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How to Solve the HO Availability/ Affordability Crisis (Part 1 of 2)

Author: Bill Wilson

In many states, it has become extremely difficult to find a viable homeowners market. In most states, even where markets are relatively abundant, the hard market has played havoc with premiums, resulting in affordability problems for many insureds. However, there are some simple things you and your clients can do to improve the situation. Why we haven't done them before is one of the great historical mysteries of insurance.


I'm reminded of a Miss Peach comic strip. In the first panel is an empty auditorium with a sign on the stage for a seminar called "How to Become Rich and Famous." The second panel shows a packed and rapt audience and the speaker's opening remarks: "There are no easy ways to become rich and famous." The last panel is an empty auditorium, save the lone speaker on stage.

Such is the case with the homeowners crisis faced in many states by many consumers. There are no easy ways, but there are SOME ways we can mitigate market conditions now and in the long term. As General Jimmy Doolittle once said, "The problem with Americans is that we're fixers rather than preventers."

(For some applicable statistical information from an IIABA study of the homeowners insurance marketplace, CLICK HERE.)

Now is the time to initiate a long-term crusade to prevent, as best we can, the conditions that now confront us, rather than trying to fix them through government or surplus lines markets or, worse, legislation. We can talk about "getting back to underwriting" and other nebulous concepts, but there are more concrete actions that can be taken. The solutions must be the responsibility of insurers, agents and consumers.

I'm going to editorialize a little bit, but my personal feeling is that our current predicament has evolved over a long period of time, perhaps decades. Years of underpriced and overly-generous homeowners policies, coupled with miniscule deductibles and, lately, increasing claims largely attributed to water damage and mold, have tightened the marketplace. Insureds who even report water damage claims are increasingly finding themselves facing nonrenewals.

So, what can we do? I'd suggest three things, only one of which really involves an "insurance" solution:

  • First, homeowners policies are too broad.  In most cases, an "insurance" solution works best when we offer products that protect consumers from potentially catastrophic, but infrequent, losses. That's what insurance is good at. Below, I'll give you a suggestion for how to tackle this in conjunction with the next "solution."

  • Second, deductibles are too small.  How many homeowners can't afford more than $250 for a deductible, particularly when you consider that the average homeowner only files a claim every 10 years or so? Let's face it, deductibles are GROSSLY inadequate to prevent small claims that drive up costs and result in nonrenewal or availability problems for consumers. It's called risk retention...look into it. More on this below.

  • Third, loss control is virtually nonexistent in personal lines. Alternative risk management techniques, particularly loss control (loss prevention and loss reduction), are not encouraged by the insurance industry, nor practiced by consumers by and large. There are some simple things that we can all do to improve loss experience, reduce rates, and make exposures more insurable. A sample tool is referenced below.

Who's to blame for the current homeowners insurance "crisis" (since we Americans feel compelled to point the finger at someone)? It's easy to place blame on folks like attorneys and mold remediators (and they deserve their fair share), but that's just the excuse du jour.

If you'll take a moment to consider the premises above, the answer is easy...WE are largely to blame. Companies have expanded HO coverages ("We cover on an 'all-risks' basis."), sometimes at the instigation of agents wanting more competitive products, to the point where, coupled with low deductibles, they serve almost as maintenance contracts. And we do little to promote, facilitate or reward homeowner responsibility for loss prevention.

Before we go on, perhaps we should consider a fourth problem to the three cited above. It's generally accepted that a relatively small number of people account for a disproportionately high amount of crimes. In other words, there are a lot of repeat offenders. The same is true of insurance claimants.

According to the Insurance Information Institute, 11.5% of homeowners file a claim in a given year. In other words, on average, a homeowner files a claim every 8-9 years. It seems, though, that some homeowners file a claim every 8-9 months.

For example, one of the largest direct writing homeowners insurers in the country sent a letter to policyholders who had submitted more than three claims in the past three years. According to the letter, only 1.5% of current policyholders had submitted 3+ claims in the past three years. However, this group accounted for over 20% of ALL claims payments!

According to another captive agency company, over the past five years, 2% of policyholders accounted for 18% of claims filed (the number was 30% in Florida) and 20% of claims payments (33% in Florida), yet they only generated 1% of the carrier's written premium. In other words, this group consisted of accounts half the size of the average insured, yet had claims ten times the average!

Perhaps the suggestions below can, in some way, get control of these "repeat offenders," but it might take more drastic action to place them in a facility that better reflects their risk of loss. They won't like it, but the other 98% will love the resulting rate reductions.

