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February 6, 2023

Closing the insurance coverage gap in risky coastal areas

With climate change intensifying and coastal areas becoming increasingly affected, how will people in those areas secure insu-

rance coverage? The lack of robust coverage options in coastal regions is a result of many insurers leaving these areas due to the high risks involved.

The coastal insurance landscape


There has been a significant exodus of insurers and reinsurers from the market due to increasingly costly catastrophic climate events. Consequently, many homeowners are unable to obtain suitable insurance coverage.


In Florida, the problem is especially pronounced. When Hurricane Ian hit the Sunshine State in September 2022, the Florida insurance market was already in a state of crisis. The damage caused by this Category 4 storm is estimated to be as high as $65 billion. Aside from Hurricane Katrina, it was the second most expensive natural disaster in U.S. history.


It’s estimated that just 18% of Floridians have flood insurance in a state that’s most vulnerable to disastrous flooding. The Florida Insurance Department has been working to mitigate the coverage gap. Insurers have been encouraged to offer more policies in coastal areas, and new programs have been developed to help homeowners obtain coverage. Despite these efforts, many Florida homeowners are still underserved. In 2017, nearly one-third of Florida homeowners were underinsured or had no insurance. This number is expected to grow as sea levels rise and risk-averse insurers exit the market.

The good news is that there are options for homeowners struggling to find satisfactory coverage. The National Flood Insurance Program (NFIP) offers flood insurance for those who live in participating communities, and private insurers are beginning to offer policies that cover wind damage from hurricanes.


However, these NFIP policies typically only cover up to $250,000 in damages for most residential properties. Private insurers, on the other hand, are beginning to offer more comprehensive coverage options for coastal areas, but these policies are often more expensive than traditional policies. Therefore, it’s important for homeowners to weigh the cost of coverage against the damages that might be sustained in the event of a natural disaster.



What is the coverage gap?


As coastal areas continue to experience more frequent and intense storms, the issue of insurance coverage for these regions has become critical. Unfortunately, many insurers are reluctant to provide coverage in these areas due to the risks involved. This leaves many homeowners and business owners without sufficient protection against potential damages.

The good news is, several options are available for those seeking insurance coverage for their coastal property. It is essential, however, to understand the different types of coverage available and what each covers before deciding.


Some insurance policies will cover damage caused by storms, but exclude flooding. Others may cover flooding, but exclude storm surges. It is imperative to understand the difference between these two types of coverage to ensure you are well protected.


Several government-sponsored programs provide some coverage for coastal properties, but these typically only cover a portion of the damages sustained.


This leaves many homeowners with significant out-of-pocket expenses following a major storm event. While some private insurers are starting to offer more comprehensive coverage options for coastal areas, they typically come at a much higher cost than traditional policies.


Alternative insurance options


As the effects of climate change become more evident across the globe, coastal regions, in particular, are absorbing the brunt of the damage. In Florida, where much of the real estate is clustered near the coastline, property damage owing to extreme weather conditions is a persistent threat. Because many traditional insurers have grown reluctant to cover these risks, homeowners are finding themselves caught in a gap between what their home is worth and what it would cost to rebuild.


Luckily, there are a few alternative options for those looking to close the coverage gap and protect their home from future damage. One option is to purchase an all-risk policy, which covers a wider range of perils than a standard homeowner’s policy. Another option is to purchase windstorm insurance through the Florida Windstorm Catastrophe Joint Underwriting Association (JUA), which was created specifically to provide windstorm coverage for coastal areas of the state.


There are a few additional options available for those who are still unable to find good coverage through traditional means. The first is self-insurance, which involves saving each month to cover potential damages. The second is to purchase a surplus lines policy, which is available through insurers not regulated by the state. While these policies may be more expensive, they can provide coverage to protect your home from future disasters.


Then there is parametric insurance, which differs from traditional insurance in several ways. Parametric insurance pays out a predefined settlement when predetermined data triggers are met (as opposed to a manual determination of loss by an insurance adjuster). If the applicable data triggers are met (usually using National Hurricane Center data to settle), a payout can be sent within weeks as opposed to the typically burdensome claims process that can take months or even years with traditional insurers.


In conclusion, the insurance landscape in coastal areas with risky climates such as Florida, is rapidly changing as a result of the increasing frequency and severity of catastrophic climate events. As traditional insurers withdraw from the market, many homeowners are struggling to find adequate coverage, leaving a coverage gap that needs to be filled. The NFIP and private insurers are stepping in to provide coverage for those in need, but it’s imperative for homeowners and business owners to understand the different types of coverage available and what each covers to ensure they are sufficiently protected.


As the risk from natural disasters continues to increase, it’s important to explore all options, including parametric insurance, to protect your property and assets. Closing the coverage gap is crucial for homeowners and business owners in coastal areas, and it’s important to be proactive in seeking out and understanding the available options to stay protected.


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Source: Siddhartha Jha

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