No one knows exactly how climate change and severe weather will impact the luxury home market. But advisors to the wealthy do have reason to be concerned, as the ultra-wealthy naturally gravitate to areas that suffer the most from destructive storms and other natural hazards.
“Who wouldn’t like to live with a beautiful waterfront view?” asks Scott Spencer, worldwide loss prevention and appraisal manager at Chubb Personal Insurance. “We continue to rebuild in places that have losses. Again and again and again.”
The simple fact for insurance companies is that wealthy policyholders tend to build and buy properties along picturesque coastlines susceptible to rising sea levels, on tropical islands vulnerable to intensifying hurricanes and in scenic mountain areas prone to escalating wildfires.
“High-end homes are going to be built in areas where the aesthetic qualities of that particular area are the most attractive feature. You design and build the home around that,” says Thomas Jeffery, chief hazard scientist at research and analytics firm CoreLogic.
Jeffery says the three biggest risks to high-end homes are storm surges for those on shorelines, floods for those along inland rivers and wildfires for those in the mountains. He pays close attention to climate change research so CoreLogic can develop data on storm surge levels to help insurance carriers identify homes at risk. “If you have a $10 million home, it only makes sense to know what the risk is and try to mitigate against that,” he says.
Jeffery’s research involves hazard analysis at the property level. He often works with high-end insurance carriers to advise them on how to avoid or mitigate losses to multimillion-dollar homes. CoreLogic can evaluate the impact of everything from damaging winds to hail, tornadoes, floods, storm surges and wildfires, he says.
Some events affect high-value homes disproportionately, and some don’t. For example, Jeffery says tornadoes and hail aren’t site specific. “They’re going to damage all the homes in their path. They’re not necessarily going to occur in areas with homes with higher values or lower values. But when you think of storm surge, you think of coastal areas,” he says.
A Risky Business
Insurers and reinsurers, well known for making reality-based decisions grounded in statistics, are taking the economic impacts of nasty weather very, very seriously. They’re also raising rates for owners of high-priced homes and increasing requirements for obtaining coverage as exposure to meteorological risks rises.
Nationwide, rates for high-value homes, defined as those worth more than $1 million, were up 4% in January from the same period last year, according to MarketScout, a Dallas-based insurance exchange. By contrast, January 2013 rates for homes valued at less than $1 million increased only 3% year over year.
A 4% rise in premiums may not sound so bad, unless advisors have clients with properties in areas that were clobbered by powerful storms and raging wildfires in 2012. Because insurance rates are based on the kinds, numbers and severity of losses in a particular geographic location, homeowners in areas smacked hard in 2012 will likely pay more in 2013.
“If insurance premiums are up, that means the industry as a whole is losing money and they need to increase rates. After Hurricane Sandy, if you had a big home on the beach at Fire Island, N.Y., then you’re going to be hit with a significant increase,” says MarketScout CEO Richard Kerr.
Sandy had a major impact on insurers writing excess and primary flood coverage, Kerr says. Over the next two years, he expects rate increases for flood insurance in the Northeast of 10% to 20%.
With extreme weather pummeling the globe, insurers are doing more than just raising premiums. They’re also inspecting luxury homes in high-risk areas and asking owners to take remedial measures, Kerr says. “The insurance companies want to protect the home as best as they can. That’s why they send inspectors, who work collaboratively with the homeowners to reduce the magnitude of claims should a catastrophe occur,” he says.
Spencer leads a team of loss prevention specialists who help wealthy homeowners mitigate risks. “We visit every single home that we provide insurance for. We make recommendations on how losses can be prevented. If you’re in a coastal area, we’ll have conversations about storm shutters and impact-resisting glass and securing things around your home that could become ‘wind missiles’—in other words, objects picked up by the wind and thrown into your house,” he says.
But Kerr says voluntary measures only go so far. “If you’re in California, the requirement might be that the brush has to be cut back 100 feet from the house. If you’re in a wind-prone area, you have to meet certain building code requirements,” he says. If the homeowner doesn’t comply or can’t meet the requirements, the carrier could refuse to provide a quote, restrict coverage or increase premiums.
A Selling Point
While weather-related disasters are affecting insurance rates and coverage for luxury homes, they thus far have not started scaring away rich property owners. There has been no noticeable drop in luxury real estate prices, industry experts say. Nor has there been a drop-off in rebuilding efforts or luxury property sales.
