High Net Worth

High Net Flood Risks

Whether high net worth homeowners take up sufficient excess flood coverage is a point of concern.
By: | April 9, 2018 • 5 min read

From the Hamptons and Malibu to Miami and Palm Beach, America’s high net worth class likes building lavish homes on the water.

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Yet these multi-million dollar estates are exposed to growing risk from sea level rise and increasingly powerful storms.

The fact that these structures are generally non-primary residences makes them even more vulnerable, and their big price tags can make them expensive to fully insure. Many of these homeowners are turning to excess flood insurance policies while others are carrying bare-bones coverage and keeping their fingers crossed.

Flood Risk on the Rise

Coastal areas have always been at a greater risk of flood. Those risks are rising. According to the National Oceanic and Atmospheric Administration, sea levels rise at a rate of an inch every eight years.

This pushes storm surges farther inland than they once did and is creating more frequent nuisance flooding. Research from Zillow estimates that 1.9 million homes worth more than $800 billion are at risk of being underwater by 2100 due to climate change. The biggest risks are in Florida, New Jersey, Massachusetts, California, South Carolina, Hawaii and North Carolina.

Lisa Lindsay, executive director, PRMA

The Private Risk Management Association (PRMA) surveyed agent and broker members in 2017 about their high net worth clients and found nearly 54 percent were unprepared for flooding.

And while more than 60 percent said catastrophic weather events like hurricanes and floods kept their clients up at night in 2017, nearly three-quarters said they wouldn’t increase their preparedness levels.

“Many still think it’s not going to happen to them. It’s just a mindset that people continue to have,” said Lisa Lindsay, executive director, PRMA.

In recent years, weather events have flooded areas previously not considered high risk. The U.S. has now experienced more than two dozen 500-year flood events since 2010, including Hurricane Matthew in 2016 and Hurricane Harvey in 2017, which caused $125 billion in damages and catastrophic flooding in Houston.

In 2012, Hurricane Sandy flooded thousands of homes in the Northeast that previously were never considered at risk for flooding.

Going strictly off FEMA flood maps to gauge risk is an “outdated way of thinking,” Lindsay said. A study in Environmental Research Letters found more than 41 million Americans live in a 100-year flood zone, more than three times as many as the FEMA estimate.

Some FEMA flood maps are years outdated and don’t account for how buildings are constructed, rapid rain accumulation and population growth. Larry Larson, senior policy adviser and director emeritus, the Association of State Floodplain Managers, told Bloomberg the maps “will always be obsolete the day they come out.”

Moving to Excess Flood Insurance

PRMA is working with the industry and high net worth homeowners to promote better ways to assess individual risk exposure. The PRMA survey found half of homeowners living in high-hazard areas didn’t take steps beyond purchasing basic flood insurance, and less than 20 percent purchased excess flood insurance.

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This often leaves a big gap in coverage for high net worth homeowners because NFIP limits are only $250,000 for structures and $100,000 for contents.

“That’s obviously not going to cut it if you have a $10 million house,” said Will Van Den Heuvel, senior vice president, personal lines, Cincinnati Insurance Companies.

Excess flood insurance is available in most areas, Van Den Heuval said. Cincinnati offers high value home insurance customized for high-end properties with deductible options up to $500,000. Many excess policies cover flood and multiple risks for primary and vacation homes with coverages up to $5 million for structures and $2 million for contents.

Despite the availability of coverage, high premiums and low perceived risks can still leave some questioning the value of their policies, said Charles Williamson, CEO, Vault Insurance. High net worth individuals can be just as price sensitive as general consumers, and many have raised their deductibles, lowered coverage or even gone without coverage at all.

“The discussions are the same, the numbers are just larger. They might wonder why they’re paying $100,000 per year for hurricane insurance when they haven’t had one in years,” Williamson said.

Moving Beyond Insurance

Many municipalities update building codes after major events to reduce the risk of damage in the future. Dade County in Florida imposed significant building codes in 1994 after Hurricane Andrew, and the rest of the state followed suit between then and 2002.

While those codes are some of the most rigid in the country, they’ve been credited with reducing damage in subsequent storms. Yet in parts of the Northeast, such as Long Island, there aren’t any particular hurricane building codes.

“Ultimately, the closer you are to the water, the more expensive it becomes to the point where customers may do the calculation that it’s just not worth it,” — Will Van Den Heuvel, senior vice president, personal lines, Cincinnati Insurance Companies

“It’s very much market by market depending on elevation and how the home is built,” Williamson said.

Flood policies are usually based strictly on flood zones and elevation of the home, but other variables can come into play in the private market. Most high net worth homeowners buy a FEMA policy first and then purchase excess coverage in place to fill the gap, Williamson said.

