Extra Credit Assigment 1

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University of South Carolina *

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341

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Finance

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Jan 9, 2024

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Nathan Conway FINA 341, Section 001 November 3, 2023 Extra Credit Assignment #1 1.) Based on the assigned articles, what are some of the factors driving the higher cost and reduced availability of homeowners insurance? In addition to the readings, cite at least one external source providing hard data supporting your response to this question (include a link to the source in a footnote). The increasing cost and reduced availability of homeowners insurance in Florida can be attributed to a variety of different factors. One of the more major contributors to these changes is the increasing occurrence of extreme weather events in the state, with Florida often being the main target for hurricanes, tropical storms, and other natural disasters. These extreme weather events lead to an increased number of insurance claims, which then causes insurers to raise their rates in order to cover the higher potential losses. Additionally, these rising interest rates paired with the overall growth in property values have also played a role in the availability. There is high demand for homes in Florida, but often very limited housing options; this has driven property prices up significantly and has made it far more expensive to insure these properties. Furthermore, the cost of rebuilding homes in Florida has also increased due to factors like rising construction costs and stricter building codes that have been designed to withstand hurricanes and other natural disasters. The state’s litigious environment has been adding to this as well, with more homeowners filing lawsuits related to insurance claims, which can then drive-up insurers’ expenses. Many insurance companies that were operating in Florida have decided to leave the state due to these challenges, which has led to overall reduced availability of homeowners insurance. According to data from the Insurance Information Institute, Florida has the highest number of policies written and the highest exposure cost of over $422 million in 2022. As previously stated, the increasing exposure costs mean that insurer have to charge more in order to cover the losses, resulting in those higher rates for homeowners. Additionally, Florida had the highest average cost of homeowners insurance premiums in 2020, with a 12% increase since 2016 1 . The rising premiums, driven by a combination of factors, clearly show the severity of how costly it is becoming to have homeowner’s insurance in Florida. 2.) Can a homeowner simply drop their homeowner’s insurance? What are the potential consequences of doing so? If you were the financial advisor to a homeowner who is considering dropping the home insurance, how would you advise them? Homeowners generally do have the option to drop their homeowner’s insurance since it is not illegal, but it is a risky move with potentially significant losses. However, if the person has a mortgage, they are required by the bank to have homeowner’s insurance. For people who own their own homes and do not have a mortgage, the decision to not purchase insurance can look appealing because of the rising costs. Nonetheless, the financial consequences of this decision will likely be significant. 1 Insurance Information Institute (III). (2023). Facts + Statistics: Homeowners and Renters Insurance. https://www.iii.org/fact-statistic/facts-statistics-homeowners-and-renters-insurance Conway 1

If a homeowner chooses to go without insurance and their home is damaged or destroyed by natural disasters or other catastrophic events, they will have to deal with the full financial burden of rebuilding or replacing their home, belongings, and the dealing with the related costs of damage removal. This would then clearly result in significant out-of-pocket expenses and could be financially devastating for the homeowner. As a financial advisor to a homeowner who is considering dropping their home insurance, I would strongly advise them against getting rid of it. Instead, I would recommend the homeowner to look into different insurance options and possibly work with an insurance agent that would be able to provide more affordable policies. Additionally, I would advise the homeowner to consider having higher deductibles in order to lower their premium costs, since this will still provide them with the necessary coverage. I would also emphasize how crucial it is to have insurance as a preventative measure to protect against unexpected incidents, especially in Florida since it is such a disaster-prone area. Overall, while the rising costs of homeowner’s insurance may be a significant concern, completely dropping it is a risky move with severe financial consequences. Choosing cost-effective insurance options and working with a financial advisor and an insurance agent is a far more responsible and secure approach to managing these challenges. 3.) At the end article about the cost of insurance in a Florida town, one homeowner characterizes the price of home insurance as “robbery.” Given our discussion in class about how insurance rates are made, do you agree with this characterization? Lastly, how well informed do you believe people are about the risks of living in a place like Florida (or other disaster-prone area) when they decide to move there? The characterization of home insurance as “robbery” in the context of the rising premiums in Florida shows the financial strain and stress that many homeowners are experiencing. It’s important to remember that insurance rates are determined based on a range of factors, such as location, risk level, and regional conditions. Even though some premiums have increased drastically, it doesn’t necessarily mean that the homeowners are being robbed by the insurance industry. Insurers set rates based on their assessment of the risk and their costs in covering the potential claims, the rising costs are not for the financial benefit of the insurer like it seems homeowners believe it to be. However, the rising costs have certainly become a substantial problem for many homeowners. This has led to their perspective of being blatantly overcharged, but it’s important to acknowledge the challenges the homeowners are facing and the factors that are actually contributing to the rising rates. These higher insurance costs seem to be the result of a combination of factors which include climate change, increased property values, and the increasing likelihood of natural disasters in Florida. In terms of people’s awareness of the risks of living in disaster-prone areas like Florida, it certainly varies widely. Some people may have a thorough understanding of the risks and the importance of insurance, possibly based on past experiences of loss, while many others have a complete lack of awareness for the potential financial consequences that can come about. It is crucial for individuals considering moving to areas like Florida to fully research these risks and consider the chance that they are taking by choosing to move to a disaster-prone area. Lastly, they need to get expert advice and make informed decisions about their insurance options to ensure they are fully protected in the event of a disastrous loss. Conway 2

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