Experts say there is a silver lining to the destruction caused by storms such as Hurricane Sandy. As unfortunate as it is for families that lose homes, experts say the destruction or condemnation of old, lower-quality homes often leads to the construction of houses that can better withstand natural disasters.
In fact, there is some evidence that property values may actually improve after weather-related disasters. A November 2012 Insurance Journal article reports that after Hurricane Hugo slammed South Carolina’s barrier islands in 1989, “home values rose sharply in the years immediately following and have been on an upward trajectory ever since.” Housing prices on the state’s coast actually rose at double the rate of inland properties over the last 10 years.
Likewise, there is little evidence of long-term negative impacts on post-disaster home buying and selling. Of course, pending sales can be delayed if weather-related damage is severe enough to require new appraisals, or scuttled if nervous buyers back out entirely. For a property that’s too badly damaged, the contract could be voided.
If clients are concerned about building or buying in a particular area, CoreLogic’s Jeffery recommends contacting insurance carriers who have access to his company’s property-level hazard data. CoreLogic’s research can help locate homes and land that are not likely to be affected by increasingly bad weather.
A Call To Action
While advisors can’t personally defend their clients’ mansions against every possible weather-related catastrophe, they can help them with some smart insurance planning for an increasingly blustery future, experts say.
MarketScout’s Kerr, who is also the founder of a new Dallas-based trade association, the Council for Insuring Private Clients (CIPC), is working with some of the largest high-net-worth personal insurers to develop best practices for serving wealthy individuals and family offices. He’s seen an increase in the attention advisors are paying to severe weather because rich clients with multiple homes in harm’s way are asking their advisors if they have enough insurance coverage.
Kerr has seen hundreds of examples of pricey homes that were uninsured or underinsured when disaster struck. He cites a home in California that burned to the ground because of a brush fire. “Brush [fire] was excluded by the policy. The family lost a home that was worth well over $10 million,” he says.
In another case, a $16 million house on the East Coast sustained $9 million in damage from a hurricane. The policy lacked coverage for wind and subsequent flood damage. “The homeowners lost $9 million in the blink of an eye because of one paragraph they didn’t have in an insurance policy. Wealth managers can be fired if they don’t address the insurance needs of their clients,” he says.
Advisors who don’t establish adequate risk management programs for their clients not only might be fired; they could also be exposing themselves to professional liability. To avoid this, Kerr says wealth managers should look to specialty insurance carriers and agents for help. “The problem is the high-net-worth market is so unique, you can’t go to just any insurance agent. You’ve got to have somebody who understands antiques, fine art, fine wines, multiple homes. That’s a whole different dynamic,” he says.
Experts say as many as 60% of those who could qualify for policies with specialty insurers, such as Chubb, Fireman’s Fund, AIG (Chartis Private Client Group), ACE Private Risk Services and Privilege Underwriters Reciprocal Exchange (Pure), still have mass-market policies that don’t address the size and complexity of the risks the rich face.
Carriers that specialize in insuring high-value homes offer several advantages. In addition to property risk assessments, they have programs to protect homes likely to be affected by the forces of nature. Chubb, for example, provides wildfire defense services in 14 Western states. The program deploys certified wildfire fighters to take protective measures like installing temporary sprinklers on properties or spraying fire-retardant gel on threatened structures.
If disaster does strike, specialty carriers usually provide faster claims service than standard insurers and can often have adjusters on site within hours. They also offer “full replacement cost” coverage to rebuild unique and historic homes with similar quality materials and craftsmanship, even if rebuilding costs exceed policy limits.
If a posh home’s value has fallen, it might be tempting to reduce the amount of insurance to reflect the lower worth. The problem is, the cost of repairing or rebuilding an expensive home might not be declining. In fact, commodity prices in general, and the cost of unique building materials in particular, could be rising.
Spencer says the increased demand for local labor and building materials following a natural disaster often quickly exhausts supply and drives up costs. “You want to get your house rebuilt as quickly as possible. You don’t want to be last in line because you were dickering over price with a contractor,” he says.
There’s another reason to go with a specialty insurer: Its policies usually cover building-code upgrades, in case the client’s version of Downton Abbey lacks modern plumbing or electrical wiring. And unlike standard insurance policies, many high-end policies have no limits on temporary housing expenses, which could come in handy if it takes a while to remediate a custom-built or historic property.
Spencer says it’s also essential that clients understand what their policies cover. “Each policy is different. Each carrier offers different coverage. I bet a lot of people have no idea what their insurance policy includes and doesn’t include and the worst time to learn that is just after something happens.”