High Net Worth

Own a House on the Beach? Chances Are You’re Underinsured.

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

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.