I sat in a meeting with one of our carriers last week and heard an interesting statistic. On average, insurance companies who wrote Texas home policies in 2016 paid $1.30 out in storm related claims last year for every $1.00 of premium they received. That doesn’t include non-storm related claims such as fire, theft, water damage, etc. The issue facing all home insurance companies is how to remain profitable without raising rates astronomically. One method carriers are examining is roof depreciation schedules.
Most home insurance companies will write either a replacement cost policy or an actual cash value policy (see http://wiseinsurancegroup.com/home-insurance-replacement-cost-actual-cash-value/). If the roof needs to be replaced due to hail or wind damage, a replacement cost policy pays the amount it costs to replace the roof with a new one of the same quality less the wind / hail deductible. For example, a $200,000 home with a 1% wind / hail deductible ($2,000) and costs $10,000 to replace, will pay $8,000 to replace the roof with comparable grade shingles.
Actual cash value policies, on the other hand, pay the depreciated value of the roof less the wind / hail deductible. For instance, a 10 year old roof covered in 20 year shingles will be depreciated by at least 50% if it’s in excellent shape. If the cost is still $10,000 to replace the roof as in the above example, the total amount paid for the claim will be $3,000 ($10,000 less 50% depreciation less 1% deductible). The issue with actual cash value policies, aside from the lower claim amount paid, is there’s too much wiggle room when determining the depreciated value.
To reduce the amount of interpretation and provide a better client experience, a couple of companies have implemented or are considering implementing roof depreciation schedules. For instance, a brand-new composition shingle roof may depreciate at a published rate of 2% to 3% per year until it reaches a certain minimum amount, say 25%. Slate, tile, and metal roofs would have their own depreciation schedules. This enables the client to know if they don’t have a hail claim until 10 years from now, the claim amount paid will be some value between 70% and 90% depending on roof material.
Insurance companies believe providing a written depreciation schedule prior to writing a policy enables clients to know the risk up front and make the right decision for themselves. In some cases, home insurance companies may provide a discount for accepting a roof depreciation schedule and charge more for a replacement cost coverage on the roof. Other companies may adopt this approach as their primary offering on all home policies and not offer a replacement cost option at all.
Would you pick this type of coverage or elect to pay more for replacement cost coverage on your roof? Share your thoughts and questions on roof depreciation schedules with me on my Facebook, Google +, and LinkedIn pages. I’d love to hear from you!