While homeowners-insurance policy exclusions can burden consumers with significant out-of-pocket expenses, expanding policies to fill coverage gaps creates a new set of challenges, such as affordability issues, lower consumer demand as rates rise and regulatory approval for risk-based rates, the Government Accountability Office says.
As coastal populations grow, and with the possibility of more frequent and severe weather, the GAO was asked to study the possibility of private insurers providing more comprehensive insurance that includes coverage for risks currently excluded.
The GAO, in a January report, says, "A main challenge is that expanded coverage would have higher costs, potentially limiting consumer demand. Even if insurers charged higher rates that were based on risk, the severity and unpredictability of catastrophic losses could still jeopardize insurers' solvency.
Industry participants the GAO spoke with questioned whether consumers would have the appetite to pay the higher rates that would come with more comprehensive coverage. "Some said that may homeowners try to keep expenses for insurance as low as possible, citing as evidence low participation in [the National Flood Insurance Program], despite federal subsidies," states the report.
With low consumer interest, the report notes concern among insurers that they might be left with only the riskiest households in their insurance pool, which could jeopardize solvency.
Insurers also wondered how regulators would react to requests for more expensive risk-based rates for expanded policies. A regulator questioned for the GAO report, though, said charging higher rates might not be an issue since loss experience is a critical factor in setting rates.
The GAO explains that if insurers were to take on additional risks, they would also need to hold more capital. "Insurers may not be willing to maintain the higher capital levels needed for insuring against higher-risk events if that capital could be used for other insurance or investment purposes," the GAO report states.
In order for insurers to offer expanded coverage, according to the report:
- Insurers would need the ability to accurately model additional risks, which some industry participants said might already be possible for floods and earthquakes.
- Consistent mitigation efforts, building codes and sound land-use policies would need to be developed to help reduce natural-catastrophe risks, according to two industry organizations.
- State and federal government involvement may need to continue in some capacity to guard against the catastrophic nature of flood and other nat cat risks.
Summing up the obstacles, the GAO says, "The challenging mix of financial risk, political and regulatory issues, policy cost and consumer demand has thus far prevented private-sector insurers from offering flood insurance to homeowners, let alone more comprehensive or all-perils policies."
But while challenges exist, the GAO recognizes the impact that current policies can have on homeowners, stating that losses due to policy exclusions can have significant financial ramifications for consumers. "Communities can also be impacted by perils excluded from homeowners policies, particularly if unrepaired homes result in blight and affect whether others in a neighborhood rebuild," says the GAO.
"Expanded coverage could offer homeowners more protection, potentially reducing the cost of repairs that homeowners would have to cover with their own resources."
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