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Appraising Property Insurers

June 9, 2012

Tampa Tribune - 07/10/12
By Ross Buchmueller

Over the next year, about 3,500 owners of high-value homes in Florida will be searching for a new homeowners insurance company as Citizens Property Insurance Corp. carries out its plan to discontinue coverage for any home insured for $1 million or more.
There are distinct challenges to insuring custom-built homes, starting with the need for appraisal expertise to fully understand the challenges of rebuilding unique, luxury properties. For all Floridians, including the affected owners of high-value homes, choosing the right insurance company can be much more complicated than finding the lowest premium.

It starts with the ability and willingness to pay claims

Above all, an insurance company must have the capital to meet its obligations to pay claims — and a professional response to a major hurricane can require a substantial amount of capital (or "policyholder surplus"). As consumers, we rely on the due diligence and high standards of major rating agencies (A.M. Best, Standard & Poor's, Moody's and Fitch) so we can sleep well, believing our insurance company has excellent financial strength.

However, without sufficient scale, diversification, experience, expertise or capital, it has proven difficult for the vast majority of Florida domestic property insurers to meet the standards of the major rating agencies. While we believe that a consumer should look hard for a carrier that enjoys a strong rating from A.M. Best, the majority of Florida consumers are covered by companies that are not rated by the above-listed major agencies. Here are some issues to consider, especially if you are considering an "un-rated" Florida insurer:

  • Leverage. Simply look at how much premium an insurance company writes against how much policyholder surplus it maintains. The overall insurance industry writes about a $1 of premium for every dollar of surplus. If the insurance company writes significantly above that sort of ratio, it might be wise to consider a less leveraged provider.
  • Liquidity. In the event of a major hurricane, large global reinsurers can help deliver billions of dollars in claims payments to keep your primary insurance company strong. Florida insurance companies tend to rely heavily on reinsurance; but some reinsurance contracts are "reimbursement" contracts that require the primary insurer to pay for the repairs to your home before they can seek reimbursement from their reinsurers. Under these scenarios, an insurance company may be able to demonstrate an ultimate ability to pay, but a potential lack of liquidity could force delays (or out-of-pocket expenses for you) as you wait for repairs. Your carrier should be able to demonstrate its ability to fund claim payments, even if it must wait for reimbursement from reinsurers.
  • Service. A number of the smaller insurers have chosen to "outsource" core functions, including the handling of claims. Your agent should be able to give you feedback on his or her experience with a carrier, the market reputation and even some details regarding how a company plans to respond to a major hurricane. Increasingly, insurance companies are developing new and valuable services to help you maintain proper coverage limits and to find ways to prevent losses. Ask your agent about any value-added services that may be available for you and your family.
  • Other coverage. The Colorado wildfires are a dramatic reminder that you should consider potential losses other than those caused by hurricanes. Make sure you maintain adequate limits, and ask if your carrier will provide extended coverage to protect you if the actual cost to rebuild your home proves to be even greater. You may also find savings by bundling your home and auto insurance. For some families, an umbrella policy that provides additional limits of liability may prove to be the smartest insurance protection.
  • Agent representation. Just as all carriers are not alike, neither are all agents. A great agent will serve not as an insurance salesperson, but as your family's partner in risk management, and he or she can help provide you with advice, insights and options. The best agents care about their hard-earned reputations and will likely represent the insurance companies that meet your high standards.

As hurricane season continues, Florida homeowners would be wise to look beyond price when choosing an insurance carrier. An independent agent can help families determine whether a provider has the financial solvency, claims handling and coverage to meet their policyholders' needs.