Summary:
The casualty insurance industry is in a crisis.
The financial burden of property insurance has been steadily increasing, with significant rises of 17.4% in the first half of 2024, 11.6% in 2023, and 5.9% in 2022. This cumulative increase of approximately 69% over four years presents a significant financial challenge for property owners, necessitating immediate attention to mitigate potential financial risks.
Due to natural disasters and inflationary pressures, the cost of the same coverage has nearly doubled in the last five years.
Lenders require sufficient coverage to provide for replacement costs.
Many property owners have raised their deductibles to $5,000 to $10,000 or more per claim.
Some consumers respond by underinsuring their properties. This bad decision, often based on naivety and ignorance, can have devastating consequences.
Article:
What is property hazard insurance?
Insurance is a form of protection whereby insurance companies collect premiums en masse and use those premiums to reimburse accidental damages. The business strategy is to collect more premiums and pay out fewer claims. The purpose is to generate a profit for the company and its shareholders. The insurance industry is systematically regulated and operates nationally and worldwide. There are many types of coverage and policies to insure for different risks.
Real Property insurance is a complex subject because it encompasses many subsets, including residential, commercial, business, and personal coverages. The insured categories include homeowners, Condo/co-op, commercial property, renters, mobile and manufactured homes, liability, and personal property.
Covered events are called perils. A peril is an event that causes damage or destruction to a home or property. Insured perils include fire, windstorms, hail, theft, vandalism, and earthquakes.
Insurance does not cover property damage that occurs over time due to a lack of timely maintenance, wear and tear, deterioration, or faulty quality. The covered claims are due to damage caused by sudden and fortuitous events that occur by chance. Understanding this concept clarifies the nature of insurance and how it operates. Insurance companies calculate the probabilities of claims and losses and issue coverage accordingly. Profits are the motivation.
Non-covered perils, such as flooding, earthquakes, riots, etc., require additional coverage known as“ riders” or special endorsements.’ These are add-ons to your standard policy, providing extra protection for specific risks. In such cases, the guidance of a skilled commercial lines insurance broker is essential, as it provides you with the necessary expertise and reassurance that you are in good hands.
The most crucial element of insurance is understanding your policy. By reading and understanding the insurance contract, you can empower yourself with knowledge about your coverage. It’s surprising how few people have read their policy, and this lack of understanding often leads to disappointment when a claim is denied. Understanding your policy can give you a sense of control and empowerment in the face of potential claims, instilling confidence in the audience.
The underinsurance speed trap with devastating consequences is a pressing issue that demands immediate attention. Over the past decades, markets have remained stable, with little indication of inflationary pressures. We are now in an accelerated speed trap, which describes the rapid increase in building costs and insurance premiums. This is due to a race between increased premiums and building costs, both of which are related to inflationary pressures. During inflationary times, there is constant pressure on rising prices of original construction, regulatory compliance, and the rising cost of required building enhancements.
A Borrower may be focused on saving money, but should be advised of the adverse financial consequences of recovering losses in a claim when the property is grossly underinsured. If the Borrower follows the recommendations of his qualified insurance agent, good things may happen. What happens when a property owner experiences a hazard loss, tenders a claim to the insurance company, and discovers the condition of massive under-insurance? Blaming others is the answer, of course. Due to policy limits, the insurance company is fully aware that it has no liability for this underinsurance problem.
Inflation causes the prices of building materials, appliances, heating and air conditioning, municipal approvals, including revised building codes, and labor costs to increase substantially; over time, this process compounds prices.
Whether intentional, uninformed, or negligent on the part of the Borrower's insurance agent, real estate agent, or mortgage broker, the insured parties may find themselves underinsured and must pay a portion of the repair and reconstruction costs for the loss. Many owners may not have the financial resources to cover the shortage. The consequence may be to walk away from the property and hand the keys to the lender. This highlights the urgent need to address the issue of underinsurance to avoid such dire financial consequences, instilling a sense of caution in the audience.
