Self-Insuring Coastal Property

Is self-insuring coastal property a way to solve the rising cost of hurricane insurance? Is there a coastal retirement property that looks like a good investment today, considering wind and water damage insurance rates, not to mention the Herculean struggle to collect on claims?

A married couple, friends of my Mother’s, owned a quarter million dollar home in Florida and a hurricane destroyed the place. The storm left them high and dry, unable to collect on insurance or recover anything from the loss. It seems incredible that such catastrophes strike people living in coastal properties, but it’s happening frequently, so the question is what can be done?

Coastal property insurance represents an actual Gordian knot, and self-insuring a poperty is one way to join the discussion. Not only do rates go up because of climate change, but when your insurance company fails, your policy’s value enters a gray area and introduces fundamental uncertainty that you will get any insurance benefit. For instance, In Florida, tens of thousands of policyholders have watched their insurance companies go into receivership, leaving their claims in limbo.

Devastating Climate Change

The challenge of Climate Change is daunting everywhere, but it’s extra tough in coastal communities because of the high risk of storm damage. It makes the value of an insurance policy suspect right out of the box.

In fact, just selling your coastal property is becoming a problem due to the perception of high-risk coastal property insurance.

People watch in horror as Insurance companies undervalue a property or write off hurricane damage as uncovered by their policies. You must buy property insurance with a mortgage and a separate hurricane insurance policy in Florida.

In addition, you must pay high insurance rates and retain an attorney to fight for you if your claim is denied or the settlement amount offered is low. When the retirement home is destroyed, it can be a total loss. So what kind of insurance makes sense in light of catastrophic damage?

Rental Insurance: Switch to Renting

Before self-insuring coastal property or any other tactic, consider renting. The most apparent disadvantage of renting vs. owning most property is that you lose all that equity you put in a home when you buy, and liquidity is a great thing to have in your life. But things can work against home ownership when it comes to beach property:

• Beach property may actually depreciate because of climate change.
• Renting is short-term, while owning a home is long-term, and it may fit your plans better anyway.
• It’s easier to abandon a community destroyed by Hurricane What’s-her-name if you’re just a renter.
• Consider investing funds you might use for the property insurance premium in the stock market instead and make money there.

Global Warming hampering Real Estate Market

The rising sea level, the erosion of the shoreline, the damage to property from hurricanes with its’ flooding and high wind cost homeowners hundreds of thousands of dollars. In addition, a tighter credit crunch turns a seller’s market into a buyer’s bonanza, further eroding your coastal property’s value.

To get ahead in any real estate market, you need to pay mortgage payments for the long term. It’s a ten-year minimum proposition when people talk about making money in real estate. So the question is, do you have ten years to spend owning a property rather than renting and investing your funds in the stock market? Consider buying bonds.

If you own property on a beach threatened by global change, you are locked into that ownership. It’s kind of l like the dilemma people who double down on their home ownership when the local economy goes bad. They error on the side of staying in their home rather than selling, and in effect, turning away from relocating and starting over in a better economy. Many financial experts believe that’s a losing proposition.

Go With a Large Deductible

You can deduct up to $10,000 from your insurance policy’s payout. If you took out a mortgage, you’d have to buy insurance regardless, so how much does the insurance rate go down if you take a large deductible? While nobody will guarantee they’ll honor hurricane claims, the premium will decrease.

Is Self-Insuring Coastal Property a Solution?

After confronting the reality of coastal property insurance, self-insuring coastal property offers a solution, but only in a maybe sort of way. The insurance industry sells many insurance policies that are of questionable value, but homeowner insurance is not one of them. To insure your home is a good idea because the loss could be huge, or worse: Total. Can self-insuring address this?

Consider this: Wind and flood insurance is not part of a standard homeowners insurance policy. You pay separately for it.

Can you self-insure by buying a standard home insurance policy that the insurance company will honor and then turn to a self-insurance approach against flood and wind? While your mortgage lender would balk, it would cover hurricanes for people who own their property outright.

In this scenario, your property would be covered if you sustained damage from something other than floods and high winds. You’ll be protected against fire, smoke, theft or vandalism, but how about damage caused by another natural occurrence such as lightning, wind, or hail? You could self-insure against floods and high winds.

