How to Navigate the Crippling Home Insurance Crisis
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Walking the money for the rest of us. This is a personal the show on money, how IT works, how to invest IT and how to live without worrying about IT. I'm your host, David stein.

Today is episode four eight one. It's titled how to navigate the crippling home insurance crisis in the fall of twenty twenty. The person I tried to take out a mortgage for a house we wanted to purchase.

We hadn't had a mortgage in over a decade, but thirty year mortgage rates were less than three percent. So the offer was too good to pass up. We started working with a mortgage broker that was recommended by our relator in phoenix, and the whole process went on for months.

And we never got A, A, A mortgage. We never got an approval. Turns out that the agencies in the U.

S. That purchase most of the mortgages and package these mortgage into mortgage back security, these are bonds. They change the rules, added new requirements for the self employed because of the pandemic.

They wanted to make sure that self employed people still had income to pay their mortgages. Because seventy percent of home mortgages in the U. S.

R. Bought by Fanny may and friday mac, those agencies guarantee the mortgage that are package into these bonds. So if there's a fault on the mortgage, these agencies, which are owned by the U.

S. Government at this point, have to basically make up the default or any shortfall. If the house is sold in, there is not enough to cover the mortgage that is, package into this bond. After several months of not getting an approval, we went to another mortgage broker. We knew that was a member of money for the rest of plus.

After a couple months, we had a brand new mortgage that we used to remote our home and two thousand because ultimately, we had to pay cash for the house because we couldn't get a mortgage in IT was a super competitive market. You basically had to do cashers. The mortgage originator was finance of amErica mortgage service CoOperation.

They obviously sold off the loan to fanning may or pretty mac, and then they saw the service rights to chase even though Fanny man and pretty mac and other U. S. Agencies buy most of the loans, guarantee most of the loans, package them into mortgage back securities.

There are other companies that actually service so that who you make your payment to and i'll make your payment to chase. Since i'd been over a decade, i'd been used to just paying my property taxes in my insurance, like we do for a cabin here in idaho directly to the company. But when you have mortgage bin large, they want to handle making sure the taxes and the insurance is paid so that binyamin pretty max interest are protected.

And so that's one of the other things these mortals ices do. They maintain the ego account to a part of your mortgage payment, goes into this esco account and out of that esco the property taxes and the insurance is paid. As a result, I got a little lazy and didn't really pay attention when apparently email was sent by our home ensure safe code, that they were increasing our policy rate, that new inventory win in.

In fact, beginning in march IT, wasn't until early April, I got to notice from chase that our mortgage payment was being increased two hundred dollars a month. I was learning asted. We have a fixed raight vantage at three percent.

Turns out our home ensure safe code had increased the policy rate seventy three percent in one year. I did some research, turns out the year prior, they increased the rate forty percent, even though in that case the increase the value, the dwellin coverage by fifteen percent. Two years ago, we were paying around twelve hundred dollars for home insurance for house and two thousand.

Now they weren't close to three thousand dollars. We're not the only one seeing this. There's an article in the new york times where a relator there that covers the jupiter, florida area says thirty of the one hundred houses they ve sold in the last year.

The people that sorted was because they couldn't afford to ensure the house anymore. The rate had gotten so high. S M. P global market intelligence estimates that owner occupied houses, the premium rate for home insurance increased eleven percent on average nationally in the past year.

Now i've seen other data that it's up twenty three percent from january twenty twenty three to february twenty twenty four. In some states such as lousianner, the average home insurance increase is closer to what I saw with our sixty three percent were at seventy two percent increase in one year. Pretty mac, the U.

S. Agency that that buys many of the U. S. mortgages. Their data shows that the typical home owner was paying a thousand eighty one dollars or home insurance in two thousand eighteen. That's about what we were paying in twenty twenty two. In twenty twenty three, IT was fifteen hundred and twenty two dollars. So upwards of forty percent increase in five years will take a look at why home insurance premiums are going up so much in this episode and what we can do about IT.

But one of the things I thought about is, well, with these super big increases and home insurance that should flow through to the consumer pricing, dex, the measure of inflation in the us, turns out, is not even included only type of home insurance has included in the basket of good and services that make up the consumer Price index is rental insurance for renters just further personal goods, the buyer of labor statistics that calculates the consumer Price index, they use what they call a rental equivalence approach and measuring Price changes for owner occupied houses. We've discussed this in terms of home Price increases aren't included in CPI because a house is considered an investment. It's not A A consumer good or service.