Increasingly sophisticated mapping and pricing technology is enabling excess coverage carriers to better price risks depending on elevation and design, meaning many policies can be priced on a house-by-house basis.

“But ultimately, the closer you are to the water, the more expensive it becomes to the point where customers may do the calculation that it’s just not worth it,” Van Den Heuvel said.

High net worth homeowners are also taking measures beyond flood insurance.

New construction is putting homes higher above sea level. Mechanical equipment, such as HVAC units and hot water heaters, are being placed on higher floors. And in Florida, many beachfront coastal homes now have “floodable” first floors used for parking and patio space with livable space placed high enough that most storm surges can run beneath the home.

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There are also inflatable water barriers that can be used to keep out floodwaters up to three feet high. Innovative yet expensive designs can also reduce risk. In “dry floodproofing,” walls, doors and windows are made watertight to keep water entirely out of the building.

With “wet floodproofing,” the building is designed to let water flow through the building and minimize damage by moving power outlets up the wall. Whereas flood risks can’t be fully eliminated, homeowners can reduce the cost of potential damages.

“There are so many things that people can do. We’re trying to change the mindset that all they can do is buy insurance. There’s plenty to do to minimize the losses, and it’s necessary given the frequency of disasters,” Lindsay said.  &

Craig Guillot is a writer and photographer, based in New Orleans. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2018 Most Dangerous Emerging Risks

Emerging Multipliers

It’s not that these risks are new; it’s that they’re coming at you at a volume and rate you never imagined before.
By: | April 9, 2018 • 3 min read

Underwriters have plenty to worry about, but there is one word that perhaps rattles them more than any other word. That word is aggregation.

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Aggregation, in the transferred or covered risk usage, represents the multiplying potential of a risk. For examples, we can look back to the asbestos claims that did so much damage to Lloyds’ of London names and syndicates in the mid-1990s.

More recently, underwriters expressed fears about the aggregation of risk from lawsuits by football players at various levels of the sport. Players, from Pee Wee on up to the NFL, claim to have suffered irreversible brain damage from hits to the head.

That risk scenario has yet to fully play out — it will be decades in doing so — but it is already producing claims in the billions.

This year’s edition of our national-award winning coverage of the Most Dangerous Emerging Risks focuses on risks that have always existed. The emergent — and more dangerous — piece to the puzzle is that these risks are now super-charged with risk multipliers.

Take reputational risk, for example. Businesses and individuals that were sharply managed have always protected their reputations fiercely. In days past, a lapse in ethics or morals could be extremely damaging to one’s reputation, but it might take days, weeks, even years of work by newspaper reporters, idle gossips or political enemies to dig it out and make it public.

Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

These days, the speed at which Internet connectedness and social media can spread information makes reputational risk an existential threat. Information that can stop a glittering career dead in its tracks can be shared by millions with a casual, thoughtless tap or swipe on their smartphones.

Aggregation of uninsured risk is another area of focus of our Most Dangerous Emerging Risks (MDER) coverage.

The beauty of the insurance model is that the business expands to cover personal and commercial risks as the world expands. The more cars on the planet, the more car insurance to sell.

The more people, the more life insurance. Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

As Risk & Insurance® associate editor Michelle Kerr and her sources point out, growing populations and rising property values, combined with an increase in high-severity catastrophes, threaten to push the insurance coverage gap to critical levels.

This aggregation of uninsured value got a recent proof in CAT-filled 2017. The global tally for natural disaster losses in 2017 was $330 billion; 60 percent of it was uninsured.

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This uninsured gap threatens to place unsustainable pressure on public resources and hamstring society’s ability to respond to natural disasters, which show no sign of slowing down or tempering.

A related threat, the combination of a failing infrastructure and increasing storm severity, marks our third MDER. This MDER looks at the largely uninsurable risk of business interruption that results not from damage to your property or your suppliers’ property, but to publicly maintained infrastructure that provides ingress and egress to your property. It’s a danger coming into shape more and more frequently.

As always, our goal in writing about these threats is not to engage in fear mongering. It’s to initiate and expand a dialogue that can hopefully result in better planning and mitigation, saving the lives and limbs of businesses here and around the world.

2018 Most Dangerous Emerging Risks

Critical Coverage Gap

Growing populations and rising property values, combined with an increase in high-severity catastrophes, are pushing the insurance protection gap to a critical level.

Climate Change as a Business Interruption Multiplier

Crumbling roads and bridges isolate companies and trigger business interruption losses.

 

Reputation’s Existential Threat

Social media — the very tool used to connect people in an instant — can threaten a business’s reputation just as quickly.

 

AI as a Risk Multiplier

AI has potential, but it comes with risks. Mitigating these risks helps insurers and insureds alike, enabling advances in almost every field.

 

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]