States Pick Up Some Wind and Flood Risk for Homeowners/Underwriters Rely on Sophisticated Risk Analysis Tools to Set Rates

Homeowner’s insurance underwriters in the U.S. have significantly restricted the extent to which they provide coverage. This trend began as a result of huge losses suffered due to disasters such as hurricanes. It is also a result of vast homeowner policy claims for mold damage, particularly in southern states. A number of insurance firms have ceased offering coverage in Florida and Louisiana. After hurricane Andrew, Florida legislators attempted to utilize innovative ways to maintain the availability of homeowner’s insurance policies. For the period between 2020 and 2023, insured damage from storms, wildfires and other natural disasters in the U.S. exceeded $90 billion each year according to Aon.

The state of Florida set up two state-sponsored insurers of last resort that provided windstorm coverage to homeowners who otherwise could not obtain wind coverage in the private market. Later, the state set a limit on the rates that could be charged for homeowner’s windstorm insurance and established the Citizens Property Insurance Corp. (CPIC) to cover homes for wind, hurricane and hail damage that insurance firms wouldn’t cover at the capped rates.

High-end homeowners in coastal states are getting a break due to the founding of a small number of new insurers such as Privilege Underwriters Reciprocal Exchange (PURE). It and others like it offer coverage to owners of homes worth $1 million or more at attractive rates. PURE is able to do so because larger, more expensive homes tend to be well built enough to sustain minimal damage during powerful storms.

Meanwhile, the U.S. government runs the National Flood Insurance Program (NFIP) through the Federal Emergency Management Agency (FEMA). NFIP provides flood insurance to millions of homes, many located in Texas and Florida.

In many cases, today’s homeowner policies have reduced the underwriters’ exposure for claims due to windstorm, mold, swimming pool liability, dog owner liability and losses due to fires in fire-prone areas. In addition, policies typically no longer provide guaranteed replacement of the home regardless of cost to the underwriter. Instead, many policies will pay only the stated insurance policy coverage amount plus up to an additional 20% or 25%. Today, the language used to describe such coverage is frequently referred to as “extended replacement,” compared to “guaranteed replacement” in the past. This puts the burden on the homeowner to be aware of the costs of replacing the home and then making certain that the policy amount is adequate for replacement. It also increases premium costs for homeowners seeking to maintain full coverage.

Insurance companies use many tools to set premium rates. In addition to actuarial tables, which provide a good portion of the data used for insurance calculations, insurers use catastrophe models which predict best- to worst-case results of natural disasters such as hurricanes, tornados, floods and earthquakes. The models gather a series of criteria such as historical weather patterns, position and paths of past storms, combined with client data such as the number of policies currently held in a targeted area and the age, height and structure of the buildings there. Using all those factors, plus additional data such as the costs for rebuilding, relocating displaced families and deductibles and coverage limits, the firms calculate premiums and the numbers of policies they can support.

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