What they do is a include rent of apartments and then they ask home owners what they would charge if they were going to rent their owner occupied house. And that's one reason that estimate what homeowners believe the owners equivalent rent that is kept inflation higher than expected because even though home Prices have stabilize somewhat and apartment rent of actually declined some based on new leases, many hookers still believe if they can get more, more to rent their house. But I didn't realize that those same home owners, what they're paying for home insurance isn't included in the consumer Price index.

IT is included in the personal consumption expenditure Price index, which is used to calculate GDP gross domestic product, the measure of economic output in the us, but in the CPI home owners insurance premiums are not included. Before we continue, let me post and share some words for one of the weak sponsors. Net sweet quick math.

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The reason why homeowner insurance is increasing is because home insurance companies that sell these policies to consumers, they don't keep all the risk on their books. They will sell off some of that risk. Theyll buy insurance for themselves from reinsured. And in areas where there have been major natural disasters, reinsurer have dramatically increase the Price of those reinsurance premium. In fact, reinsured are going through that process now providing new premiums to the underlying sures was the journal reported on a homeowner near houston that has been dropped twice by different insurance companies, which is one of the other chAllenges.

Insures are pulling out of some regions because they don't want to take the risk anymore, but this particular hooo has seen his insurance rate triple thirteen thousand dollars per year to ensure a twenty two hundred square foot home built in the one thousand nine sixties. But it's in an area that was impacted by hurricane vey as well as a storm last year. Home insurer by these reinsurance policies to limit the risk.

And those reinsurer are giving double digit increases to the insurance companies. The luise ana citizens plan in luise ana, which I believe is the the state sponsored plans out of a bear bones insurance plan if you can't find insurance elsewhere. So a sixty three percent increase in policies to homeowners, and they said IT was almost totally a result of the increased cost of reinsurance.

David duffy, who is the head of global clients at the reinsurance broker guy carpenter, said the whole premise of the reinsurance industry is that you can be a florida or a lousianner commoner ensure, and you can spread your very concentrated catastrophic risk to the global insurance market. You're selling commoners insurance in florida, pretty concentrated risk, and so you sell IT off to reinsure, but all insurance do this. Brian snider, who is senior director of fit ratings, said that reinsured, in many cases were passing on increases to the underlying insurance companies of thirty, forty, fifty sent in the past year because the reinsurance profits were down and they weren't seeing the level profitability that they want.

Many years ago, when I was an institutional advisor, I would often take a trip to the new ork other areas and just meet with hedge funds. I was chief investment strategist at a firm. Hedge fund managers are smart. They always had interesting comments, and I remember one heads from managers talking about how much they like to invest in reinsured because one of the things they found after a major disaster insures have the pricing power to increase premiums to their insurance company clients. And we're seeing that now the profitability of reinsured is actually increased.

Its improving, not a bad business, which your half way does reinsurance because they have found IT so profitable David fan dro, whose head of strategic advisory at the reinsurance broker, Howard rees, the market restructuring shifted a lot of the risk of relatively frequent catastrophe pes back to insures. Reinsurer, by and large, have stood their ground since then. So what happened is we had natural disasters. We ensures that had taken on some of that risk, had to pay out to cover the losses. Their profits were down.

They have raised premiums upwards of fifty percent so that underlying property, casually companies had to raise their premiums ms to home owners because the reinsurance companies to matic ally increase their premiums to the property and casually companies and the mcDonald, who is coach chief executive officer at cyprus property and casually says, when you've got grape fruit sized hail coming down, that does serious damage to a roof, no reinsure is willing to take on that risk. In episode four forty four last year, we looked at whether natural disasters were increasing. And we look at some studies, some which we're produced by the I M.

F, others comments by reinsured, and they found that while forest fires haven't really increased, earthquakes haven't really increased, what has increased our hydrological events, mostly thunder storms and hurricane, and that is a function of climate change as the average temperature increases, say a one degree increases, that increases the air capacity to hold water vapor by seven percent. And so there are more thunderstorms dumping huge amounts of water. Tomas blanco's, chair of munich e.

