Our Latest Insurance Dance

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:

Insurance Discontinuity

In reality, the true risk profile is much smoother, which you can imagine as the orange line added here.

SmoothedDiscontinuty

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:

NoStormActivity

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.

29 comments to Our Latest Insurance Dance

  • I wouldn’t mind a higher deductible on our homeowner’s insurance. We have never had a claim- we basically just mail them money every month. We don’t have hurricanes though. Instead, we have tornadoes, but they are not nearly as far-reaching as hurricanes and don’t do nearly as much damage.
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    • Ask your insurance agent the next time you’ve got a renewal coming up! It’s not often ours gets requests for it, but it was a really easy change to make!

  • We just changed our car to liability-only. It’s an 11 year old car, and we have the money in the bank for a replacement (just can’t decide what we want). We save $200 every 6 months, which isn’t a lot, but I’m happy with that. If we were to get a new car soon, we’d likely give away our car to relatives rather than try to sell it. I figure losing the car in an accident is similar, which is why I’m willing to take on the risk.

    That said, the decision did make me a little nervous, but I’m hoping that we’ll save $400+ over the rest of the life of this car, and that will make our decision worthwhile. Kind of wishing we had done this last year, honestly, to increase our savings. Eventually, the amount saved will be worth more than the car is worth ($2k? 3k?), which is the point where the decision becomes fully worthwhile.
    Leah recently posted..Little LuxuriesMy Profile

  • we just started homeowners insurance a week ago, since we became homeowners. I am contemtplating getting earthquake insurance since we live in southern california… I don’t know if it’s necessary or not since we don’t live on a fault line or anything… but still..
    Newlyweds on a Budget recently posted..The Escrow Process of Buying Our First HomeMy Profile

  • Kay

    I finally got earthquake insurance on my house in Utah and I paid $343 a year with a 20% deductible. Almost seems like a waste. It was $443 a year for 10% deductible.

    • For that difference I might be tempted to take the lower deductible. $100 more per year for a 10% deductible instead of 20%? If you’ve got an insured value of $200K, the extra 10% is $20K, which would take 200 years to break even on. I don’t know how often earthquakes occur, but I’m pretty sure I’m not going to live to the break-even point. =)

  • In general we tend to opt for the higher deductibles for the lower monthly payment. I’ve never made a car or home insurance claim, and I hope I never have to. If I do, it will be for something big and I’m sure I’ll be more than happy to pay the deductible to get some help!
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    • I hope you never have to pay your deductibles either! So far we only have once when I was rear-ended by another vehicle. It wasn’t that big of a deal in the end.

  • Debbie M

    Now that I have some savings, I am a big fan of big deductibles. I only want insurance for catastrophic stuff. If I have the money, it’s not a catastrophe. And most maximum deductibles aren’t even very high, considering.

    Also, with homeowner’s insurance, it’s better never to make a claim if you can help it or your rates will skyrocket for a while, and if I’m not making claims but just paying for stuff anyway, there’s no point in having a low deductible.

    Also, my cars are usually so old that even the tiniest amount of damage is considered to total the car since fixing it is more than it is “worth.” But I’d still rather fix it.

    Also, with health insurance, you still get huge discounts (pre-negotiated by the insurance company), and I don’t enjoy negotiating and am terrible at it. In the right situation you can put your savings in HSAs, pre-tax, and then they grow tax-free forever until you need the money for an approved medical expense or for being over 65.

  • Gosh, I’m glad we don’t have to worry about hurricanes in these parts. We did have some widespread expensive damage with the hailstorm that struck several years ago, but that was a fluke, not a regular occurrence.

    Have always been glad not to have the higher deductible: the exploding oven, the hailstorm that took out the roof, the $10,000 worth of vandalism, the current ongoing healthcare nightmare. When you need the coverage, the event ALWAYS happens at the worst of all possible times, financially — dunno why; it’s some kind of karma.
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    • I think if things were tighter, we’d probably switch to a lower deductible to play it safer, but for now the higher deductibles are good for us.

  • Justin

    Rating based on zip code is an interesting difference between Florida and Cape Cod, MA, where I live. Our homeowners insurance companies use distance to “tidal water” as the main factor. Though our hurricane exposure is minimal compared to Florida. I am insurance agent and each homeowners quote begins with me using a mapping program. Of course, each insurance company uses different software and has a different opinion on what constitutes “tidal water”.

    • I wonder how unique Florida is with its zipcode rating. I think the distance to tidal water sounds like a much better system overall and I’m curious to see if FL ever gets around to changing its system.

