Florida homeowners’ bottom line has been and will continue to be under severe pressure, resulting in consistent financial losses since 2016. The main drivers of social inflation, soft fraud and benefit attribution (AOB) significantly increased attrition loss ratios while reinsurance expenses due to higher catastrophe losses also increased. The concentration of these effects in Florida has resulted in significant rate increases just to break even, and other states are not immune.
While there is no one-size-fits-all solution to this confluence of factors, leveraging existing policy wording regarding “other insurance,” which designates the insurance policy as excess over any service plan or existing warranty, has the potential to partially mitigate these impacts.
In all states, the following ISO policy language (in several forms) is approved by regulation:
Other insurance and service contract If a loss covered by this policy is also covered by: 1. Other insurance, we will pay only such proportion of the loss as the limit of liability which applies under this policy bears to the total amount of insurance covering the loss ; or 2. A service contract, this insurance is excess over any amount payable under such contract. A service contract means a service plan, property restoration plan, in-home warranty, or other similar service warranty contract, even if it qualifies as insurance.
Given the prevalence of wind peril in Florida and other coastal states, shingle manufacturer warranties represent a non-leveraged source of recovery for policyholders and insurers. Shingle manufacturers have improved their warranties over the past 10 years to extend far beyond the traditional manufacturer’s defect coverage that typically offers limited value.
Typical coverage includes 15 years of non-proportional wind coverage up to 130 mph. We estimate coverage eligibility for nearly half of all single-family homes with asphalt shingles, however wind roofing claims continue to be paid at the expense of property insurers and substantial deductibles from policyholders.
By determining which homes are eligible for shingle warranty coverage and applying existing policy wording, insurers can reduce roof claim payouts and improve policyholder service outcomes through saved deductibles or reduced. The reduction in claim payout may be particularly noticeable among claims based on social inflation or light fraud, as not all policyholders will comply with the submission requirements of the guarantee. Non-compliance by the insured with his obligations after a claim, etc. can also become a factor.
Overall, we expect the AOB lawsuits to be reduced as the shingle manufacturer’s warranty is primary and the insurance policy is excess.
Subrogation strategies may also exist for specific shingle manufacturers, but warranty contracts differ between manufacturers, so the insurer must determine which ones are worth pursuing.
Once proven to be a source of recovery for non-catastrophic events, insurers have the ability to leverage this same policy language for CAT events, which should ultimately likely reduce maximum losses and reinsurance expenses.
Deteriorating attrition loss ratios and skyrocketing reinsurance spending in homeowners’ markets is bringing insurers back to strong fundamentals, including enforcement of existing policy wording. The innovative application of the other insurance provision to wind risk offers an opportunity for improvement.
Joe DiMartino, Ph.D. is an insurance industry president/CEO, consultant, licensed insurance agent, licensed insurance adjuster, and founder of RoofCovr. He can be contacted at [email protected]covr.com. The opinions expressed are those of the author.