Homeownership: The Troubled Dream

By Jeff De Turris

Insurers are in a position to help Americans fulfill their homeownership dreams by providing insurance to protect their biggest asset. But why has doing so become so difficult over the last few years?

Hurricanes and other natural catastrophes are one obvious answer that comes to mind. And in their aftermath, sometimes divergent views among regulators, insurers, and policyholders complicate the recovery process.

As climate continues to change, all affected parties will still need to find a way to deal with increasing storm severity. According to Verisk subsidiary AIR Worldwide, since 1990, annual aggregate losses caused by severe thunderstorms in the United States on average are responsible for more than half of all insured catastrophe losses.1 In 2011 alone, thunderstorm events cost the industry $25 billion — a high price for the cost of doing business. And it's more important than ever for homeowners to ensure roofs are sealed, gutters are clear and in good condition, and trees are healthy and pruned as a defense against strong winds that could have a devastating effect on a house after a severe storm.

However, it becomes a challenge for many homeowners to defend their dream from Mother Nature. When families are forced to live from paycheck to paycheck, paying the mortgage and keeping food on the table take priority.

Lack of disposable income due to the economic downturn might result in a decline in home maintenance. Such neglect can make itself evident in several ways:

  • It's easy to put off the purchase of replacement windows and new appliances if the old ones still get the job done, no matter how poorly. Taking the risk that may go along with avoiding the purchase of home improvement upgrades is something some homeowners simply may not be able to avoid.
  • While homeowners might put off hiring a contractor because of monetary constraints, they may also simply be unaware of looming problems. For example, insureds don't generally check their washing machine hookups and other appliances for leaks or corrosion. It makes sense to inspect a boiler and water heater regularly, but many homeowners overlook such tasks.
  • Changes in the way we live and build our homes can also present greater risk. A basement washing machine that develops a leak may cause some damage. But the same appliance located on a home's second floor can damage carpets, furniture, electronics, wallboard, and wood flooring throughout the house if connections break while the homeowner is away. Add the additional living expenses incurred during the course of repair, and the loss can be extensive.

Perhaps insurers need to offer homeowners a maintenance incentive. Similarly, a driver with points on his or her license has incentive to attend a defensive driver class to improve driving skills and save premium dollars. A parallel version of this course could, for example, arm a homeowner with information about the risks of an aging roof, old washing machine hose connections, and hot water heaters that have outlasted reasonable life spans. Knowledge can be powerful, and a little incentive — such as a discount, lower deductible, or some other benefit — may help reduce future losses and claims.

Some argue that coverage under homeowners policy forms has become too broad. Years ago the now-extinct HO-1 policy, which provided coverage against fewer perils than the HO-2 and HO-3, was still available. Perhaps the time has come to offer many of the broader coverages as options for an additional premium charge.

Emerging Issues

Beyond today's challenges, we must also monitor emerging trends so we can develop solutions to deal with them in a timely manner. Here are some examples:

  • As millennials move back home with their parents to save money, as more workers telecommute, and as the population ages, the risk profile of the average household is likely to change.
  • More and more, our mobile app society is controlling lights, garage doors, heaters, and household alarms through Wi-Fi networks on smartphones and tablets. But such advances give hackers a new way to cause damage.
  • Sharing services are becoming a popular method to help pay the rent or mortgage.
  • Another technological advance could transform the average homeowner into an entrepreneur if desktop 3D printers become readily available and affordable.
  • Roof repair and replacement may be even costlier as homeowners install solar panels. Decreasing prices and other incentives have increased the growth of the solar market. In the first quarter of 2013, solar panel installations for the U.S. residential market increased 53 percent over the same period in 2012.2 Net metering could present additional exposure as homeowners try to reduce their electric bill and capitalize on their solar panel investment.
  • Consider untapped markets: One-third of U.S. occupants are renters,3 but only 15 percent of property policies are renters policies.4 And trends indicate that the number of renters in the market is growing.

Through the use of data and analytics, we'll be able to improve our knowledge of the occupants of the homes we insure — and their changing risk profiles.

Insurers will also need to balance their goal to increase premium volume with the desire to select good risks or price poor risks accordingly. Predictive modeling and analytics can again be ­critical factors in solving this dilemma.

As every insurer works to overcome the existing and growing challenges, we'll need to be careful about how customers react. They'll be looking for a positive insurance experience at a time when they need it most. All insureds need a roof over their heads, and they rely on their carrier for help after a devastating event. Providing education and information about coverage and rating changes is vital to keep customers informed and satisfied.

After all, we're insuring the American Dream.

Jeff De Turris, CPCU, is assistant vice president of Personal Lines, ISO Insurance Programs and Analytic Services.

1. http://www.air-worldwide.com/Models/Severe-Thunderstorm-(Tornado,-Hail,-Straight-line-Wind)/
2. http://www.seia.org/research-resources/us-solar-market-insight-q1-2013
3. http://www.nmhc.org/Content.cfm?ItemNumber=55508
4. Conning study, 2013 Personal Lines Consumer Markets Annual