal Insurance, Burns & Wilcox, and Donna Dodd, Vice President, Personal Insurance, Burns & Wilcox, provide their insight on insuring hard-to-place homes in the specialty lines market.
Q: What is the leading cause of loss with hard-to-place homeowners insurance and what are insurers doing to help curb that trend?
Bill Gatewood (BG): Loss frequency continues to rise in Homeowner’s insurance. Currently, water damage is the leading cause of loss – that was not the case a few years ago. Almost 34 percent of Homeowner’s insurance losses are caused by water, up from about 21 percent in 2010.1 Due to the increase, insurers are looking at ways to help prevent the loss in the first place, by partnering with water mitigation companies to install water shut off valves, and mounting water detection sensors on the floor underneath sinks and refrigerators. The industry in general is taking an active role in helping clients prevent losses from happening or becoming bigger than they should be. As an example, a client on vacation came home to a stream of water running out his front door – a pipe broke in an upstairs bathroom. Unfortunately, preventative mitigation measures had not been put into place yet, and the water damaged the home to the tune of $900,000.
Donna Dodd (DD): Following water damage, approximately 27 of Homeowner’s insurance losses are caused by wind and hail and 26 percent by fire and lightening.1 E&S coverage can be tailored to provide higher wind and hail deductibles to help in areas most exposed, such as Texas. With hail, many E&S markets require a Cosmetic Damage Exclusion for metal roofs, where the roof has been pitted by hail, but is structurally sound. The insurance industry as a whole has been proactively using hurricane, tornado, and hail modeling to help pinpoint areas with higher exposures.
Q: What other unique exposures cause a home to be hard-to-place? Can you provide examples?
DD: Think of a million dollar home on a mountain top, overlooking beautiful foliage and small towns below. While it sounds perfect, if a fire broke out, the response time of the fire department would be far too slow due to proximity. Location makes all the difference in real estate and insurance alike. Whether a home is on the coastline, in a brush fire zone, or in an area unprotected by a local fire station, they all have unique risks. Number of losses, a lapse in coverage, or an applicant’s credit score, may also move a home into a hard-to-place situation. For instance, an individual who has an un-dismissed bankruptcy due to reasons such as medical bills, is an example of home that should be in the standard market, but could qualify for E&S markets.
BG: In the past year, there have been a lot of natural disasters, including flooding in Louisiana and Virginia, Hurricane Matthew, wildfire in Tennessee, and the massive Ft. McMurray wildfire in Canada. It is important not to pass on insurance because it seems impossible. Each market and carrier has its own appetite for risk. No matter where a home is located, there is ability for placement. Flood policies, for example, are excluded from Homeowner’s policies. The National Flood Insurance Program (NFIP) offers protection from flood, but specialty markets also offer monoline coverage.2 Coastal homes are most commonly hard-to-place, and a lack of hurricanes in the last eight to 10 years has kept pricing down.
Q: It is a trend to renovate older homes from the early 1900s in urban areas and downtown neighborhoods. What makes insuring these types of homes different?
BG: Older homes in urban areas are continually the subject of renovation and reinvention. People in many parts of the country are moving back into the big cities. If a home buyer, for example, is going to spend three to four months renovating, the home will be hard-to-place. A Course of Construction policy is needed in this instance. These early 1900s homes have detailed construction that newer homes do not have. For example, plaster walls are more labor intensive to fix than homes with drywall. Early craftsmen constructed custom pieces within the homes on-site by hand, including kitchen cabinetry, staircases, and built-in features. Getting true replacement value for these details can be difficult, but not impossible. If the house is purchased for a low, even foreclosed price, and renovated back to its original integrity, the insurable value could be two to three times more than the purchase price.
DD: In most cases, the dwelling may be vacant during renovation and theft of valuable appliances, tools, or copper plumbing could be a problem. Downtown neighborhoods are closer to commercial exposures and can be in higher crime areas. Most carriers require the dwelling have basic updates to electricity and plumbing. Items such as knob and tube wiring or fuses can be hard-to-place until updated to circuit breakers, due to a fire hazard. Building codes have changed greatly since these homes have been built, and in the event of loss, the dwelling must be repaired according to current laws. Many policy limits exclude or limit Ordinance or Law, and coverage works in one of three ways: to cover costs of bringing a house up to code after a loss; to help with the extra cost of demolition; and to rebuild those parts of a house that were not damaged by the loss, but must be brought up to code as required by the local building department. Building departments may not issue a permit to repair the covered damage until all areas not to code are addressed. This coverage can be bought or increased by endorsement to the policy and is based on a percentage of the dwelling limit.
Q: What effect does direct-to-consumer sales of insurance over the internet and through new apps have on hard-to-place Homeowners insurance?
BG: There is much discussion in the industry around direct to consumer Homeowner’s insurance sales, where a client can buy a policy directly over the internet. Cutting out the insurance broker or advisor leaves clients up to their own devices, which can be dangerous. The single biggest investment most people make in their lifetime is their home. Most clients are not trained to understand all the exposures they have. If a claim were to occur, they may not be properly insured because they bought a policy they did not fully understand. There is a reason why certain professions require licensing and continuing education, and that reason is complexity. Each colleague in our industry has an obligation to demonstrate the value that is brought to clients. When that is forgotten, people may think buying insurance over the internet is better than someone who shows little interest. Brokers should take time to educate clients on exposures they have. It is easy for the insurance industry to demonstrate this to clients. To be risk managers is the sole reason the industry exists. The internet is not a good risk manager.