Hurricanes, Tornadoes, Fires & Sky-High Hazard Insurance Costs! Beware! SOLUTIONS!

Main Reason Why the Economy Boomed in the 1980s – Leg Warmers!

One of the main reasons we saw an enormous economic boom in the 1980s was the invention of leg warmers! It turns out that women had been horribly constrained for centuries by cold shins and calves, and when leg warmers surfaced – BOOM!

OK…the other main reason why the 1980s boomed was the deregulation of transportation (truck and rail), airlines, and energy in the 1970s. When the government stopped “protecting” us from high prices, new entrants surged into the industry, production surged, and prices plummeted.

I personally remember 85 cents per gallon gas and $25 Southwest Airlines tickets. And yes, this relates to insurance costs.

Florida = Hurricanes; Texas = Tornadoes; California = Wildfires

JVM is licensed and active in many states, including Florida, Texas, and California – and these three states in particular are seeing massive increases in hazard (homeowners) insurance costs, largely related to these natural disasters. Homeowners who are clearly outside the paths of those potential natural disasters are not seeing their costs rise nearly as much.

In CA, for example, some of our clients have seen their insurance costs triple and quadruple – when their homes are located near open space where fire risks are high. And Florida now has the highest insurance costs in the nation, averaging $6,000 to $8,000 per year, depending on the source. Interestingly, Florida is followed closely by “tornado” states like Oklahoma.

Insurance Costs Are Killing Transactions!

Insurance matters so much right now for those of us in the mortgage and real estate industries because the sky-high rates are killing transactions. This is both because buyers are walking away from properties when they see how much their insurance premiums will cost and because borrowers sometimes lose their ability to qualify solely because insurance payments end up much higher than expected.

We have a client in CA, for example, who was expecting just over $100 per month for insurance, based on recent premium costs, but instead is getting quotes in the $350 range because the home he wants to purchase is about a quarter mile from “open space” that is deemed a high fire risk. I have blogged about this a few times, and there are much more egregious examples in the media where insurance costs are up by factors of 4 or 5 or where insurance is unobtainable altogether.

Causes of Sky-High Insurance Costs

Politicians love to blame everyone but themselves for skyrocketing insurance, and here are a few of the ostensible culprits.

1. Climate Change. Poor climate change gets blamed for everything, but alas there is little statistical proof of an increase in tornadoes and hurricanes, and CA’s fires are largely a result of poor forestry management.
2. More building in high-risk areas (in fire and hurricane paths). This is a huge factor that accounts for the much higher insurance payouts we now see – that are often attributed to climate change instead.
3. Inflation. This too is a major factor, as construction costs have risen by anywhere from 25% to 50% over the last several years, but that does NOT account for the four and five-fold increase we’ve seen in some premium costs.
4. Poor forestry management. This is a CA cause more than anything else, but in Gavin’s defense, many of California’s fires are in the grassland regions where there is no forest to manage.
5. Price gouging. Some insurance companies are taking advantage of the current situation/shortage of providers and charging abnormally high prices. This, however, would be temporary – if more entrants were enticed into the high-cost states.
6. Insurance Fraud. Insurance fraud is way up as well, and that too is driving up premium costs.
7. Legal Abuse. Excessive litigation and enormous legal settlements have always driven up costs in many industries – and hazard insurance is just one of them (pharmaceuticals, healthcare, and manufacturing suffer similarly).

But, here is another factor that politicians never blame: themselves and/or regulators. Excessive regulatory scrutiny keeps new entrants out of the industry, and it allows existing players to charge more in many cases, when they have regulatory approval. If you don’t believe me, please see the energy, transportation, and airline industries in the 1970s…

Solutions

Here are a few solutions to prevent transactions from blowing up.

1. Full Upfront Disclosure by Listing Agents. If listing agents have so much of an inkling of what insurance costs might be, if they have increased markedly, they might want to disclose them to prevent both sticker shock and qualification issues.
2. Shopping for Insurance ASAP. Pre-shopping for insurance in general areas might work in Florida and Texas, for example, as the areas susceptible to hurricanes and fires tend to be broad. But, in CA it is much more difficult, as properties only blocks from each other can have significantly different insurance premiums, depending on proximity to fire-prone areas. So, when pre-shopping is not practical, buyers should shop for insurance as soon as they get into contract.
3. Seller Credits for Insurance. This is an excellent idea suggested by an insurance broker we work with often. If insurance costs will likely be so high as to be off-putting for potential buyers, sellers might want to offer credits to cover the cost for the first year or two, after which time costs may very well be much lower.

And here is a solution to bring costs down in general: you might write a letter to your local politician that says something like this: “Dear Politician, please stop protecting me from higher prices so I can pay much lower prices…” (let me know how that goes).