Climate change increases the risk of property damage and losses. And insurance companies know it's only going to get worse in the coming decades and they're getting ready to adapt their home insurance policies to these new realities.
Precipitation has increased by 12 percent in just 50 years and has become a greater threat than fire. In fact, the insurance giant Allianz estimates insured losses will increase a whopping 37 percent per year as a result of these changes, while Lloyd’s of London identified climate change as the number one issue for their insurance group.
So what does this mean for you and your home? We'll look at five ways climate change can affect your home insurance policy and what you can do if you find your policy doesn’t cover the risks associated with it.
1. Increased Premiums
The effects of climate change are very unpredictable. Floods, storms, droughts, and wildfires can hit areas unexpectedly. This is a nightmare for the insurance industry, since the profitability of insurance products depends on insurers having reliable and predictable data. That’s extremely challenging when severe weather events can hit even areas that are considered low risk and cause extensive damage when they do. To offset this unpredictability, insurance companies need to raise premiums substantially (for related reading, see The Seas Are Rising – Do You Need Flood Insurance?).
Most companies predict double digit hikes to cover losses to property. Because the risks affect all insurance companies, these are industry-wide increases that cannot be avoided by switching insurers (see How Home Insurance Premiums Are Calculated to learn more about your premium).
2. Increased Deductibles, Reduced Limits, and New Exclusions
Even if climate change can affect any area, some are more prone than others. Insurers are, obviously, less than keen to cover homes in high-risk areas. Coastal, desert, and grassland homes, as well as those built near waterways, are at a higher risk of facing floods, hurricanes, tornadoes, and wildfires. These major natural disasters cost insurers more than they could ever hope to recoup through premiums. In recent years, Allstate paid out more from hurricane claims in the Gulf Coast states than it earned in its 75 years of selling homeowner’s policies (learn how insurance companies cover claims after a widespread disaster).
New trends include increased deductibles, reduced limits on claims, and new exclusions for climate change events unless homeowners have additional coverage. Some companies now implement two deductibles: one for wind, hail, and water damage and one for all other perils. Owners of expensive homes often opt for higher deductibles now, instead of paying steep premiums. Furthermore, many major companies have stopped insuring high risk areas. This means that traditional insurance companies will offer homeowners who do have insurance more expensive coverage and fewer policy choices (see An Overview of Insurance Deductibles to learn more).
3. No Renewal or Discontinued Coverage
Allstate slashed the number of policies it offered in Florida from 1.2 million to 400,000, with a goal of providing fewer than 100,000 policies. They have also stopped writing homeowners policies in California and many other states. State Farm and Farmers Insurance are also more discriminating about where they insure, and other major companies will probably follow suit.
Even if a company doesn’t discontinue homeowner coverage, it may refuse to renew your policy. If you live in a high-risk area or you made a claim in recent years, this is a very real possibility, particularly if it was due to water damage (read 5 Water Damage Home Insurance Scenarios to find out what you can expect in terms of coverage).
4. Costly FAIR and NFIP Coverage
State officials say they are seeing a huge increase in homeowners who cannot obtain insurance. Only 36 states offer the Fair Access to Insurance Requirements (FAIR) plan meant to provide insurance coverage to those who cannot get coverage by other means. However, many homeowners choose not to use these plans because they are more expensive and less comprehensive than traditional homeowners' policies. Premiums may be a few hundred dollars more or double the cost.
Moreover, protection from floods associated with hurricanes, tropical storms, and heavy rains through the National Flood Insurance Program (NFIP) can be equally costly, but since homeowner’s insurance doesn't cover flood damage, coverage from the NFIP is necessary.
When disaster strikes, assistance is a loan paid back with interest. A $50,000 loan at 4 percent interest will cost you $240 a month over 30 years. Flood insurance with $100,000 coverage costs approximately $33 a month. If your community is part of the Community Rating System (CRS), you can qualify for a discount, but it's still more expensive (for related reading, see Why You Might Want to Insure Your Loan: An Intro to Credit Insurance).
5. Increased Need for Excess and Surplus Lines Insurance
We will certainly experience more severe weather in the coming years due to climate change, and an excess and surplus lines insurer may offer the coverage you need. These carriers are not required to be licensed by the state, but they must have a surplus lines license to issue policies. What's more, most of the regulations imposed on standard market companies don't apply to them, which allows them more flexibility with risk and rates. However, they do not provide a guaranty fund, should they go bankrupt (see How to Choose an Insurance Company That Won't Go Out of Business to find out more about guaranty funds and how an insurer's bankruptcy can affect you).
Even though these companies are licensed abroad, they are still watched very closely. They must offer products not offered by regular insurance carriers, and they can only write a policy if three regular carriers have rejected you. Each state maintains an approved list of surplus lines companies. You can also check their ratings with A.M. Best, just as you can any other insurance company.
Since surplus line insurance protects your property from unusual or high risk events, it is more expensive than a standard insurance policy. However, it is usually more affordable and more comprehensive than FAIR or NFIP coverage. In the high-risk state of California, surplus line policies increased 91 percent in 2014, a trend that will probably continue.
As a homeowner, your best protection is attention to detail. Review your policy, and ensure you have coverage to protect you from flood, hail, hurricane, tornado, drought, and wildfire – but only if these are risks worth insuring against. Even if you don't live in a high-risk area, budget for increased premiums of at least 15 percent.
And keep in mind that some insurance companies offer discounts if you have taken measures to protect your home. Monitoring systems connected to smoke detectors, temperature monitors, leak detectors, and smart locks could save you money and keep you safe (learn more in How Smart Devices Can Protect Your Home and Help You Save on Insurance).
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