Rees reinsurance committee, say climate change is taking an increasing toll by a large insurance companies are conservative businesses. There's over twenty six hundred property and casually insures in the us. Those that fail in any given year are a small fraction of one percent.

Many insurer have been in business for over two hundred years, including many mutual insurance companies that are owned by policyholder. They're not publicly traded. They're not owned by hetchy.

They're owned by policyholders. And I prefer when IT comes to buying a single premium immediate annuity ity to purchase from a mutual insurance company. So there isn't any other monday other than to keep in existence going for a there is no earnings target.

They have to meet or be to keep their publicly traded stock from falling. They have different incentive to stay alive to run in insurance company in a conservative way that IT continues, and they can do so for the benefit of their policyholders. The way the economics for insurance companies work, property casually insures.

This is analysis by Jerry, the adora in the insurance journal, a typical property and casually ensure once a direct loss ratio of seventy percent, so the premium is set to where seventy percent of that premium in a given ear is paid out, the losses and other thirty percent is used to cover the Operating expenses of the insurance company. And then there's about eight percent of investment income on top of that, that generates a profit for the insurance company in a given year. A good year is the losses are less than seventy percent of the premiums received. In a bad year, the losses are greater than seventy percent.

The adora pointed out in his article that in twenty twenty three, the direct loss ratio of a number of insures in IOS good mutual, one of these companies owned by the policyholders, two hundred and ninety percent loss ratio in twenty and twenty three west field, two hundred fifty three percent farmers mutual hail, hundred and sixty four percent state farm, hundred and thirty seven percent loss a show in twenty twenty three, all state one hundred and six percent there were more ensures that that went under still a very, very small amount in iah because storms are greater, the ice storms and more thunderstorms. But when you have those type of s ratio, ensures can do two things, they can pull out and reduce their future risk or they can read home insurance premiums. They've done both around the country.

Many home owners are seeing their policies cancelled or there seeing seventy percent increases like we're seeing now. Some have said, well, it's very insurance companies fall because they're not regulated to the same extent property and casually insures are those companies are regulated by state regulators and any premiums s have to be approved by those regulators. But the reinsurance companies that Operate above that and they are not regulated by state regulators and so they can adjust their premiums at will.

But there is and they're also josh nap, who's executive vice president at gallagher north america, says the reinsurance market is not the tail that's waging the dog. The fundamental issue is the heightened level of losses in the system associated with home insurance. Before we continue, let me pause and share some words from this week.

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There's also the fact that home Prices increased and the cost of repairs have increased due to the overall surge of inflation that we've had in the last few years, which was a function of the money supply increasing forty percent from twenty twenty three, twenty twenty three, and that was a function of massive deficit spending, along with the federal reserve purchasing government bonds to quantitativity. In the combination of those two, basically monotones the dead and and pushes out cash into the economy. The money supply checking account saving accounts, retail money market mutual funds, dollars points increase forty percent and that drove up home Prices.

And in now it's driven up the cost to repair those homes to IT isn't just natural disaster that is having an impact, but this is other Price drivers, the higher Price of homes, higher Price repairing ing those homes that also contribute. So what did I do? Well, I went to my homework, or insurance broker.

In this case, there was policy genius, a company that was a long time sponge to the podcast. I detail them, and we set up an appointment. And a bit out, I expressed the frustration of my three thousand dollar homework or returns policy, and I had a call with them and they said five companies turn them down, including progressive travelers and mercury.

They wouldn't ensure a house because IT has a flat roof and flat roof houses. If there's a major thunderstorm, they can leak, they can sag and they wouldn't ensure the house. I went to our independent agent in idaho that we have a cabin insurance from an an or no truck there.

She's still trying to find a quote for our house. Now that's pretty sobering. As of a week ago, I have the seventy percent increase in our home and terms, and I can't get a quote for any other company.

They won't even ensure the house that got the poli thinking long term, I don't know. We should have a flat roof house in arizona. So what do we do then if you're seeing a big increase in your home insurance? But first, we have to recognize the risk.

I hadn't considered that having a flat roof house in a thunderstorm prone area and we get big monsoon storms in the summer aizen a they can drop inches of rain at one time and hail that that's a liability compared to a slatted roof house. So if to recognized the risk, we have to recognize that if our home is in a threat where there are more storms, including hurricanes, we have to recognize that because of climate change, there is a greater risk of flooding due to thunderstorms. What's interesting though, in terms of risk perception, this is from a survey by the insurance information institute.