OK, with that being said, let's take a look at the three main premises above and what we can do about them....

Homeowners policies are too broad

According to the Insurance Information Institute, citing ISO statistics, over 80% of all homeowners property losses are caused by fire, lightning, windstorm/hail, water damage/freezing, or theft. Why, then, do we need policies that cover just about anything that happens other than earthquake, flood, and normal wear and tear?

Perils other than those listed above cause relatively few losses, but result in voluminous, hard to read/understand contracts (i.e., policies) that, to determine whether something is or isn't covered, too often require litigation and generate claims expenses disproportionate to the exposure. They also foster the attitude expressed by former California Supreme Court Justice, Malcolm Lucas, when he said, "No one knows what evil lurks in the hearts of men...but it's all insured." And, when confronted with the rare exclusion, many insureds are likely to say, "Well, what did I pay for insurance, then?!"

Admittedly, though, things can happen that can be potentially catastrophic. Therefore, what I'm suggesting is that we consider, in conjunction with the topic below, returning to a named perils approach, with an "all risks" "umbrella" or DIC option (broader perils, that is, not limits). Keep reading for some details....

Deductibles are too small

You own a car with an ACV of $7,500 and a $500 collision deductible. You own a home with a RC of $150,000 and a $250 deductible. In other words, an asset with 20 times the value of another has a deductible half the amount. Does that make sense? Does it encourage loss prevention, one of the principal purposes of a deductible?

In another article, we discussed some of the factors to consider when choosing how high a deductible one can reasonably bear. One of our faculty members made the following observation:

For homes in the $750,000 plus category, I've advised the local producers to offer their customers a $2,500 or $5,000 deductible and to compare the premium savings over five years to the cost of one or two years of interest for a home equity loan for such amounts. Most folks can repay the principal and interest in one to three years. Of course, with today's low interest rates, the advantages will stand out. In a 7 to 9% interest rate environment, it would still be a good deal. Remember to take into account the $500 or $1,000 deductible the insured would otherwise have to absorb.

It hasn't been that long ago that the "standard" deductible was raised from $100 to $250. I say it's time that the typical deductible was increased to something meaningful, say 1-2% of the value of the home. A flat $ deductible can still be used, but based on the Coverage A limit. It's doubtful that a $2,500 deductible would bankrupt most homeowners. (Note: An April 23, 2003 Wall Street Journal article indicated that many commercial lines insureds were now using deductibles 5-10 times those used just a year or two before.)

In the statistics cited above for the captive agency company, their study also showed that the average policyholder had been with the company for 13 years. During that time, 50% of them had NEVER submitted a claim, and another 25% had only reported one loss. So, using this example, half of their insureds would have experienced no difference between a $250 and $2,500 deductible (except a lower premium), and a fourth of them would have effectively contributed less than $200 per year.

I'd also suggest, as implied above, that coverage be applied on a two-tier basis...named perils for common losses such as fire, windstorm and water damage, and "all risks" coverage for the "unknown," but potentially catastrophic losses. Separate deductibles would apply as well, perhaps for many insureds $1,000-$2,500 for the named perils exposure for "controllable" losses such as water leaks and $250-$500 for "uncontrollable" losses such as tornados and hurricanes, but $2,500-$5,000 for "all risks" protection. Certainly, a deductible of this magnitude might not be easily borne by many consumers, but it's certainly an amount that can be financed if necessary...and most consumers don't seem to have a problem financing vehicles and other consumables.

Needless to say, I'm not an actuary or economist and the suggestions above are debatable. If you have thoughts on this subject, keep reading and I'll tell you how to share them.

Loss control is virtually nonexistent

Combine a low deductible with minimal consumer education about loss prevention and you'll find little, if any, incentive for insureds to seriously practice sound loss prevention.

In commercial lines, loss control services for larger and/or more hazardous risks are commonly offered by insurers. In fact, in some cases, compliance with loss control recommendations is mandatory to make a risk acceptable to the underwriter and failure to comply is often a grounds for cancellation.

Perhaps, considering the account size or sophistication of the market, this approach has not been pursued with regard to personal lines. I believe, however, that a risk management approach to controlling personal lines losses is an idea whose time has come.

In Part 2 of this article, we'll explore this concept in more detail and we'll provide a downloadable "risk management" guide and survey form that you can use with your clients.

In the meantime, do you have opinions, facts or other observations to share on the discussion above? If so, email them to and we'll add them here. Below are your comments, followed by Part 2 of this article....

