What's Causing Chaos in Homeowners' Insurance?

In recent months, we’ve had many conversations with clients regarding current factors impacting their wealth. A frequent recurring topic has revolved around recent changes in homeowners’ insurance. From non-renewals to drastic increases in premiums to challenges with coverage and deductibles, we’ve heard – and experienced – a number of aggravating accounts. While these conversations have been mostly about venting frustrations, we felt the discussion deserved further investigation with insurance expert Hanna Ogle to better reveal the cause of the chaos and actions to take to ensure you’re getting the right coverage for fair prices.

Hanna is an executive vice president for personal lines with Watkins Insurance Group, where she has many years of experience providing specialized insurance for high-net-worth clients. She is also an instructor at the Center of Professional Education through the University of Texas (Austin) Extended Campus, where she teaches insurance and risk management for the Certified Financial Planner™ program as well as continuing education courses for CFP^®.

Here's Hanna’s take on home insurance in 2024.

Why is homeowners’ insurance such a challenge right now?

The issue is being caused by the collision of three primary factors: climate change, inflation, and a lack of reinsurance availability.

Climate change is the most visibly recognizable cause. In recent years, the U.S. has experienced a greater number of weather-related disasters that have also been more severe on average. Wildfires, hurricanes, and tornados have combined to cause year-over-year upticks in the number of claims being filed in recent years. More claims equal higher costs for the insurance companies and erase their profit, and make no mistake, insurance companies are in business to make a profit.

Inflation is another area that most people understand how it impacts the industry. Insurance is merely a function of whatever it is that it’s insuring. But over the past few years, insurance rates have lagged behind sharply rising construction and home repair costs and are now scrambling to catch up at the same time claims are rising. For instance, it was common last year and the year before for insurance rates to rise about 10 percent. But, at the same time, the cost to replace your roof rose about 20 percent. Combine that with more storms causing greater damage to rooftops, and it’s easy to see why insurance companies are scrambling to recover.

Then there’s the issue of reinsurance, which many people are less familiar with. Like virtually any other large business, insurance companies around the world are required to carry their own business insurance. In this industry, this is called reinsurance, and its purpose is to insulate providers from very large surges in claims. The amount of reinsurance a company is required to carry is based on the number and value of the policies in its portfolio.

As storms increased, claims went up. As inflation rose, the costs to rebuild and repair have gone up. The combination of both has made the insurance industry essentially a bad market for reinsurance investors. By the middle of 2023, the number of investors pulling out of the reinsurance market hit such high levels that the insurance companies have found it extremely difficult to find the amount of reinsurance they need to cover their renewals, much less take on new customers.

The result is insurance companies are having to reduce their exposure basis by reducing their policy counts. As an insurance broker today, it’s very common for us to go to market requesting quotes for new policies and have half the responses come back as ‘declined to quote.’ Some companies have simply shut down for new business, while others are just making it increasingly difficult to obtain quotes through their underwriting process and/or rate increases.

Is there any relief in sight?

It’s really a backward situation right now. Many of our clients come to us thinking that insurance companies want their business. They don’t. Right now, just about the last thing insurance companies want or need is more exposure to a potentially high volume of claims.

For the rest of this year, I don’t expect we’ll see any relief in rates or availability. The industry needs to re-balance itself from the blows we discussed earlier. If the changes made in the past six months show good results for the rest of the year, we may see some softening in the market in 2025. Regardless, we’re going to be looking at some very different realities when it comes to purchasing insurance for our homes. The number one thing homeowners may have to be willing to give up is roof coverage. Essentially, it’s likely to become a situation where homeowners are self-insuring the roof through two- and three-percent deductibles.

What are the challenges facing people with higher home values?

There are primarily two classifications of insurance companies: traditional and premium. The traditional companies are the ones you see advertising at every turn – Nationwide, Allstate, State Farm, Progressive, and so on. Premium carriers – Chubb, AIG, and Pure, being the most recognized – historically have opened their home policies for dwelling values between $1 and $1.5 million. For all the reasons we’ve already highlighted, premium insurers have essentially doubled their qualifying prospect number to $2 to $3 million. Plus, some premium carriers are withdrawing from Central Texas entirely.

There are some exceptions, but their appetite has narrowed and moved upstream regarding new clients. One significant challenge to this is that it’s creating a large group of homeowners who previously qualified for premium insurance to now seek insurance from a bunch of traditional providers who aren’t particularly hungry for that business.

On the positive side, by shifting their qualifying figures, these premium carriers have essentially preemptively adjusted for themselves to better accommodate new requests in the current market, albeit by eliminating a large portion of their previous prospect pool.

What are some steps people can take to better their results in the current marketplace?

The number one thing people should do is invest in a water leak detection system with monitoring. It’s like a burglar alarm for water leaks. When the system senses that water is leaking within the home, it alerts the homeowner of the potential issue. Some systems can automatically shut off the main valve to the home depending upon water flow settings.

Since water loss claims are the second most common home insurance claim behind storm damage, having a leak detection system tells insurance underwriters that you’re taking proactive measures to reduce the possibility of future claims. If the insurance company is limited in the number of policies they can provide, such a system can be the difference between getting a quote and getting denied. Or it could help with discounted premiums or better policy terms.

In today’s environment, some insurers are beginning to require these kinds of systems for owners who have had a water claim within the past five years before they will provide a quote.

Some other steps homeowners can take to make their homes more resilient include:

• Update older roofs. Particularly, asphalt shingle roofs older than 15 years are more likely to have damage, and the insurance companies know this. A newer roof will be more attractive to underwriters. (Note: Metal roofs can be a benefit due to their durability in hailstorms; however, most insurers only cover physical damage and not cosmetic issues, which can be more apparent on metal surfaces.)
• Manage the defensible space around your home. This lowers the potential for damage caused by wildfire and makes it easier for emergency crews to defend your property. Essentially, you want to make sure that the vegetation surrounding your home is well-maintained, healthy, and clear of undergrowth. Different carriers have different rules on this, but the maintained defensible space is usually 100 to 200 feet out from the home. (Learn more about protecting your home against wildfire.)

Any final thoughts on this subject?

Mostly, I think homeowners need to ready their deductible expectations. We’re living in a new environment where it’s going to be commonplace for higher-end homes to require $50,000 and $75,000 deductibles. It’s not what any of us wants to hear, but the insurance industry just isn’t in a position to provide the one percent deductibles that were once the norm.