Property self-insurance can lead to increased climate resilience.
In many regions across the United States insurance companies are exiting markets or increasing rates dramatically due to the high risk of severe weather events. This may be a blessing in disguise. Homeowners who choose to self-insure or have no other option are now taking the precautionary actions that insurance carriers have been advocating to their customers but with little success. Now that ‘you’re on your own’ dollars otherwise spent on premiums can be redirected towards loss mitigation efforts and reserve funds.
One of the primary arguments in favor of self-insuring your home is the potential for substantial cost savings over time. Unlike traditional insurance premiums, which can be substantial and subject to increases over the years, self-insurance allows homeowners to retain control over their financial resources. By setting aside funds in a dedicated emergency fund or savings account, homeowners can effectively create their own insurance pool to cover potential losses. Consider two families facing very different severe weather threats.
Homeowners who self-insured hardened their homes against storms and were among the few left standing after Hurricane Ian tore through Fort Meyers Florida Sept. 28, 2022.
The Smith family (pseudonym for privacy sake) of New York spent years paying homeowner’s insurance premiums. They then found themselves facing a steep increase in their policy rates following a minor claim for water damage. Frustrated by the prospect of continually rising premiums, the Smiths decided to explore the option of self-insuring their home. By redirecting the funds they would have spent on insurance into a high-yield savings account, they were able to build a substantial emergency fund within a few years. When a hailstorm damaged their roof, they had the financial resources to cover the repairs without relying on insurance payouts or facing further rate hikes.
Not all ‘severe weather’ events driven by climate change are named storms or hundreds of acres of wildfires. The average thunderstorm now carries far more water and hale and wind than similar storms from just a few years ago. When planning for the financial impact think big and small impact - it all adds up.
The Johnson family from coastal Florida faced escalating insurance premiums and deductibles in the wake of several hurricanes (watch Buying a home in the Florida Keys to learn more about insurance in a high-risk area). The Johnsons made the decision to self-insure their home against windstorm damage. Drawing on their savings, they invested in hurricane-resistant windows, reinforced roofing materials, and storm shutters to safeguard their home against future storms. As a result of these investments, the Johnsons have not only reduced their vulnerability to severe weather-related losses but also achieved peace of mind knowing that they are better prepared to weather the next storm.
The financial benefits of self-insurance can also mean potential investment opportunities. By investing funds earmarked for insurance premiums in diversified portfolios, homeowners can potentially generate higher returns over the long term. This approach allows homeowners to leverage their financial resources to build wealth rather than simply mitigating risk. Of course, this strategy requires careful consideration of risk and a willingness to accept fluctuations in investment returns.
In a hybrid approach, consider the Patel family from southern California. Rather than relying solely on traditional insurance to protect their home against earthquakes, they decided to self-insure and invest the equivalent of their insurance premiums in a balanced portfolio of stocks and bonds. Over the years, their investment grew significantly, outpacing the returns they would have received from a standard insurance policy. When a major earthquake struck their neighborhood, the Patels were able to cover the cost of repairs using the proceeds from their investment portfolio, and with capital remaining.
Self-insurance also encourages homeowners to implement a range of loss mitigation and precautionary measures tailored to their specific circumstances and risk tolerance. From retrofitting homes with storm-resistant features to investing in resilient landscaping and flood barriers, homeowners have myriad options at their disposal to make their homes more resilient. By taking these proactive measures, homeowners can not only reduce the likelihood of property damage but also minimize the financial impact of future weather-related losses.
One self-insured homeowner in Palos Verdes, California cleared brush from around his house, installed a fire-resistant roof, and fire prevention soffits to keep embers from being sucked into the attic where many house fires during a brush fire start.
In the end, self-insuring your home is not without risks. The decision to self-insure should be based on a thorough assessment of individual circumstances, risk tolerance, and financial goals.
“Veteran environmentalist/conservationist and startup entrepreneur Ken Smith offers a well-researched, concise and powerful wakeup call about how climate change will affect our financial futures, including a list of publicly available resources for planning for this. A must-add to the bookshelf of anyone who’s serious about personal financial planning.”
Learn more about building financial resilience for an uninsurable future; the impact of climate change on personal finances and the wealth of the nation.
