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Climate Change and Homeowners Insurance Trends

by Eric Stroup, Director of National Sales / Licensed Agent

February 9, 2016

A tornado threatening a houseIt’s hard to predict what will end up making waves in insurance markets, but increasingly, it is waves themselves that are causing a stir. As weather events become more erratic and damaging, insurers have had to contend with increasing uncertainty and larger payouts. While the public at large still might not agree on its legitimacy, it’s definitely safe to say climate change has officially hit the insurance market.

As debate surrounding climate change has become louder in recent weeks, weather-related losses have risen in a silent, deep tide — catastrophic damages have amounted to approximately $131 billion per year between 2004 and 2013, as Mother Jones reports. Compare that to 1974 to 1983, when the cost of damage was just $10 billion.

Climate change is still relatively controversial, and while most insurance firms won’t risk issuing an official stance on the topic, they have had to contend with its impact. As the demand for supplemental homeowners insurance rise, so does risk, crippling payouts, and competition with large multinational firms. For any insurer, now is the time to determine how to best cope with increased uncertainty and growing number of claims — or else risk being priced out of homeowners insurance markets.

Remaining Afloat

As extreme weather events occur more frequently and incur greater destruction, insurers will be liable for even larger claims. As the Insurance Information Institute notes, the combined losses that resulted from hurricanes Katrina, Rita, and Wilma in 2005 totaled $64.3 billion.

The cost of similar catastrophes is expected to rise 40% over 20 years, and losses in dense urban areas could reach well upwards of $60 billion. To compensate, firms must update their policy structures, premiums, and forecasting models, or else risk insolvency.

But this has been a challenge. As NerdWallet observes, these destructive weather events are highly erratic and unprecedented — like the recent floods in Colorado that caused more than $2 billion in damages, according to CNN — making industry forecasts based on historical trends unreliable. Some insurers have had to hike premiums, make specific policy exclusions, or leave vulnerable markets entirely.

Fortunately, as Smithsonian Magazine explains, complex catastrophe models have helped somewhat to better predict risk, and the federal government has relieved some pressure with subsidized coverage through programs like the National Flood Insurance Program. However, other companies are incentivizing homeowners to reduce risk themselves.

Preparedness a Win-Win

As the Lawrence Berkeley National Laboratory observes, some insurers are offering discounts or premium incentives to customers who take measures that reduce the vulnerability of their properties to dangerous weather. This can include everything from installing window shutters in hurricane-prone areas, building fire walls in dry areas, or even storing valuable items in high places in areas at risk for flooding.

For customers, this both reduces the catastrophic impact of weather and results in significant savings. For insurers, it allows them to offer more comprehensive coverage, all while avoiding the high premiums that would adversely affect populations who rely on subsidized insurance. Always, the cost of rebuilding after massive storms is substantially larger than that of proactive prevention.

Competitive at Any Level

Unfortunately, increasingly severe weather seems almost certain, and climate change mitigation has become a cottage industry in its own right, according to Insurance Journal. Naturally, the demand for homeowners insurance is sharply on the rise, but this often puts smaller agencies into direct competition with multinational carriers.

However, there are many opportunities for generalist agents to find leads outside of hot/cold personal networks or thankless cold calling campaigns, empowering them to remain competitive in this heated environment. Often, it’s helpful for insurers to remain in close contact with property developers who understand the vulnerabilities of certain areas and frequently refer clients.

Additionally, home insurance lead generation companies offer a reliable stream of actionable prospects at the precise moment they reach the decision stage of the purchasing funnel.

While climate change poses serious challenges for insurers to provide affordable, comprehensive coverage, there are already many opportunities for agents to better engage with leads that are in desperate need of their help.

(Main image credit: Unsplash)

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