Climate considerations in the home-buying process
Extreme weather events increasingly impact premiums and the availability of insurance products.
Natural disasters are becoming more difficult to anticipate as deviations from typical weather patterns and more extreme events are emerging. Once considered low-probability/high-cost events, they are now increasing in both frequency and intensity.
In 2021, natural disasters caused more than $343 billion in economic damage globally, according to Aon’s 2021 Weather, Climate and Catastrophe Insight report. Among 2021’s notable weather events, Hurricane Ida took its place as the fifth costliest hurricane on record with $75 billion in estimated damages.
These extreme weather events increasingly impact premiums and the availability of insurance products. This also creates a more complex landscape for insurance agents to navigate as families continue to live in and purchase properties in areas that have a high potential for loss. Insuring homes today requires developing both short- and long-term risk strategies to allow each insured to fully understand their property exposures.
Understanding the trends
According to Aon Private Risk Management’s Family Office Benchmarking Report, insureds experience an average of two claims over a five-year period. From 2015 to 2019, property claims accounted for 29% of all claims reported but resulted in 73% of all claim payments. We also witnessed a notable surge in weather-related damages, with three of the top five property-claim drivers stemming from these events:
- Wind and hail rank at number two, representing 15% of property claims.
- Wildfire comes in at number three, generating 8% of property claims.
- Flood takes fifth place, causing 3% of property claims.
Water damage, representing 46% of claims, remains the most common type of property loss. Some of these losses can be attributed to climate exposures as this includes freezing and bursting pipes due to extreme low temperatures.
Mitigating the risks
As weather patterns become more unpredictable, insurance agents should review their property portfolios to ensure each insured is taking proper mitigation measures. It’s also important to advise clients of possible exposures when purchasing new property.
Here are a few steps consumers can take when a potential purchase is identified.
Talk to an insurance broker
Before finalizing any home purchase, it’s important to resist the urge to make assumptions about the potential risks based on an area’s positive history of no or infrequent catastrophic events. Today’s flood events, for example, don’t just occur in floodplains. We have seen urban areas subjected to disastrous flooding time and time again. Prospective buyers should talk to a qualified insurance broker to better understand a property’s exposures. Insurance professionals can help identify the risks and provide details that can help a purchaser make informed, prudent decisions.
Explore protection options
Understanding risk mitigation measures is critical. For example, some states and counties have their own wind mitigation building codes, which might require property owners living in hurricane-prone areas to update their properties to minimize damage. Homes in wildfire-prone areas may also require additional mitigation efforts to lower the possibility of loss. Some of these mitigation efforts require a sizable investment and homeowners may be required to secure insurance coverage.
Understand how coverage works
Catastrophic risks — such as flooding, earthquakes and hurricanes — are generally excluded from property coverage, requiring families to pursue supplementary coverage to protect their properties against these perils.
For example, flood is excluded from property policies and it is recommended to carry minimum flood coverage. National Flood Insurance Program policies offer protection limits of $250,000 for structures and $100,000 for personal property. Additional coverage beyond these limits can be secured with private flood insurance and excess flood insurance. Excess flood is generally offered in incremental percentages of the total property limit. Other factors, such as the size and configuration of the property, location, and overall risk tolerance, determine the amount of excess flood coverage recommended.
Blanket policies are a creative, and at times cost effective, solution for families with a significant number of properties and varied geographic risk. This unique policy structure consolidates coverage for the residences and personal property of all family members on a single policy under one aggregate limit. Blanket coverage also offers the advantage of including coverage for catastrophic perils that are typically excluded. Coverage options are flexible, allowing for some or all properties to have protection against flood, earthquake, and hurricane winds. This structure simplifies program administration and assists in establishing uniform insurance standards for all members under one policy. Premium accounting for multiple owners and entities can also be customized to facilitate payment allocation for a family office.
It’s important for insurance professionals, at minimum, to review programs annually to discuss changes in exposure and market alternatives.
Protecting what’s important
As the threats of weather-related disasters continue to grow, it’s imperative that property owners reach out to insurance professionals to help them assess the risks involved and provide guidance around steps they can take to help protect the place they call home.
Cheryl Azar (cheryl.azar@aon.com) is the Southwest Associate Regional Director for Aon Private Risk Management. She collaborates with a team of colleagues specializing in high net worth and ultra-high net worth personal insurance solutions and risk management services for individuals and families.
This information is provided for general informational purposes only and is not intended to provide individualized business, insurance or legal advice. Coverage is governed only by the terms and conditions of the relevant policy.
See also: