Is an insurance crisis on the way?

"Don't believe in climate change? Your insurance company does." Unknown

"extreme weather phenomena drive direct physical risks to all categories of human-owned assets—land, houses, roads, power lines, railways, ports, and factories...The insurance industry has historically managed these risks. But we are fast approaching temperature levels—1.5°C, 2°C, 3°C—where insurers will no longer be able to offer coverage for many of these risks. The math breaks down: the premiums required exceed what people or companies can pay." Insurance executive Gunther Thallinger

My homeowners insurance rates went up 25% in one year! After the initial shock, I set out to do a deep dive in comparing rates and companies. I discovered some surprising things and ended up saving over a thousand dollars by staying with my current insurer. How is that even possible?

It should be no surprise that homeowner insurance is on the rise- up some 40% in just the last six years! The reasons for the rise are pretty clear:

1- A rise in home values and the costs of materials to repair and replace a home.

2- More natural disasters in more areas (see the chart above) More insurance payouts means higher premiums for all of us. I just had a tornado hit less than ten miles from my home.

3- Immigration crackdowns that are causing labor shortages in the homebuilding industry.

Natural disasters are less predictable and so more areas are susceptible to rising premiums. While the average premium has risen to around $3,000 in the US, average premiums in Florida are three times that because of hurricanes and twice that in Oklahoma, home of tornado alley. Even places like North Carolina and Hawaii have been hit recently by torrential floods and wildfires respectively, and there's no telling where the next disaster might hit.

The insurance model is simple math. Predict the likelihood of a payout and charge enough in premiums to cover all likely payouts with a bit left over for CEO salaries and shareholders. Insurance is essential for banks to be able to provide loans, Should the insurance market collapse, so would the loan market, because no bank would want to sit on defaulted properties that have been destroyed. And without bank loans, our entire economy could collapse into a sad pile of goo.

Homeowners in some flood-prone areas are turning to government-subsidized flood insurance, but this is not a long-term solution. Government funds are drying up as taxpayers demand more cuts and interest payments keep draining federal coffers. At some point, as insurers leave the most risky markets, governments will have no choice but to step in or see cities go vacant.

Climate change, coupled with poor zoning and housing decisions has made the private home insurance model look incredibly shaky. While the rest of us keep debating about global warming, the actuaries at insurance companies plug in the data into their models and raise insurance rates because there's no other choice. Every insurance policy is a gamble, one that both buyer and seller hope never has to pay off. Warmer temperatures have made tornadoes and hurricanes more powerful and more common. Higher air temperatures carry more moisture, and rainfall can be more powerful than ever in some regions, while drought and wildfire risk increases in others. Predictions are that the next ten years will see warmer weather still.

I find it odd that for something so incredibly important, we still have goofy spokespeople like Flo from Progressive, the Geicko Gecko, Liberty's Limu Emu and Doug, Allstate's Mayhem, Jake from State Farm, and the annoying Dr Rick, who humorously teaches homeowners how not to become like their parents. Rarely do you see an insurance commercial anymore that talks about reals risks and benefits. Probably because insurance is too complicated and boring to put in a commercial, so why not build a brand with comedy instead? And most of them claim to save you hundreds of dollars if you switch. (I found that last promise to be BS, because most of their rates are pretty similar, and any bonus from switching quickly goes away after the switch.)

One of the first things that I did in my search was check Consumer Reports ratings of home insurers. A quick Google search of any big company is likely to find some bad and discouraging reviews from past policyholders. Insurance is a weird mixture of grand promises and red tape delays and denials once you might actually have a claim. Consumer Reports takes those ratings and other data and builds a very helpful database of ratings on premiums, coverage, claims, customer service, and more. Highly recommended, but it will cost you a few bucks to join online.

The next step was to try both online insurance calculators and actual human insurance brokers. I've never particularly trusted insurance salespeople, because they try to sell you more insurance than you actually need and find companies that give them the best commissions. That's the way the system works and I can't fault agents for doing what salespeople do. The online calculators try to hook you up with a human to close the deal, but try as I might I could never seem to find a substantially lower price that I could trust.

So then I told my agent of 12 years that I was shopping around and started peppering her with questions. What exactly is my coverage? Why did it go up so much? What discounts am I missing? Well wouldn't you know it, she found several things in both my homeowners and auto policy that could be changed, and I ended up saving over $1,200 a year on both policies. The secret, I guess, is to be a pain in the ass, and not take insurance for granted. She wasn't going to offer those discounts out of the blue, and I wonder if any insurance agent would.

So what's the lesson here? Insurance is going to get tougher and more expensive as climate change worsens and inflation rises. Insurance companies are going to keep doing what insurance companies do, and governments at some point are going to have to step in to stabilize bank, real estate, and insurance markets. In the meantime, here are some things each of us can do to lessen the risks. (If you're a renter, this still affects you- bug your landlord about it so rents don't get out of control).

1- Shop around and ask plenty of questions. Make sure that all of the discounts that you're entitled to are included.

2- Take on higher deductibles for things you judge to be least likely.

3- Bundle policies as much as possible.

4- Maximize your credit score where you can.

5- Install home security items to make theft less likely- alarm systems, smoke detectors, deadbolt locks etc.

6- Maintain your home by replacing worn-out systems, leaky roofs, and clearing tree branches that are too close for comfort.

7- Most companies offer a discount if you can pay in full once a year instead of monthly.

8- If you're a safe driver, use a cell phone app to lower your auto insurance.

9- Don't over-insure. Know the odds and risks involved.

10- Be picky about where you live. Avoid flood-prone areas, homes surrounded by lots of old trees, roofs older than 15 years, or anywhere a claim is more likely than not.

There. Rant over. And now for a final laugh, here's a funny insurance commercial.