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High Net Worth

Own a house on the beach? Chances are you are 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

Risk Management

The Profession: Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

R&I: How did you come to work in risk management?

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

R&I: What is the risk management community doing right?

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I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

R&I: What could the risk management community be doing a better job of?

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

R&I: What was the best location and year for the RIMS conference and why?

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

R&I: What emerging commercial risk most concerns you?

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

R&I: What insurance carrier do you have the highest opinion of?

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Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

R&I: What have you accomplished that you are proudest of?

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

R&I: What is your favorite book or movie?

Favorite movie is definitely “Good Will Hunting.”

R&I: What’s the best restaurant you’ve ever eaten at?

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

R&I: What is the most unusual/interesting place you have ever visited?

The Grand Canyon. It is just so vast. A close second is Stonehenge.

R&I: What is the riskiest activity you ever engaged in?

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A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

R&I: If the world has a modern hero, who is it and why?

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

R&I: What about this work do you find the most fulfilling or rewarding?

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

R&I: What do your friends and family think you do?

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]