Self-inuring Coastal Property: Save Money on Premiums

An advantage of self-insuring coastal property includes saving on the cost of a premium. Right out of the box, the money you pay when you shell out for insurance is an expense. You pocket some or all of the premium by not paying for any or all parts of insuring your home. If you never make a claim, you’ve saved money that your can pocket or put away for a rainy day, no pun intended. Consumers balk at paying for other types of insurance because they believe that the premium cost would cover whatever loss is sustained.

This is particularly true if you insure against the actual cost of replacing something. If you have old furnishings, the actual cost of reimbursing you for loss would be considerably less than if you insured against replacement cost.

If you know better than your insurance company how to avoid hurricane damage, you’ll never need insurance, which is risky in any environment. Insurance companies accurately calculate what insurance your property will cost THEM when they look at the risk they are taking. It would help if you listened to their assessment of your situation. But if you know or can divine that, you’ll never suffer hurricane damage, and your assessment sharply diverges from the insurance company’s assessment. If you’re actually correct, then self-insurance works excellently!

What Else Does Self-Insuring Coastal Property Do?

You may also better administer insurance than your insurance company can when you turn to self-insurance. You’d do a better job yourself presumably of:

• Rating: Examining the location, claims statistics, and property factors
• Quoting: Estimating the cost of insuring
• Binding: Starting the insurance coverage
• Issuing: Providing the actual policy
• Endorsements: Making adjustments to your policy over time
• Renewals: Determine the value over time of your policy

These are costs your insurance company throws out as a reason to hire them, rather than calculating your risk. Sometimes, you may do a better job than the computer program insurance companies use, mainly because such apps are one-size-fits-all.

There are also plan administrators you can hire to do it all for you, and they are cheaper than an insurance policy.

The biggest problem you may be able to administrate better than insurance companies is the predictability of hurricanes.

Self-insuring Coastal Property: How Predictable are Hurricanes?

Even though hurricanes have a high predictability factor, coastal property is not a tiny asset that can be covered, like renter’s insurance, but the comparison is illuminating. People blow off the idea of renter’s insurance because bad things happening isn’t likely, and the price of an insurance premium looks high. That’s not true of rental insurance or of insuring a coastal property, but let’s let it stand.

Even though hurricanes have a high predictability factor, coastal property is not a tiny asset that can be covered, like renter’s insurance, but the comparison is illuminating. People blow off the idea of renter’s insurance because bad things happening isn’t likely, and the price of an insurance premium looks high. That’s not true of rental insurance or insuring a coastal property, but let’s let it stand.

When you can’t find reliable homeowners’ insurance, as in Florida on the Coast, you can turn that money into a pot for self-insurance. Is this option only adviseable if you never suffer a hurricane?

Self-insuring Coastal Property: Is Predicting Hurricanes Impossible?

While hurricanes are unpredictable, there’s still a window of certainty, say much longer than tornadoes, but certainly not more than weeks. The window of confidence is only several days at best. It’s about weather patterns that become clear only several days before a hurricane hits. So, it’s not less than two days, but not more than five. Are hurricanes predictable for all practical purposes, especially for insuring your property? The answer seems to be NO. But, Hurricanes are predictable as annual events. They even have a season for Hurricanes, for instance. So is there an element of predictability in hurricane risk?

Self-Insuring: The Trailer House Example

By scaling up the renter’s insurance example, if you just looked at percentages, then personal property left uninsured in a renting situation would represent a small percentage of your total investment. The ratio between the net worth of your stuff in your apartment (the cost of replacing it with new things) and the rental property’s value would give you a ratio that you could scale up and see what amount of money you could pay for a coastal property, arriving at a price, that you could conceivably self-insure. This price is when you buy and does not consider other factors like appreciation, risk fluctuations, etc.

A one-bedroom apartment could be furnished for about $10,000. Using a national average figure, the rental insurance would cost $160 a year. If you could self-insure a $75,000 structure, you could purchase an 8-ft trailer home and self-insure it comfortably. That’s a lowball example.

Some people believe mobile homes appreciate like any real estate. Still, other more pessimistic voices think the appreciation is slower than standard housing, and a mobile home may not appreciate at all. It’s essential to own a well-maintained mobile home.

Not everyone wants to live in a manufactured home, but the advantages are apparent. In addition to mobile homes, there are tiny houses built on wheels that you could drive out of the threatened area and return to after the threat abates. Maybe that’s the future of coastal properties: A long chain of RV parks.

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Cover Photo: Etienne Beauregard Riverin/Unsplash.com