Planning for a Rainy (and Windy) Day

About 18 months ago, I wrote about the damage Hurricane Ian did to our house in Florida. Many of you asked whether things were put back together. In short, yes. Everything is put back together. The total cleanup, repair and rebuild insurance claim was about $130,000. All in all, we feel very blessed in that we were able to get everything repaired and essentially broke even. We were able to repair some things that weren’t covered (namely the 3-season room) with reimbursement for some things that were covered that we chose not to replace.

In the 18 months since that storm, it’s been widely reported that insurance costs have gone through the roof (pun intended) across the country. I renewed my Cincinnati homeowner’s policy in April. Last year’s premium was $1,267. This year’s premium came in at $1,656 for a 31% increase!!! To get to the bottom of what’s behind the insurance inflation, I turned to a friend of mine, Jean Mabry, who works for Risk Source, an independent insurance company in Cincinnati. Make sure you stick around for some ideas on what you can do to minimize your insurance costs. Jean’s answers along with my commentary are intertwined as follows:

What’s behind the huge insurance increases across the country in 2024? First off, the value of homes has gone up dramatically since COVID. The aggregate house price index is up 32% in the past 5 years*. Since the base insurance coverage for a home is the coverage of the dwelling itself, the premium for the dwelling coverage alone is bound to increase. Second, there were 28 separate billion-dollar weather disasters that impacted the US in 2023**. These weather events caused insurance companies to incur massive payouts, driving premiums higher.

What factors may cause my premiums to increase? Above and beyond the macro factors, insurance companies maintain an “insurance score”. Think of this as something akin to your credit score + factors that increase the likelihood of claims. Here are some items that can impact your score:

• The age of the roof. The roof has become a major expense to insurance companies, both due to the number of weather-related claims, as well as, the $ amount of such claims. Said another way, when a roof is damaged, a claim often involves complete replacement. For the Florida house, which included damaged plywood underlayment, the total bill exceeded $30,000 for the roof alone. One way insurance companies are limiting their risk here is to move an older roof from full replacement to “actual cash value”. This simply means that they will only reimburse what the roof is worth based on its age.

• Claims count. Insurance companies consider the # of claims a homeowner has made in the past 5-6 years.

• Length of time with a carrier. Insurance companies look at the amount of time you were with a previous carrier and the liability limits you carried. Loyalty is a plus, making frequent switching to save a few dollars less desirable.

What can I do to lower my premiums, or at least minimize increases?

• If you replaced your roof recently, make sure to communicate that to your insurance company. This may result in a discount.

• Utilize insurance for catastrophic events and avoid making small claims that are below or slightly above the deductible.

• And finally, and maybe most importantly, consider adjusting your deductibles. If you maintain a robust “emergency fund” or some call it “rainy day fund”, you have enough money set aside to cover a higher deductible, likely saving you money in the long-run. I will use an example to highlight the approach. Costco has a tool on their website that lets you adjust deductibles and immediately see the impact on the premium. I put in my house in Cincinnati and then adjusted the deductible:

This is where I tie insurance back to financial planning. If you build your financial plan to have 3 to 6 months of living expenses covered, and you minimize claims to only major events, you set yourself up to raise your deductible, saving 10 to 16% annually on premiums. As much as we like the stock market, a 10 to 16% return is as good as any return most of us can get in the market! And with interest rates hovering in the 4 to 5% range, that rainy day fund can provide a nice return using Treasuries or bank CD’s. If you have questions about a financial plan, rainy day fund or returns on short term savings vehicles, feel free to give me a call.

If you have any insurance questions, please feel free to reach out to Jean Mabry at Risk Source. Her email address is jean.mabry@onedigital.com. I am also including a link to a pdf her company put together that does a nice summary of the themes mentioned in this article.

For those of you interested in a short market update, I’ve included one below.

————————————————————————————————————————————————————

The market took a breather in April, with the S&P 500 down 4%. The breather was short-lived. May has seen the S&P reverse and go higher, up over 6% thus far during the month, and with an overall gain for the year of 12%.  The market continues to be dominated by large tech companies with mid caps up 7% and small caps rising 4% year to date. The bond market is lagging, down 1.3%. 

Inflation continues to moderate with Truflation showing a year over year change of 2.49%, slightly over the Fed’s target of 2%.

While inflation has moderated in many ways, we are feeling the 2nd or 3rd layers of inflation. Insurance is a perfect example - the house goes up in value first, with the insurance to follow. As with insurance, if you’ve been out to eat recently, you feel food inflation. We went out for Mother’s Day. Dinner for 4 of us, with water to drink, was $120. 

There are some charts that suggest a recession on the horizon. One, the “US Personal Interest Payments” shows consumer debt load has gone up substantially, and the increases usually precede a recession (grey shaded columns are recessions):

However, overall the economy has been surprisingly resilient. Even some of the macroeconomic geniuses we follow who have largely gotten the direction of the economy right, initially forecast a recessionary slowdown on much faster timing than we’ve seen. Those forecasters are now predicting recession in the fall. Those same economists were calling for that recession to start in March-April (2 months ago!). We shall see!

Jared

Planning Pays Dividends

* YCharts “Aggregate House Price Index for Past 5 Years

** RiskSouce 2-pager on insurance claims (sent to Kellett Wealth by Jean Mabry of RiskSource)

All other YCharts graphs are created by me, Jared Kline.

Kellett Wealth Advisors LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Kellett Wealth Advisors LLC and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Kellett Wealth Advisors LLC unless a client service agreement is in place.