Homeowners Insurance? It's not so bad.

I read an article by an amateur data analyst who only seemed able to discover data that matches his hoped-for outcome, which was the need to reduce carbon emissions and by doing so, the ancillary benefit is to save homeowners insurance. What an absolutely inane analysis. I don’t like being so direct, but this lack of brain usage needs to stop. And it’s not just climate wishers but many insurance company CEOs that need better brains too.

If climate change is the driver of homeowners losses, then consider for a moment the momentum involved with climate. The climate is huge. It makes slowing a semi going 100 mph look like child’s play. To slow climate change in time to save homeowners insurance, assuming the proposition has any merit, is proof of stupidity. By the time the climate is “fixed” so as to save homeowners insurance, all the homeowners insurance companies will be dead, as will be all current homeowners.

But some insurance company CEOs don’t think. I read quote from one who said the new homeowners captive models can’t work because their concentration of risk is too high. He may have a point, assuming the homes are underwritten according to the way carriers have traditionally underwritten homes. But some of these new markets are not underwriting homes the same way and the forms are different. Therefore, the concentration of risk calculation is materially different and it’s not the risk that used to be, assuming the new markets execute their models correctly. My point is that people need to think through the problems.

Moreover, it is not as though traditional carriers don’t have a concentration of risk issue. I suspect one reason for so much upheaval in the homeowners market is carriers, greedy for growth, wrote too much property in specific geographic areas and now they’ve realized they have a problem. But they would much prefer to blame the problem on regulators and climate change. And I know some carriers have committed this mistake. For example, one carrier who historically has never made an underwriting profit decided to load up on Florida homeowners a couple of years ago. They’re now losing even more money.

Another example of why it’s not climate change causing most of the homeowners losses: it is people moving from bucolic weather states to better states with worse weather. North Texas has always had bad weather. Hail, tornados, wind, heat and humidity and yet, the population keeps expanding at an amazing pace. Previously, the hail hit prairies and cows. Now it devastates McMansions. The simple fact that it’s impossible to get the data on how much of these losses are due to climate versus population changes is unacceptable. The NAIC should be providing this data, or at least their analysts should be able to figure it out.

And it is not that homeowners insurance cannot be fixed. If insurance companies would offer legitimate discounts for hail proof roofs and change their underwriting to focus on loss mitigation, homeowners loss ratios would improve significantly. I have many agency clients who can identify house after house whose owners have spent the money to reduce their exposure to loss and yet the carriers continue blanket underwriting. Blanket underwriting is another example of not using brains. It’s another reason the new markets possess a competitive advantage over the traditional markets because they’re thinking through the problems. No one needs an insurance company underwriter that won’t use their brain to underwrite the risk individually.

When I was a homeowners underwriter writing multi-million dollar homes in wildfire zones, underwriting homes individually made us a fortune. It was easy pickings too because the other carriers were lazy then too, though the blanket underwriting today surpasses all levels of lazy thinking I’ve ever seen.

And it is not a reinsurance issue. Relying on the “reinsurance” is the cause of all our problems is lazy thinking too. How can reinsurance be the issue when the carriers mostly buy reinsurance from themselves?

Problems are never solved with bad analytics driven by emotions. The homeowners loss ratios are not, with just a handful of state exceptions, major problems. The loss ratios are problems around the edges with fairly simple and cost-effective solutions. But this requires taking the time to truly study the data and quit talking about unimportant factors that cannot be controlled or addressed before everyone dies. Climate change, how new markets can’t possibly succeed, and all homeowners is bad are red herrings designed to avoid taking responsibility for solving the problem at hand.

In states with propensities for catastrophic weather, the solutions are more difficult, but completely surmountable. The forms likely need to be changed. A number of DIC options exist that offer flexibility to fill the gaps. Better management of concentration of risks and risk mitigation is required. These two points are common sense, use your brain opportunities. No one needs AI to solve these points. Good human, old-fashioned underwriting will work.

The real question is whether any carriers want to seize the opportunity.

Chris is an insurance industry consultant known for creating highly accurate forecasts of carriers’ future actions and the industry’s overall future course.

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