We go through a dance with our homeowner’s insurance company nearly every year.
Two years ago it was figuring out if it was worth it to self-insure our pool and lanai. Spoiler alert – since at that point it would have cost us an additional $2K/year to insure it for $10K, self-insuring was the better bet.
Last year, it was deciding if we were comfortable with the takeout of our policy from Citizens to a smaller insurer. We went with it and regained coverage on our pool and lanai for a nominal increase (just $20) in our premium.
This year, we ended up raising the deductible on our policy in order to decrease our premium. The way the math worked out, we have a seven year break-even on the risk for the hurricane portion of the policy (which now has the highest deductible we are able to take on according to our mortgage contract).
Why Did We Do This?
We view insurance as protection to cover losses you aren’t financially prepared to take. Our old deductibles were quite low (2% hurricane – which was $3,300 – and $1,000 for all other perils). We are more than prepared to increase this for two reasons.
- Regular readers of our income statements know that there is a rare month when we wouldn’t have been able to easily cash flow the entire old hurricane deductible on our house. While that’s a good feeling, it feels like a bit too much insurance considering…
- We also carry a decent amount of cash on our balance sheet (a minimum of $20K and average of ~$26K to satisfy Mr PoP!), and have a completely untapped HELOC ($38K) that we could access if we needed money on an immediate basis beyond what we could pay off at the end of the month (as we do with all of our credit cards).
The new deductibles (which are the highest that we are allowed under the terms of our mortgage) are 5% hurricane ($8,250) and $2,500 for all other perils.
When our insurance agent confirmed that we would be financially able to meet the new higher deductibles if necessary, we had no second thoughts saying “yes”.
But I Still Wanted To Learn A Little More About Hurricane Statistics and Insurance Rates…
While I would have been happier with a shorter break-even period, I still think this is the right decision for us as it basically rests on the assumption that we won’t have major damage to our house from a named storm* more often than every 7 years. And I do mean “major damage”. As it was, we would have likely considered eating the losses of minor damage even before this recent deductible increase as we’ve heard that once your house gets a claim history your rates can skyrocket and you have little defense. Our house currently has no claim history and we’d like to keep it this way unless absolutely necessary.
So How Often Do Hurricanes Impact Our Neighborhood?
NOTE: This is NOT an assumption that we are immune to storms or any other type of damage. Storms will happen.
We don’t know when… so we make our estimates on the best estimates we have at the time. Here’s what we have. Over the last 100 or so years Florida hurricanes have corresponded with a Poisson statistical distribution with a mean of 0.62 hurricanes hitting the Florida coastline each year. (That’s Category 1 and up.)
But the thing is, the Florida coastline is freaking huge – 1350 miles worth of coastline. (Compare that the California’s 840 miles or Texas with 367 miles!)
Lots of hurricanes can hit Florida and leave us with nothing more than a little bit of wind and rain, or even nothing at all if it’s one that hits up north. There have even been a couple of fairly major hurricanes that made landfall within ~50 miles of our house in the decade before we owned it and the neighbors said there was never any damage and there was no claim history on the house.
So some back of the envelope math shows with a 50 mile radius (100 miles of coast when you count both directions), 1350 miles of coastline, and 0.62 hurricanes per year… we’re looking at roughly…
100/1350*62% = 4.6% of a hurricane (Cat 1 or above) making landfall “near” us each year. The likelihood that it would be a major hurricane (say Cat 3 or higher like those that have landed “near” our house in the decade before we bought) would be even smaller.
Now that’s a pretty rough estimate since it assumes hurricanes are distributed evenly along the FL coastline. They’re not – South Florida gets more than the panhandle or the northeast coast. But even if it’s double or triple that estimate, we’re still coming out on the right side of the equation by increasing our deductible to a seven year break-even point since 1/7 = 14.3%.
So Why Are Our Insurance Rates So High To Begin With?
Well, we’re coastal, but we’re not. Unlike flood insurance where your base insurance rates are calculated by the exact location of your property on a detailed map, it turns out that homeowners insurance base rates in our area are calculated by zip code.
So that means because our zip code touches the coast, we’re in the highest rate band even though our house is ~2 miles inland as the crow (err, hurricane) will fly. And rating by zip code means that there can be big discontinuities in the base rate where the zip codes change. Our house happens to be quite near one of those discontinuities. Sadly, though, we’re on the wrong side of it.
Here’s an approximation of what the current system for base rates looks like in our area:
In reality, the true risk profile is much smoother, which you can imagine as the orange line added here.
So in theory, we’re overpaying for coverage, subsidizing owners right on the coast. And homeowners just another quarter mile or so inland from us are likely underpaying for their coverage, being subsidized by homeowners living miles further inland in their zip code. All of this seems to foot pretty well with the conclusions in this study that within the current homeowners insurance system subsidies exist even on an intra-zip code level.
Our insurance agent did tell us that there is a proposal in the works to eliminate the zip code rating that is used to set base rates in our area and replace the ratings with more granular geographic ratings, but wasn’t willing to stake his reputation and give me a probability that it would pass or what the estimated effect on our property would be. So we’re not really counting on the rate structure changing dramatically for us. Thus, the best way for us to reduce insurance costs at this point is to increase our deductible.
The Emotional Part
While I believe it’s a totally rational decision to increase the deductible, there was still a small part of me that made this a little difficult. Namely, the timing and how it plays into my emotions. (Contrary to Mr PoP’s sometimes assertions, there is a small part of my brain that isn’t a rational robot.)
Our renewal date for the insurance company is mid-August every year. The height of hurricane season is September-October, so when making these decisions, we’re always going to be heading straight into the part of the year with the highest risk of a loss. It’s the time of year when I’m checking the NHC website and crossing my fingers that we see images like this one:
And I’d be lying if I said that timing doesn’t impact me a little when we make these decisions**. So I have to poke myself every time we’re making decisions about insurance coverage and ask:
Am I hesitating on this change because we’re in the middle of hurricane season? What would change about our decision if it were March or December?
Long term, I think we made the right decision. And so far the first hurricane season with our new deductible is officially over as of a week ago and ended without any Florida hurricanes. We don’t know what next year (or the next five years after that) will bring. Knock on wood that we don’t experience any storm damage. But if it does happen, we’re financially prepared for that. And that’s really the best you can hope for, right?
What would you have done in our shoes? Have you ever opted for higher deductible coverage for any of your insurance? Home, car, or health? How did you make the decision to do so?
* In all the documentation with the insurance company it’s called a “hurricane deductible”, but really this means any named tropical cyclone (which can be a tropical storm or a hurricane). Hurricane deductibles are now limited to one per storm season (June – November) in Florida.
** Which is probably a big part of why I didn’t want to write about it when we made the change in July. But now that it’s December I’m okay with it.