Millions of homes are underinsured against natural disasters

Extreme weather conditions, from floods to forest fires to hurricanes of high category, are causing more and more damage in neighborhoods. New research now shows that much of the country's housing stock can be underinsured against these disasters.

The cost of rebuilding has increased dramatically in the last two years and continues to increase due to a severe labor shortage in the construction sector as well as new tariffs on materials. If these additional costs are not taken into account regularly in insurance coverage in disaster-prone areas, homeowners will suffer huge losses that could even resonate in the mortgage market.

Homeowners who can not recover from disasters are much less likely to stay up to date on their mortgages; If a region is devastated, home values ​​decline and homeowners can be overwhelmed by borrowing.

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Last year, 14 natural disasters, record fires in California at the devastating hurricanes of Florida, cost the United States $ 91 billion, according to the National Ocean and Atmospheric Administration. . It was the eighth consecutive year with at least eight multi-billion dollar disasters.

NOAA also reported that 2018 was the fourth hottest year ever recorded and that global warming not only increased the risk of drought, forest fires and more violent hurricanes, but that it also increased the risk of severe snowstorms.

All these changes are pushing insurers to recalculate the coverage of homes that may represent a total loss after a natural disaster. A new CoreLogic report examined assessments in four disaster-prone regions and presented alarming figures on the rising risk for real estate due to increasingly extreme weather conditions and higher reconstruction costs.

"Underinsurance issues can result in financial damage to homeowners, artificially low coverage limits for insurers, and an increase in unpaid bills," said Amy Gromowski, head of analytics at CoreLogic. "Homeowners who experience natural hazards, such as forest fires in California, are often struck by personal and financial damage and many are unable to rebuild their homes, which prolongs the recovery of the area and often requires landlords do not repay their mortgage. "

According to the CoreLogic report, undervaluing properties for many years can create problems beyond the single claim. If construction and labor costs are not continuously monitored, claims estimates may be inaccurate.

In California, one of the study areas, Corelogic has identified 110,000 properties in southern California posing a very high to extreme fire risk. With an estimated average reconstruction cost of $ 400,000, the risk is more than $ 46 billion. These costs are significantly higher than they were two years ago due to a significant increase in labor costs and materials.

So, if only 1% of homes at risk were a total loss from a forest fire, given the increase in reconstruction costs over the last two years (5.6%), the sub-total valuation of this 1% would be $ 25 million if the insurance coverage was not up to date.

In hurricane-prone coastal areas along the Northeast Atlantic and Gulf Coast regions, Corelogic has identified approximately 1.1 million properties with a very high to extreme loss risk due to Storm surge. In Florida alone, the reconstruction of risk properties is estimated at $ 240 billion, with the recent increase in costs.

"The financial impact of not updating the reconstruction costs for two years is considerable," according to the report. "If a catastrophic event hit only 5% of homes and caused only 30% of the storm surge damage on these 5% of properties, the undervaluation of the cost of rebuilding would be about 205 million. of dollars".

This is simply the risk for the coasts, but if one takes into account flooding in the land, as in Hurricane Harvey, underinsurance is more prevalent. The reconstruction costs in Houston have increased by more than 7% in the last two years, which means that if the insurance is not up to date, the market coverage is undervalued by 49 million of dollars.

And Tornado Alley is also considering a potential deficit of insurance coverage. In Oklahoma alone, with an average of 56 tornadoes a year, about 1.3 million buildings with $ 257 billion in reconstruction costs are at very high or extreme risk. If insurance for these homes is not valued at current cost levels, which have increased 6.6% over the last two years, homeowners could suffer huge losses. If a tornado caused 20% damage to only 1% of dwellings considered to be very high risk, reconstruction coverage would be reduced by approximately $ 34 million.

Without adequate insurance coverage in disaster-prone areas, the risk in the mortgage market also increases. Following three major hurricanes in 2017, serious mortgage delinquency rates have tripled in the metropolitan areas of Houston and Cape Coral, Florida, and quadrupled in San Juan, Puerto Rico, according to CoreLogic. The 2017 wildfires in Tubbs caused a sharp rise in delinquency rates to 50% in Santa Rosa, California.

"Disruption of income and regular payments from a family, as well as a substantial loss of property value, may result in mortgage default, particularly if homeowners are underinsured and can not afford to rebuild, "said Frank Nothaft, Chief Economist at CoreLogic.