Prospective buyers of recreational properties or second homes are finding that they need to calculate a new risk into the purchase: Will they be able to find suitable – or any – insurance to protect their investment?
Some of the most desirable scenic locations in North America are subject to catastrophic losses from worsening extreme weather. Insurance advisors are encountering problems finding coverage at a reasonable price for clients, and in some places finding any insurance at all is difficult.
Wendy Sinclair, Vancouver area president for Gallagher, an insurance brokerage and risk management firm, cites availability issues in Florida and California, as well as increasing issues in B.C. She predicts Alberta, affected year over year by extreme weather events, will start to experience problems as well.
Wealthy Canadians have favoured Florida for some time, but increased storm activity is putting those vacation homes at risk, and insurers are growing wary of the market.
“Florida is its own mix of really interesting factors. Outside of ongoing extreme hurricane activity, there are also things that the state of Florida has put in place in and around the ability of insurers to rate appropriately,” says Sinclair.
When insurers can’t get a high enough premium rate they often restrict coverage, cap payout limits or leave the jurisdiction altogether, Sinclair says. “There is also a high litigation rate against insurers that is only recently being addressed by the Florida state government,” she says.
California is another location where it is increasingly difficult to find coverage in the face of rising wildfire risk, says Calgary-based Anna Rickard, national director, Signature by Acera Insurance.
“We’re finding it hard to find terms there. We’re having to outsource to U.S. brokers who can go into the E&S [excess and surplus] market,” says Rickard. “And they can create policies for these homes because people won’t insure them under the basic forms.”
ABC News reported last November that some insurance companies have limited new business in California, and seven of 12 top home insurers have “paused or placed harsh restrictions on policyholders and in some cases raised premiums by nearly 10 times.”
Problems in Whistler
The damage from fires, floods and storms in Canada has also been mounting.
“Looking at the Canadian landscape, I would say one of our biggest issues is Whistler,” says Rickard. “We’re finding it really hard to insure secondary homes in that area.” Townhomes and chalets in Whistler can be valued into the millions of dollars.
British Columbia on the whole has been prone to extreme flooding and fires in recent years. Some homeowners in the interior report soaring insurance bills following the Okanagan and Shuswap fires last August and September that resulted in $720 million in insured losses.
Commercial properties at risk, too
In addition to second homes and recreational holdings, many wealthy families own rental properties and commercial and industrial parcels, says Sinclair.
Brokers need to look at the perils those portfolios are exposed to and the total cost of deductibles, she says. “I’m not seeing brokers talk to families about the aggregation of exposure with their personal assets and their portfolio assets. That’s where I think families need to focus, not piecemeal property by property but looking at the bigger picture with their broker.”
On the commercial side, Sinclair says acquisitions and divestitures in a real estate portfolio should have a risk management, climate change and insurance lens.
“If you had property in Florida and you had an opportunity to invest in another place — from a climate perspective, I think smart money would begin to do that.”
Strategies for the ultra-wealthy
“For more ultra-high-net-worth families it’s less about ‘is it affordable,’” says Sinclair. “It’s more about: Do they at that premium want to transfer the risk to an insurance company? More and more, they are saying they are going to retain the risk themselves and self-insure, or they will take a really high deductible – $250,000 or $500,000, even $1 million-plus – to try to manage that premium down.”
Self-insurance can work if there are no mortgages on the property or other outside entities demanding insurance on the asset, she says. “However, you do need to ensure liability coverage is in force on those assets, even when you aren’t covering the property exposure,” she adds.
The time of purchase can make a difference in obtaining coverage. A purchase deal in summer, the high season for wildfires and floods, could become complicated if fire were to break out in the vicinity of the property.
“If there is an active wildfire within 50 and sometimes 100 kilometres of your property, and it’s new to an insurance company, they may not be willing to take that risk,” says Sinclair.
“In the high-net-worth world, insurance companies come out and do the appraisal of the home,” Sinclair says. ”They will make recommendations for improvements to the risk, and in most of these cases they will say, ‘We expect you to do these recommendations. If you don’t we will determine whether we’re willing to stay on risk.’”
Insurers may ask for the clearing of brush around foundations, the installation of metal roofs to reduce fire risk, hurricane strapping in storm-prone areas, automatic water shut-offs, and electrical monitoring, brokers say.
Rickard says some firms add a surcharge on properties that are wildfire-exposed but then offer a discount if clients enroll in a FireSmart program, which is designed to increase neighbourhood resilience to wildfire and minimize the negative impacts.
And some insurance firms are partnering with companies that will send crews to a home in an active fire zone to provide mitigation techniques and temporary sprinklers.
All in all, brokers recommend discussing insurance with an advisor or broker right from the start when considering a new property purchase.
Please visit here to see information about our standards of journalistic excellence.