What gaps are emerging in high-net-worth coverage?
Properties often make up a significant portion of HNW family assets – and in a changing climate with more frequency and severe natural catastrophes, protecting these property assets has become more important than ever. According to Aon, as hurricanes become more prevalent along the Gulf and Atlantic coasts, the majority of households in the benchmarking study are proactively insuring their property against wind damage. In fact, 95% of all properties that are located in hurricane-prone areas like Florida and Texas are insured for damaging hurricane winds.
“That’s wonderful to see,” Ott reacted. “I think that people see the devastation that these events can cause. They know when they are buying a property in a state like Florida, Texas, or anywhere it’s coastal, that having wind protection is going to be key to properly protecting their assets.”
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However, there are still significant coverage gaps when it comes to other weather-related perils. Wildfire, for example, is the third largest cause of loss accounting for 8% of all property claims, behind water damage (46%), and wind and hail (15%). As the threat of wildfire continues to grow, that 8% is expected to increase, especially in fire-prone states like California.
“Since 2017, we’ve had a series of the largest fires on record, burning millions and millions of acres of land and well over 10,000 structures in the state of California alone,” said Ott. “The insurance carriers that we work with in the state have faced great losses and they’re unable to get the proper rate that they need to have a sustainable and profitable share of business. And so, what we’re seeing is a lot of admitted carriers are pulling out of California, so if our clients have coverage, it might be non-renewed, and we need to find them new coverage.
“Another thing we’ve seen since the pandemic started is that a lot of people have been purchasing new homes in California. The seller may have purchased their home five-years-ago, and they have an admitted policy that’s got great coverage with really good pricing. They’re selling their home, so the new purchaser has to procure insurance, but when they try to do that, they’re either unable to get insurance coverage, or it’s very expensive and the coverage is limited. So, we’re seeing definite problems in the state.”
One way that Aon Private Risk Management is helping clients with wildfire risk to secure better coverage or reduce the premium impact is by guiding them through basic risk management, like installing ember-resistant venting, fire-resistant roofing, and clearing flammable vegetation from around their properties. Some of these mitigation efforts require a sizeable investment, but as Ott pointed out, they can be successful in reducing the likelihood of a total property loss.
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Flood is another area where there are coverage gaps. Flood is excluded from property contracts, so HNW property owners are recommended to carry, at minimum, primary flood (which normally has limits up to $350,000 for structures and $100,000 for personal property), and to top that up with excess flood coverage. Of all properties insured by Aon’s family office households, 33% of residences are insured for primary flood, and 25% of these properties carry additional excess flood protection.
“Just look at Hurricane Ida last year. It started as a hurricane in Louisiana, and then it travelled up the East Coast and caused significant flooding in New England and New York. But our report shows that only about 25% of our clients in New York are buying flood coverage, so there’s definitely a gap there,” Ott told Insurance Business.
“There are these events that are occurring that are causing flood damage that we’ve never seen before, so with these erratic weather patterns, we’re trying to talk to our clients about the need for this one coverage, even though they might not be in what’s considered traditionally a high hazard flood zone. The question we’re asking our clients is: ‘Do you want to self-insure against flood? If not, to what level do you want to insure?’ So, I think both wildfire and flood are very important, evolving risks in the market that we’re trying to actively address with our clients.”