Why Does Home Insurance Cost More in Coastal Towns?
It’s a simple truth. If you live in a seaside community, you pay more for home insurance than your friends in neighboring inland towns. This may be true even if you live on the far outskirts several miles away from the pounding surf. The underlying reason you pay more is that the insurance company buys insurance to protect the company from financial ruin. An event such as a hurricane has the potential to cause widespread damage to an insurer's entire book of business.
The insurance that insurers purchase is called reinsurance. The cost of this reinsurance is built into your home insurance premium. Since companies pay more for reinsurance for homes near the coast, the lion-share of the cost is passed on to these homeowners.
How does reinsurance work?
Let's use an example of fictional home insurer Windy Mutual with $100 million in assets. The number crunching actuaries determine that if a hurricane hits Massachusetts that Windy Mutual could pay out $200 million in losses. You don't need to be an accountant to see that that Windy would be out of business and unable to pay for policyholder losses.
Let's say Windy Mutual purchases $180 million in reinsurance coverage with a deductible of $15 million every calendar year. Here's how a catastrophic event would play out. Hurricane Gaga strikes and Windy Mutual sustains $200 million in claims. Windy would pay the first $15 million from their own assets and the reinsurer would pay the remaining $185 million. This process occurs behind the scenes seamless to the policyholder. Windy Mutual recovers from the hurricane and stays in business with the help of reinsurance.
Reinsurance broadens options globally across all lines of insurance coverages. In the case of our coastal friends, reinsurance helps to stabilize the market and also helps consumers have more home insurance options. On the flip side, coastal homeowners are paying more for their home insurance than property owners in landlocked neighboring towns. Some would say this is fair distribution of the cost because the risks are higher for residents with beachy borders.
Our agency, www.agordon.com, offers many solutions to property owners near or far from the coast. We can help you get the best price for your insurance if it is close or far from the shore.