  • Mama Pop

    I always vote for the higher deductible as long as you can take the hit if it happens. In the days when a big financial loss would really hurt us, we carried lower deductibles. This was especially important when the boys were involved in auto accidents in their teens.

    Doing the “hard math” to calculate the break-even point is not my thing since I still count on my fingers. I just feel pretty optimistic that bad things don’t happen that often and we can cover our part if we have to.

    We still carry an umbrella policy, and I just send the money and try not to care. In the final analysis on that one, I realize that anyone can sue anyone for anything, and I am willing to pay about $200 per year to be covered for $1 mil. That covers legal fees and injuries and all sorts of things I wouldn’t have thought of. Since Papa PoP is frequently engaged in a pretty dangerous hobby where bystanders are involved, I try to think of this insurance as a necessary evil in our society.

  • That is a very detailed insurance breakdown. WE are all at the mercy of the insurance companies, and their fee structure. They want us to get the coverage or self insure or move to another area of the US. I think they should take into account that if a town inland has not been hit with a major hurricane in 40 years, the rates should be cheaper. But the shareholders don’t like my ideas. Solution become a shareholder to be able to afford the higher rates.
    EL @ Moneywatch101 recently posted..What is the Daily Interest you pay?My Profile

    • Well, unfortunately it’s impossible for us to become shareholders of the insurance companies we have for homeowners as there aren’t any publicly traded insurance companies (heck there are barely any insurance companies period) willing to insure a wood-frame house in our zipcode for anything less than $250K. So that excludes our house. =/

  • Ivy

    We are already at highest deductible on home insurance – makes sens, especially since we are handy and fix most things ourselves.
    My pet peeve is the flood insurance. Like your story above, we are at the very corner of the flood zone (1/4th of our backyard falls in) – we’ve never got flooded, and with minimal protection (tarp with sandbags over the basement window) for the few hours at risk, we believe we wouldn’t get any meaningful damage. But for this we pay $2000 per year (compared to a homeowners of $650), even at the highest allowed deductible. We’ve estimated that even at the worst possible (realistic) damage at most we’ll have to replace the furnace and some floor covering or drywall – doing it ourselves will net us at most $6-8K. This is the main motivation why we are planning to pay off our mortgage in a year or so and finally cancel this money bleeder.

    • Oof, I can definitely see where you’re coming on the flood insurance – that’s a huge flood premium. Before we knew whether we’d be affected by the Biggert-Waters flood insurance reform, we talked about paying off our mortgage if our flood rate was going to skyrocket. Luckily the small mound our house is built on is high enough that we have affordable flood insurance at market rates, so we didn’t have to go that route, but I can understand why you want to!

  • We dealt with similar insurance and flood issues the 5+ years we lived in LA. We got some wind and rain from 4 storms while we were there, with the first coming the weekend after we closed, hahahaha… Welcome to the Gulf Coast. Fortunately our house was just high enough, even though we were miles and miles inland to alleviate really high premiums, but they still seemed ridiculously high for our location. Like you put it, we were just subsidizing everyone closer to the ocean.
    Mr. SSC recently posted..Hurry up retirement!My Profile

    • The weekend after you closed! The same thing happened to one of the girls that I work with – a hurricane blew through a couple weeks after they bought the house they had been renting for several years. Required a total replacement of the roof. She’s still a bit bitter on their timing on the house purchase. =)

  • I love the insight about how timing might be biasing the decisions. I think about that stuff all the friggin time, to the point that I basically just assume I’m operating on like 90% bias and 10% logic 100% of the time. :)

    When the analysis of insurance gets too difficult for me, I go back to my old saw: actuaries are better at calculating risk than I am. Since their job is to ensure that insurance companies make money, the right decision is usually to self-insure (or raise deductibles/reduce coverage) if you’re financially able to do so.
    Done by Forty recently posted..An Embarrassment of RichesMy Profile

    • “I basically just assume I’m operating on like 90% bias and 10% logic 100% of the time. :)”

      I think by assuming that you’re probably a lot closer to a 10/90 ratio than a 90/10 ratio. Kindof a catch 22, though, I imagine.

  • Jan

    Oh how I hate that windstorm insurance … the fact that it keep increasing every year drives me batty … someone, somewhere, determines just how much it would cost to rebuild your home if a storm came through and they base the insurance increase on that … it stinks because I didn’t ASK for them to increase my coverage … same phone call/discussion/disagreement every year in April … can’t wait to pay off the mortgage so I can call the shots! :-)

  • “What would you have done in our shoes?”

    I guess I wouldn’t live that close to the ocean. I probably wouldn’t live in a hurricane or tornado area at all. It mystifies me that people do.

    Never too late to move to Arizona! 😉
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