As a fourth generation insurance agent, I always remember my father saying that the HO-1 policy with a $1,000 deductible was the best contract in insurance and would take care of 99% of the claims that occur. Your article seems to be making the same point and one I agree with. Isn't it sad, that most companies have withdrawn the product, and in some states (RI) it is no longer approved by the insurance department. Another difficulty, is that many mortgage companies or banks require an HO3 and will not approve a deductible above $500 or $1,000. Great article for us personal lines agents.

Matthew F. Clarke, AAI, Account Executive
Meredith & Clarke-Bank of Newport Insurance Services, Inc.
Rhode Island

Your article hits the nail write on the head. I concur 100% and have been telling companies the same thing for years.

Just a couple of comments. First re: deductibles. Higher deductibles are a necessity and will help the insurance company. But many companies do not give a big enough premium discount for choosing a higher deductible. For example, one carrier I have gives a 5% credit for choosing a $1,000 deductible in lieu of $500 on their homeowners policy. If the policy premium is $1,000, the premium savings is only $50. No way I will try to sell this to the policyholder! It is not a good buy! Companies need to make higher deductibles a more attractive buy for the client. Some do a good job on this but others do not.

Loss Control: A first hand example - I was standing by my clothes dryer one night while clothes were drying and the lint underneath the dryer caught on fire. I was right there so no damage was done. However I wonder why the insurance industry does not point out this hazard to clients. I wonder why the companies do not advise replacing water hoses on clothes washers with stainless steel hoses in lieu of rubber. I wonder why they do not strongly suggest every house have an outside water cutoff valve which can be cut off anytime the house is unoccupied overnight. They raise hell about the ensuing losses but do nothing about educating the clients to prevent or minimize the losses!

I will anxiously await Part 2 of your article.

– Henry H. Lowndes, Jr.
C. T. Lowndes & Company
Charleston, South Carolina

Kudos! In our area (Coastal SC) the agents and clients have been suffering from a tough homeowners market really since 1993. With the direct writers capacity (or appetite for HO) now being noticed by the consumers and the state of SC's insurance department, actions are beginning to develop. I agree with all your points.

I even brought the point of the HO form being too broad up at a coastal property initiative headed by our local association with 25+ carriers attending in 2002. However, all carriers relate the "recent" personal property crisis to capacity issues with reinsurers, declining performance of the HO market, catastrophe exposure (viewed as unpredictably high in Coastal SC), and insufficient premiums as the main causes for their withdrawal, limitations on new business or refusal to even enter the state of SC as a provider for personal lines coverage.

Maybe you will address in your second part of the solution to solve the problem but my opinion is two fold. If the state regulatory department deregulates the rates and implements a file and use system, the reinsurers, the carriers, the agents, the consumers and the basic rules of economics should prevail. The reinsurers and carriers can then price a product (such as a HO3) and a financially sound rate level and supply and demand (along with enough time) will ultimately determine the rate.

My thoughts are that the deregulation of rates along with addressing deductibles, coverages provided and education to the clients on loss control would, could and should HELP solve the problem we as agents (and consumers) are encountering. The changes SC made in 1999 with auto insurance "deregulation" brought in over 100 new insurance carriers to offer coverage to the SC consumers. Of course the competition generated between the carriers have thus resulted in the consumer having a choice of coverage (deluxe or basic) and the ability to shop for the best rate.

A final thought before I quit, the actuary department in SC stated the perils that CANNOT be forecasted, should not be insured in a traditional/standard insurance market since the rate attributable to the peril cannot truly be proven and made sound. I think of Earthquake, Flood, War, Terrorism and Windstorm as perils that fall into this class. The first three noted are already excluded on the standard HO3. If the final two are addressed (and suitable residual markets developed to offer the coverage elsewhere) don't you think the HO form would then provide the intended protection to the property owner and the products available (deluxe or basic) could then be priced soundly? The consumer and the politicians won't like change but change is necessary before a federal department is assigned to study and implement mandates.

I look forward to your second part of the solution.

– Robert H. Morse, III, CIC
Harry Morse Insurance Agency
Charleston, SC

I agree with all your points. I have always offered that the Homeowners policy should should be an HO5 with RC Contents and Dwelling and a percentage deductible of Coverage A, minimum of 1%. Someone in a $200,000. house should be able to handle a $2000. loss. Insurance is to pay for what you CANNOT afford on your own. This also inflation adjusts the deductible as time goes on.

Kenneth R. Gant, CPCU, CIC, MBA
Gant, Myers & Gillis Insurance Agency

Continue with Part 2

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