They found that thirty two percent of home months reported being impacted by weather events. In the last five years, sixty eight percent hadn't been impacted. But if those that had ninety two percent believe that they'll be impacted by weather events in the next ten years, they realize, oh, this is a risk.

But at the sixty eight percent of homeowners that hadn't been impacted by a weather event in the last five years, only forty four percent believe they will be impacted by an adverse weather event in the next decade. There is some recency biased. If you've had a flood or some other hailstorm, you recognize the risk is there and it's likely to occur again.

But if you haven't, you'd need to still recognize things have changed in terms of the climate, and those freak storms can happen to you. The other thing that is driving up insurance cost and reinsurance cost is that more people are moving to areas that are thread by whether if you look at areas that have growing population, much of its in the southeast texas, florida, georgia, north CarOlina, a areas that are impacted by both thunderstorms in hurricanes. The undersigned are the number one concern of homeowners based on that survey.

And IT is the most common and most damaging natural catastrophes, U. S, according to the national oceanic and atmosphere administration. So the first thing we do is we recognize the risk that IT has increased and understand the risk of where we live.

Now that might mean moving if the the insurance rates are too high. That's what related and fraud a said thirty out of the hundred people that they saw their house. They are moving because that the rates were too expensive.

Second thing we can do there a shop around. That's what i've done. I've gone to policy genius. See if you can find something.

I've gone to my other independent insurance agent and I, can you find something now? IT turns out the policy genes, after saying they five companies had turned us down, they found one openly that has rock ridge insurance who have never heard of underwriting IT there, a member of the clear blue group, which I haven't heard of either, but apparently rock ridge is rated a minus, but they're willing to ensure our home. Now the the dwelling value they put IT is half of what safeco had.

But they also say that they'll guarantee the replacement up to five million dollars. So i've scheduled call tomorrow with policy genius to to understand how how this replacement cost works because our house is worth more than what the insurance company says. But even if we raised the the base level in terms of what the dwellings is were doubled IT IT seems like the policy premium will be lessen three thousand dollars.

So the second thing we do is shop around, try to get other quotes, see if we can get at lower palestine. Genius was able to find a lower rate on our car insurance, which is a very different topic. But you're also seeing those double digit type increase for a car insurance, and we've seen twenty, thirty, forty person increase on what we were paying to ensure a car.

The third thing we can do with regard to home insurance is potentially self ensure. That survey by the insurance information institute found that twelve percent of homeowners have gone without insurance, and the home owners that are doing that are those that make the least amount of money. Twenty percent of homeowners in the survey had household income of lesson forty thousand hours per year.

But that cohorn made up almost half of the non home insurance buyers because you're gona afford IT if you're getting A A policy quote of ten thousand dollars a year or hire article in the washington post, where a hommony near the monti bay in california, sanda crews colony her home and turns company with state farm. State farm has pulled back in california, they say. State farm says only two percent of policies have been cancelled.

But this homeowner was getting quotes of ten thousand dollars, seventeen thousand dollars, twenty five thousand dollars to ensure her house and can afford IT. And so IT sounds like she's going to do without others have done the same thing where they buy insurance policy that that just much less expensive. Rona, for ruhr colonies, for the financial times rote about this.

Their experience in their family, they have a townhouse in brooklin. They've seen also major Price increase in their home insurance after shopping around. And they said after doing that, there are two choices they could take out of policy with a handful of luxury insures. They would sell greater coverage than what they need at a Price they couldn't afford. Or they could get a bare bone policy, they would only ensure about a third of the value of their house, and that's what they did.

And then they were out, bought, fireless, extinguish and decided, well, if the house burns down, the value will be in the land and they'll go move somewhere else, which is a risk if you are self ensuring and your housework ns down, that is a huge risk, which is why we use insurance for this tail risk, and it's why ensure and companies use reinsurance for terrorists, these extreme, usually rare, by becoming more common events. And that's just the economics. It's fallout of inflation and climate.

Those combined have LED to this home insurance crisis in the U. S. Hopefully, your home insurance company hasn't dropped you.

You can get a reasonable policy rate by shopping around and you're not forced to self sure or to move in order to come up with a way to continue afford living in a house. That's a discussion of what's going on with home insurance abroad. Forty ty one.

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