Could home insurance keep housing prices down?

[Texashiker]

Dr. Pizza brought up an interesting point in another thread, and that was about hurricane being so expensive. Irene is going to be expensive because of where it hit. The more expensive the property values, the less damage needs to occur.

Do you see insurance companies saying "we will not insure the house above X amount of money because of where its located at." And because of the insurance, the prices of housing would have to go down.

 

[Six]

No. Who buys a home thinking about insurance first?

 

[highland145]

People that have to be concerned about insurance costs can't afford beach homes.

 

[sactoking]

Dr. Pizza brought up an interesting point in another thread, and that was about hurricane being so expensive. Irene is going to be expensive because of where it hit. The more expensive the property values, the less damage needs to occur.

Do you see insurance companies saying "we will not insure the house above X amount of money because of where its located at." And because of the insurance, the prices of housing would have to go down.

No, because the industry-standard HO-1, HO-3, HO-4 etc policies all require an insurance-to-replacement cost ratio of at least 80% in order to insure at replacement cost. If the ratio drops below 80% the insurer only pays actual cash value.

If an insurer tried to force customers to insure at less than 80% not only would they face potential regulatory action from the State but they also wouldn't get much business since people tend to not want to insure real and personal property for ACV.

 

[Texashiker]

If an insurer tried to force customers to insure at less than 80% not only would they face potential regulatory action from the State but they also wouldn't get much business since people tend to not want to insure real and personal property for ACV.

Was it state farm or allstate that said they were going to stop writing policies in Texas, Florida and a couple of the other southern state because of the hurricane claims.

I think the states strong-armed the insurance companies into staying and writing homeowners policies.

What is to stop insurance companies from saying "the house might be appraised for 10 million, but we are only going to insure it for $100,000 due to being in tornado or hurricane alley."

After my mom and dads house was flooded a third time, their flood insurance went from around $800 a year, to something like $1,200 a month. They had to take a FEMA buyout and move.

 

[sactoking]

Was it state farm or allstate that said they were going to stop writing policies in Texas, Florida and a couple of the other southern state because of the hurricane claims.

I think the states strong-armed the insurance companies into staying and writing homeowners policies.

That sounds familiar, to a degree. IIRC the insurers wanted to levy extraordinary rate increases in TX, FLA, et al as a result of hurricane activity. The respective Divisions/Departments of Insurance told them that their rate increases were not actuarily sound because their catastrophe-pricing models were no good. The insurers threatened to leave the state for homeowners' policies. The States called their bluff and told them that they were allowed to surrender their Certificates of Authority and cease writing all business if they wished but they would not be authorized to abandon only the homeowners market. Most of the insurers stayed.

What is to stop insurance companies from saying "the house might be appraised for 10 million, but we are only going to insure it for $100,000 due to being in tornado or hurricane alley."

Those same regulators discussed above, plus the "free market". If you go to an insurer for a quote on your $500,000 beach house and they quote you only $100,000 of coverage, would you buy? Of course not, you'd be on the hook for the other $400,000. If every insurer quotes you only $100,000 of coverage there would be a lot of collusion lawsuits and fines being levied.

Also, "appraised" value is somewhat irrelevant for homes. What really matters is the cost to replace the house. It's not uncommon for a "$1,000,000 house" to actually be $500,000 for the land and $500,000 for the house on an appraisal. If that $500,000 house only costs $300,000 to rebuild, the insurer will insure it for $300,000.

After my mom and dads house was flooded a third time, their flood insurance went from around $800 a year, to something like $1,200 a month. They had to take a FEMA buyout and move.

Flood insurance, even when written by an insurer life State Farm or Allstate, is completely underwritten by the National Flood Insurance Program, a quasi-governmental agency.

 

[DrPizza]

Your last line is pretty much the answer. Insurance companies pool the risks. If an area is at a higher risk, then they charge more. Personally, I wonder if they're charging some areas more than reality suggests should be charged, so that they can charge a little less in other areas so they can be more competitive in rates.

However, I question the premise of the OP - that the more expensive the property... A lot of the property's value is related to location. I've seen two identical houses, one in NY, the other in South Carolina, with incredibly different values. The house in NY was $32k, in SC, it was $250k - and the one in NY had a detached garage. (This was when I was considering a move to NC or SC.)

However, my point is that if either of those two homes had a flooded first floor, I see no reason that one would cost more than the other to repair. There would, of course, be a difference in cost to repair dissimilar homes - a home with 40,000 in kitchen appliances is likely to be more expensive for an insurance company than a home with $1000 in kitchen appliances. However, the homes with cheaper appliances would tend to be more densely located, while the 40,000 in appliances would tend to have much larger lots.

 

[rudder]

After my mom and dads house was flooded a third time, their flood insurance went from around $800 a year, to something like $1,200 a month. They had to take a FEMA buyout and move.

Your parents really couldn't expect any insurance company to keep paying out for repeated flooding?

Anyway insurance is what it is based on the cost to replace the home. This is dictated by material costs, labor costs, etc. Then there is the risk factor... i.e., do you have a desire to live in a flood plain or 200 miles from the nearest fire department.

 

[CPA]

After my mom and dads house was flooded a third time, their flood insurance went from around $800 a year, to something like $1,200 a month. They had to take a FEMA buyout and move.

Why is my tax money going to buy out your parent's home when they were too stupid to move after the second flood, let alone the first.

If someone is going to continue to live in a flood plain, then they should do it at their own peril. This kind of shit pisses me off.

 

[Texashiker]

Why is my tax money going to buy out your parent's home when they were too stupid to move after the second flood, let alone the first.

Flooding 3 times in close to 30 years aint "that" bad.

It was really 4 floods

1 - Some tropical depression in the early 1980s, about 10 - 13 inches of water
2 - Another tropical storm, late 1980s or so, maybe 1 inch of water, think only the carpet got replaced
<insert close to 20 years here>
3 - Hurricane Rita, 13 inches
4 - Hurricane Ike, 9 feet

When the area was surveyed in the 1970s, the survey crew marked the flood plan about 100 yards off. Another survey a couple of years ago caught the mistake and corrected the flood plan. When the flood plan was moved, it was moved 1 street over, and put my mom and dads house in a different flood zone.

 

[SMOGZINN]

Why is my tax money going to buy out your parent's home when they were too stupid to move after the second flood, let alone the first.

If someone is going to continue to live in a flood plain, then they should do it at their own peril. This kind of shit pisses me off.

The government buyout is because they don't want them to continue to live in a flood plain. Thing to remember is that Houston is almost completely flat, and flood plains move as the city changes its flood management plan. So what use to be a safe place that never flooded can suddenly start flooding during every major rain because the city changed a waterway. Sometimes this is temporary, caused by the city doing work that only lasts a few years before the flood management plan is working again, sometimes it is a permanent change to the flood management plan. Also to note is that the city does not inform the people living in these areas that the city has redirected flood waters into their area.