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Underinsurance Risk: What Insurers And Homeowners Need To Understand

Posted on by John Siegman in Hazard Data

underinsurance risk

According to the Insurance Information Institute (III), 95% of all US homes are insured. That’s good, right? This calculates out to about 70 million homes insured and 4 million homes uninsured.

From another perspective, Nationwide Insurance states that two out of every three homes are underinsured by 20% and some homes are 60% underinsured.

Quick Recap On Underinsurance Risk

  • 4 million homes are uninsured
  • 46 million homes are underinsured
  • That’s a lot of risk for insurers and homeowners to assume

Why are homes underinsured? Is it because everyone is looking to save a dollar or two and they purposely under-insure to do so?  While this is sometimes the case in price-driven auto insurance, being cheap is not the main cause of underinsurance for property insurance.

Is it because everyone is looking to save a dollar or two so they purposely underinsure? While this is sometimes the case in price-driven markets like auto insurance, being cheap is not the main cause of underinsurance for properties.

Swiss Re estimates that 75% of underinsurance risk is the result of natural hazards – including flood, wildfire, and earthquake. The problem comes down to both property owners and insurers either not knowing – or willfully ignoring – the natural hazard risk around their properties.

Unfortunately, Underinsurance Risk Happens. A lot.

For example, people with a mortgage who own homes in 100 year FEMA flood zones are required to have flood insurance. However, given the expense, some people let this coverage lapse. When the flooding comes, they lose. People who live outside of these zones but are still at risk from flood often do not carry excess water policies. When the floods happen, they lose money, goods and the memories attached to those goods. Especially when those beloved items are in the basement.

Of course, we know that people appreciate and want to protect their homes. So it makes sense that if people better understood the risks surrounding their properties they would take steps to mitigate the dangers and/or put the proper insurance in place. Whether it’s mitigation or getting properly insured, such an action reduces the underinsurance risk.

Unfortunately, most people discover they’re underinsured when it comes time to file a claim. Too many homeowners are then under the false impression that they are covered for anything and everything that can happen to their home. Some policies may exclude the very hazard likely to cause a homeowner to file a claim. Conversely, the property owner may not have kept up with the coverage necessary to completely cover the cost of rebuilding their home as building codes may have changed.

In the end, whether you are the property owner or an underwriter of the property, be aware of the natural hazards, know your underinsurance risk and get access to detailed natural hazard data for the area surrounding the property.

Insurance company underwriters can request a sample risk reduction report that includes data for over 14 natural hazards.

You’ll be glad you did.

Author Bio

John Siegman Hazard HubJohn Siegman is a co-founder and CRO at Hazard Hub, the only third-generation provider of property-level hazard risk databases spanning the most dangerous perils in the continental United States. HazardHub translates huge amounts of geospatial digital data into easy to understand answers, providing easy to comprehend risk scorecards that are used to make real world decisions. Our team of scientists provides comprehensive and innovative national coverage for risks that destroy and damage property. Learn more about Hazard Hub.

John has 30 years of experience playing with good and bad data. His career has focused on making better data and making better, more profitable decisions with better data. John started at San Diego Gas & Electric as a market researcher and modeler, then moved onto Equifax National Decision Systems to focus on geodemographic and geo-firmographic data and models. Fifteen plus years were spent in the geospatial realm – with an emphasis on spatial risk and taxation data – covering utilities, insurance, government, and gas & oil for Pitney Bowes and CoreLogic. He holds an MBA from San Diego State University in Marketing & International Business and a Bachelor’s in Marketing & Transportation from the University of Maryland.

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