Wind Insurance
Wind Insurance is increasingly difficult to purchase, especially as we head towards another Hurricane season.
With climate change and increasing frequency of storms in recent years Underwriters haven’t seen the returns they were hoping for, due to inadequate pricing and the severity and claims inflation.
With increased demand and a shortage of capacity, underwriters are reserving their wind aggregates for well-modeled business.
Limits – Commercial Insurance buyers often request full limits for wind, when arguably they probably don’t really need it. For example, how many times has a building been assessed for a Maximum Foreseeable Loss (MFL) due to a Category 5 storm? If you have a concrete and steel building, constructed to latest codes, with storm proof windows, what is the potential loss? – Roof, air conditioning units, outdoor furniture, canopies, and anything else not part of the structure, all of which represent a small percentage of overall values.
With Private Homeowner Insurance which includes Condos where windstorm cover is either unavailable or at a prohibitive price, Homeowners can access the Citizens Property Insurance Corporation (Citizens). Citizens was created in 2002 from the merger of two other entities to provide both windstorm and general property insurance for homeowners were unable to obtain insurance elsewhere. It was established by the Florida Legislature in Chapter 627.351(6) Florida Statutes as a not-for-profit insurer of last resort, headquartered in Tallahassee, Florida, and quickly became the largest insurer in the state.
Wind Deductibles
Insurers will apply a windstorm deductible, which is increased in coastal tier one and tier two counties, they do this to reduce the impact of losses and reduce the premium they would otherwise have to charge without a deductible.
Typically, insurance deductibles are imposed on risks where there is a frequency of loss to provide alignment with the Insured, for example with auto cover – if you know you’re responsible for say the first $1,000 of any loss then you will probably be more attentive when parking your car?! However, with Wind insurance it seems unfair if a Windstorm hits your property, for which you have no control and Insurers use a deductible to shift the first part of any claim onto the Insured to keep premiums down.
Windstorm deductibles will generally be the same regardless of construction, potential windstorm protections and/or proximity to the Ocean. For example: - A Beach front restaurant is likely to have the same deductible as a well-constructed high-rise Condominium built to withstand 150 mph winds – at present this is likely to be 5% of Total Insured Values at the affected location.
There appears no logic or grading with the application of Windstorm Deductibles and they have just evolved to current levels following Hurricane’s Andrew (1992) and Hugo (1989). Windstorm Deductibles initially started at 1-2% and have now risen to 3-5% as a matter of routine with the increased Hurricane activity.
Wind Deductible Buy Backs
Specialist Insurance providers will generally offer cover to buy down a 5% Wind deductible to say 1% or an agreed $ amount – i.e., covering the spread at roughly 10% rate on the exposed $ limit.
For example, with a TIV of $10m and a Windstorm deductible of 5% ($500,000) down to 1% ($100,000), so $400,000 limit for buy-back insurance will generally cost $40,000
This is generally good business for insurers, if they can spread their aggregate evenly and over a large area, it will probably take a hit or two, but with enough spread should make money due to pricing for a 1 in 10 event.
Parametric
Parametric is a relatively new concept in the insurance market, although it has been around for a while but was previously used by larger companies and reinsurance contracts as a way of hedging or transferring risk.
Parametric cover has triggers which when met provide a pay-out. With Parametric Wind Cover the trigger is normally a sustained wind of Category 3 and above for a sustained period of 1 minute within a defined radius. If the storm runs through the Circle and hits the designated wind speed, it simply triggers the policy, and the contract pays out to the stated limit. Payment is generally made within 7 – 10 days of the event. It's literally a contract to pay X if trigger Y is achieved.
The parametric will pay a sum of money out depending on the size of the Hurricane, normally the pay-outs are graded on the wind category. EG Cat 3 - 65%, Cat 4 – 85% and Cat 5 – 100%
Lender’s requirements
Capital providers who lend money want their investments protected by insurance, and generally require the Insurer to have A rated paper. This is to ensure their capital isn’t at risk from anything other than the business risk.
Currently, many Condominiums are covered by Citizens Insurance as there isn’t a commercially viable A rated alternative. Citizens is backed by the state of Florida; however, they don’t have a rating, other than a Demotech rating, and seems strange that lenders are accepting this paper?
Lenders appear to accept a 5% Windstorm deductible; however, do they question whether there is an additional credit risk to their capital? In the event of a total or sizable loss will the client be able to pay the resulting windstorm deductible so the property can be put back to the condition it was in before the loss and therefore maintain the value of the capital in the property.
Homeowner Associations / Condos
Assessments for Wind Deductible. If a Wind loss should occur the 5% deductible is the responsibility of the Association and will be divided by each condo owner. Depending on where you live and the values of the property, this could be sizeable amount for each individual owner.
As an example, a fire resistive tower valued at $72m. with a 5% wind deductible = $3,600,000. With 551 units = $6,500 per unit. If a deductible wind buy was purchased this would reduce the assessment to $2,000 per unit.
So how can you protect your property against Windstorm by using a combination of the available products in the market
1) If available and at a competitive value, then Full Value, All Risks, including wind cover with the smallest Wind deductible must surely be the first objective.
2) If option 1) isn’t available, then assess what limit you really need. Do you really need to buy cover for the full value of your property if it’s a fire resistive high-rise building, which has been built to withstand 150 mph winds? Be realistic in what you would lose in the event of a category 5 windstorm and with professional advice get a wind loss estimate on your property.
If you have belief in the integrity of your building, then perhaps consider an ex-wind policy coupled with Parametric Wind cover up to your perceived wind limit needs, of either 5% or 10% of the building value. The reason to recommend parametric, is the building integrity is so good that a Cat 3 wind would perhaps cause minimal damage and any potential loss will low down. Buying a full value limit seems unnecessary as it suggests your high-rise condo will be blown over and suffer a total loss! Why not buy up to, or just over the deductible percentage?
If for any reason Parametric cover is not considered then perhaps purchase an All-Risk cover with a wind sub-limit, pegged at the required amount and negotiate the wind deductible to its lowest level.
3) If windstorm cover isn’t available due to construction or there is no available capacity, then consider a parametric for a larger limit.
4) With Frame and/or Joisted Masonry risks, perhaps consider a traditional placement with a windstorm deductible and then buy a wind deductible buy-back to achieve the lowest monetary deductible.
5) Mobile Home Parks, or similar. Perhaps consider Parametric cover to sit alongside a traditional insurance programme. A parametric policy will pay within 7-10 days bringing cash flow to the operator whilst the loss is being assessed and adjusted.
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