Simply defined, risk is the possibility of injury or loss. Insurance risk revolves around this potential for loss or injury and an insurance contract represents a risk-sharing between two entities; the insured and the insurer. A synonym for risk often used in the Property & Casualty (P&C) insurance industry is “peril.” A homeowners’ insurance policy, for example, may have a list of perils for which the contract provides protection from financial loss. Other policies, known as “all perils” coverage, protect the insured against all risks except those explicitly excluded in the text of the contract.
The Insurance Risk Versus Insurance Reward Equation of Homeowners Coverage
The risks covered in the most commonly held homeowners’ insurance policy includes sixteen specific perils that a home may potentially suffer. This includes such things as fire or lightning, smoke, windstorm or hail, accidental discharge or overflow of water or steam, freezing, theft, vandalism, explosions, and more.
The risk to the homeowner is that one of these perils will occur to their home and cause a financial loss. Without insurance coverage, the loss must be borne totally by the homeowner, whereas if the home is covered by the proper homeowners’ policy the cost of the repair or replacement of damaged items will fall mostly to the insurer. The risk to you, the insurer, is that one of your policyholders will suffer a loss and receive the payment of a claim in excess of the amount they have previously paid in premiums. If this happened to all your policyholders, your company would go out of business. The secret, then, is to write policies for clients who are low risk and hopefully won’t be making claims.
Uncovering Insurance Risk
Your number one job as a homeowners insurance underwriter is to uncover potential risk wherever it exists. Since your company is taking on the sharing of insurance risk for a fee, it’s in your best interest to mitigate potential risks as much as possible. Evaluating historical losses for covered perils within the same risk class, examining the risk profile for the potential client seeking coverage, and estimating the likelihood of that individual experiencing future losses all go toward establishing policy premiums.
While this information may be readily available through analysis of data collected by your company, including the prospective client’s application, a critical part of the underwriting process may be an in-person home inspection. This will allow hidden risks that may exist to be uncovered. If possible, these uncovered risks may be mitigated by the homeowner under your direction. A homeowner’s unwillingness to correct risks and potential liabilities may cause you to either decline writing a policy or be the cause of increased premium costs.
Any perceived insurance risks that can be eliminated will be beneficial to both you, the insurer, and the insured. The more thorough your home inspector is, the more accurate the true risk analysis of a property will be.
Known Homeowners Insurance Risks
There are a number of special insurance risks associated with homeowners’ policies that must be taken into consideration when underwriting homeowners’ coverage. Some of these include:
- Swimming pools on the property pose significant liability issues for homeowners and need special protections to remain safe. Proper fencing and self-closing gates that lock are critical in denying uninvited guests access. Children should be constantly monitored by an adult capable of providing rescue and first aid. A whole list is available to provide homeowners with proper recommended safety steps for homes with swimming pools.
- Treehouses are popular play venues for children. When properly constructed, and used with proper safety guidelines, they can be fairly safe. Unfortunately, it’s all too easy for children high up in a treehouse to fall out and become injured, opening up the homeowner to an expensive liability suit.
- Dog bites are covered by most homeowner insurance policies, although certain dog breeds are sometimes excluded from coverage because their insurance risk is too high. Check here for more information.
- Trampolines, a favorite backyard activity for many families with children, are responsible for somewhere around 100,000 injuries per year in the US. Many doctors say they shouldn’t be allowed to be used by children unless in supervised training for sports competition. These are high-risk devices and require special consideration during the insurance policy underwriting process.
Other common risks faced by many homeowners include water damage, fire damage, flood damage, weather damage, and subsidence (sinking into the ground). A home’s geographical location may have some effect on the degree of risk faced by a particular home. Residences near bodies of water known to frequently flood obviously exhibit a higher degree of risk, as do those near areas that have suffered damaging wildfires. Coastal homes in areas that have seen hurricanes and other types of severe weather, or those in areas often experiencing tornados, all must be considered as having an increased degree of insurance risk. Homes located in urban settings with high crime rates also pose a high risk to insurers.
Some risks can be decreased by specific actions and these activities should be rewarded by special consideration during the underwriting process. Some examples include:
- The risk of destruction by fire can be lessened by installing early warning devices such as smoke and heat detectors, having this system monitored off-site, keeping vegetation away from a home’s exterior, and using fire-resistive siding and roofing materials in home construction.
- The risk of theft can be lessened by installing anti-theft devices such as burglar bars on windows, heavy-duty doors with strong locking and deadbolt mechanisms, monitored burglar alarms, and making sure the garage door isn’t easily breached.
- Special storm-resistive siding and roofing materials can be used in areas that experience frequent hurricanes or other storms.
Earthquakes and Floods
Earthquakes and floods are perils capable of causing severe damage to homes but they aren’t typically covered under conventional homeowners’ policies. For protection from these two perils, it’s usually required that a homeowner obtain a special policy or get an amendment adding the coverage to their base policy. Depending on the geographic location of the home, earthquake or flood insurance may be required by the home’s mortgage holder.
Not much can be done on the part of the homeowner to avoid the damage potential of floods/earthquakes, other than their choice of home location. Homes can be built with earthquake-resistive construction, but they can’t be made earthquake-proof. Moving to an area that won’t be flooded is also not an option. Floods have been known to happen even in the desert.
There’s no such thing as escaping all homeowner risk, although there are many proven methods for lessening risk and mitigating risk once discovered. Without risk there would be no need for insurance at all, but, as an insurance underwriter, you want to provide coverage for homes with as little risk as possible. To uncover specific risks regarding any particular property, the aid of a top-quality property inspection vendor like Insurance Risk Services is invaluable. Find out what they can do for you.