The problem of underinsurance is a nationwide catastrophe that is currently occurring. No one even talks about it. I don’t think that property insurance industry participants, including insurance agents and brokers, as well as real estate agents/brokers, are vocal enough about the magnitude of this national problem. But, as accusations fly, Mr. Fiduciary, you should have told me that I was underinsured; the lawyer community will high-five with delight.
The Borrower's Loan Broker:
My client objected to paying premiums for full replacement coverage. He is a general contractor who claims that he can repair the damage for a significantly lower price than the insurance carrier has quoted. Besides, he contends that the land will not burn down. Please reduce his replacement cost from $2,000,000 to $1,000,000. He is determined to save on insurance premiums.
After consulting a knowledgeable insurance broker who arranged the coverage, the lenders’ response underscores the crucial role of insurance brokers. Their advice on adequate coverage is invaluable, reassuring in the often complex world of property insurance. It’s essential to seek professional advice when dealing with property insurance, and their guidance can be instrumental in ensuring you have the right coverage for your property, empowering you with the knowledge to make informed decisions.
Underinsurance is more prevalent now than before due to the upward cost pressure caused by inflationary increases in construction costs. For example, lumber prices, other materials, and labor have increased dramatically. Municipal approvals and building standards/codes are much more stringent. Add-on municipal fees (taxes) have also increased.
The owner, acting as a contractor, may employ substandard workers, operate without adequate insurance, and skirt building and zoning compliance. The property owner may calculate $200 per square foot for replacement. However, in the retail market, where the insurance company is contemplating hiring a third-party contractor, the exact replacement cost is $400-$500 per square foot. These figures are for entry-level and production homes. High-end custom homes can be $1,000 to $2,000 per square foot or higher.
Lenders and mortgage companies may want to audit their loan portfolios to ensure that property coverage adequately offsets inflation. Lenders should review and discuss methods and data sources for calculating replacement costs. Most insurers and appraisers use Marshall & Swift cost data to estimate construction costs. Marshall & Swift monitors the factors that drive the cost of construction and the actual building component costs of the tract. Marshall Valuation Service reflects data in hundreds of locations throughout the U.S. and Canada. AI apologizes, Mr. Borrower, but your insurance coverage must equal or exceed the loan amount and cover the replacement cost of the dwelling and its appurtenant structures.
The current state of the Insurance industry in California:
Carriers are suffering a triple whammy of negative factors. There are current historic increases in construction costs, outpacing inflation, and an expanding number of catastrophic events (natural disasters). Additionally, the reinsurance market has collapsed. Companies have sent non-renewal notices to current policyholders and declined to approve new insurance policies. State Farm is keeping its recent book of insurance active.
AIG and Chubb are canceling or reducing insurance coverage for homeowners and businesses. State Farm and Allstate, America’s largest personal lines insurers, ceased accepting new applications for business, personal lines, and casualty insurance. Catastrophic events, including wildfire exposure, severe storms, hurricanes, tornadoes, floods, earthquake exposure, water damage, and automobile accidents, have become unmanageable without drastically increasing policy premiums.
State Farm suffered a record $13 billion underwriting loss in 2022, with $4.7 billion in losses the year before. Allstate lost $3.11 billion in 2022. Liberty Mutual Holding Co. lost $3.55 billion, and Berkshire Hathaway lost $3.10 billion..Chubb reported a loss of $2.182 billion in 2022. The Travelers lost $1.877 billion in 2022. Progressive lost $1.66 billion.
Currently, rates are skyrocketing, sometimes doubling or tripling in value. Yesterday, coverage was $3,000 annually; today, it may be $9,000. Paying the additional premiums significantly depletes the average family’s monthly cash flow.
Additionally, there will be increased pressure on California’s Fair Plan, a state-run substandard carrier for individuals who cannot find coverage elsewhere. Everyone knows what happens when the government operates a business enterprise: Inefficiency and decay set in.