Protecting Your Portfolio from Natural Disasters

Famed science fiction author Arthur C. Clarke once wrote that while humans can show mercy, “against the laws of nature, there is no appeal.” Recently, we’ve all learned how very true that is.

There’s no doubt that natural disasters in the U.S. are increasing in number and scope, and it’s having a particular impact on how mortgage companies treat their portfolios. When thinking about protecting your portfolios from the impacts of natural disasters, here are three things to keep in mind.

1. We’re in unchartered territory.

The National Oceanic and Atmospheric Administration (NOAA) recently reported the average number of natural disasters causing more than $1 billion in losses has been 7.1 over the past 20 years. But over the past five years, the average has more than doubled to 16.2 events. So far this year, there have been 18 disasters with losses over $1 billion.

Most of the damage caused by natural disasters isn’t caused by the actual event itself, but by what happens afterwards. The flooding and storm surges that follow hurricanes, for example, can cause long-term property damage that might be excluded from a homeowner’s insurance policy.

Another factor contributing to the devastation caused by natural disasters is migration patterns. Even before the pandemic, many Americans were moving inland from the West and Northeast to areas where they could get more home for their money. However, many of these destinations are more prone to disasters, such as fires in rural areas in the West and tropical storms in the Gulf states.

2. Lack of coverage is a real problem.

Natural disasters are not only increasing the costs of insurance, but also revealing how few homeowners are properly protected.

According to a survey of homeowners conducted by the NAIC’s Center for Insurance Policy and Research, 56% of homeowners believed their homeowners policy would cover a flood, even though floods are not covered under standard policies.

The survey also found that homeowners living in the Pacific, Southwest and middle Atlantic states are paying more for insurance because of wildfires and hurricanes and are more likely to report problems renewing their policies. In addition, more than two-thirds of those surveyed said they were aware of steps they could take to protect their property, but only half of them had taken them.

Another factor impacting insurance coverage is the soaring costs of building materials and labor. According to the Bureau of Labor Statistics’ August Producer Price Index (PPI) report, building material costs have risen by 19.4% during the previous 12 months and 13% year to date.

3. Access to insurance experts is paramount.

As natural disasters continue to mount, lenders, mortgage servicers and investors with real estate portfolios are understandably concerned about their risk exposure. Fortunately, there are specific policies that cover disaster risks. But finding the best coverage that fits the unique needs of one’s business can be a chore.

For this reason, the best strategy is to partner with an insurance broker that partners with other insurance carriers to get the best coverage and rates. An experienced insurance broker is better equipped to understand your risks and how they are likely to change as the type and severity of disasters continues to evolve.

If you need assistance ensuring your portfolios are properly protected from disasters, please let us know. You can reach out to us anytime at 866-300-7020 or info@ILgroup.com. We’d be happy to help.